Sunday, January 30, 2011

Tea Party Attacking GOP Incumbents

Tea Party is going to run candidates in GOP Senate primaries against conservative incumbents Lugar in Indiana and Hatch in Utah. They are looking for a candidate to run against Snowe in Maine. The Tea Party seems to be against what they believe to be the establishment more than they are against ideas that the GOP incumbents espouse. Rather than starting a third party, they hope to take over the GOP. This may drive the GOP too far to right to win general elections.

Friday, January 28, 2011

The Case for Business to Use Enlightened Self Interest

This article originally appeared in The Harvard Business Review. Michael Porter has been regarded as one of our leading experts on business strategy. He argues that a narrow view of capitalism, that puts the focus on short term profits, has contributed to some of the problems within capitalism. He believes that business must expand its vision to one of adding value to society. This will result in superior business performance as well as benefit to society.

This is not a new issue. It is anathema to conservative economists who believe that business is only responsible to its shareholders. A good case can be made against this position and Michael Porter does his best to show that creating shared value is in the best interest of society and business.

Krugman on Ryan's Response to Obama's State of Union Address

Krugman points out that Ryan's understanding of the economic problems in Europe is wrong and that using Europe as an example of what could happen to the US, demonstrates his poor understanding of Europe. Ireland's economic problems were not caused by large budget deficits. The Irish government was forced to bail out its banks when the Irish housing bubble burst. The bail out created the budget deficits, not out of control government spending. In fact, the GOP had viewed Ireland as a model for the US to follow. It linked its economic success, before the banking crisis, to deregulation and business friendly tax policy. England is also a bad example because its budget deficits did not lead to its economic problems. The bursting of the housing bubble and bank bailouts led to its recession and budget deficits. England's austerity program, under the new government, has not stimulated growth so far.

Ryan's plan for reviving the US economy is to cut government spending and taxes. His assumption is that our economic problems are due to a lack of confidence in the business community that could be restored by government austerity. For the GOP, economic problems are always caused by government interfering in the market market mechanism, which left to its own devices, always produces optimum results. His use of Ireland and England to make his point only hurts his argument since it is based upon a faulty understanding of what led to their economic problems.

Thursday, January 27, 2011

Housing Bubble and Bust Was Widespread

Allen Greenspan argued that the Fed was not responsible for housing bubble. He used charts like this that show that housing bubbles were widespread. This graph shows that he was correct in arguing that the US had lots of company. One thing that every country had in common was low interest rates. Otherwise, the banks did different things to create the bubbles. In the US, the securitization of mortgages and the use of credit default swaps (CDS) along with weak regulation and poor governance were involved in the crisis. This was also true in the UK. In Ireland, however, the major problem was a very close relationship between the major banks and real estate developers along with weak government regulation. Mortgages were not sucuritized and CDS's were not part of the problem in Ireland. In each of these countries, however, low interest rates, overly aggressive banking and weak government regulation were problems. Government could have done things to prevent the bubbles and the governance of the banks could have been better in each of these countries. The crisis was preventable.

Housing Prices Reverse Downward

This is not a good sign. A double dip fall in housing prices will not help the recovery. Unfortunately, high unemployment and a high rate of foreclosures continue to drag home prices downward.

Federal Budget Deficit

The 2010 deficit hit 10% of GDP due to the slow economy. Tax revenues fall and transfer payments rise in a slow economy. The CBO forecasts deficits at a steady state of 3% as the economy recovers along with tax revenues and lower transfer payments.

Saturday, January 22, 2011

Leaving on a Jet Plane

We are headed on a trip to a place where internet service will be sparse. Posts will be scarce for the next 10 days.

The Atlantic Describes the New Politics of Climate Change

The climate for climate change has changed. This article shows how the battle has shifted since cap and trade was defeated in the Senate. The focus is now on limiting the role of the EPA which has left to fight the battle alone. Nine of the last 10 years have been the warmest in history but the climate change deniers are winning the war. The climate has changed in Washington because the GOP and Democrats from energy producing states have sold out to the energy industry.

The cold weather in the Northeast and in the Southeast this winter has given the ignorant ammunition to support their denial of climate change. They have no idea that the problem is Global Climate Change and that scientists look at the changes over years and decades. We have prostitutes in the Congress who think of nothing beyond the next election and we have an electorate that gets its information from the sell-outs in the media.

GOP House Releases it Spending Reduction Program

The GOP released its plan for reducing federal spending that won't go anywhere. This summary is worth reading because it demonstrates some important things about government in general and about the GOP in particular. The general point is that government can be understood well by observing two things: Where does the tax revenue come from and what is it spent on. The spending cuts proposed by the GOP show us how the spending game is played. The big cut comes from not allowing any increases in the non-defense discretionary spending budget. That allows inflation to eat away at the budget and it produces big savings over time. This has two advantages. It produces savings without offending any interest group and it allows them to give the media a big number to broadcast since they show the amount of savings over 10 years. After dealing with the big cut they then list some of the specific cuts that they propose. These cuts provide the red meat for their base. They selected the programs that conservatives love to hate. The specific cuts are provided in the link. You won't be surprised by most of them. They probably seem important to their base but cutting a few million here, and another few million there, is small potatoes in the total federal budget. The only thing you will learn from these cuts is what parts of government that they hate, and what programs provide benefits to defenseless groups.

You should also notice what they don't cut. There are no cuts to a defense budget that is equal to what the rest of the world, in total, spends on defense. They also do not mention the entitlement budget which, driven by rising healthcare costs, is the greatest source of future budget deficits. They will leave that to Paul Ryan who has plans for privatizing social security and Medicare.

The GOP is just getting started in preparation for the 2012 election. It will do everything that it can to put the administration on the defensive by passing bills that the Senate will not pass and by cutting funding to programs that they don't like.

Friday, January 21, 2011

The Possibility of State Bankruptcy is Being Raised

Many states have been hurt by the recession. Tax revenues have declined and they are unable to reduce expenditures to match revenue drops. There are lots of legal issues that would prevent states from using bankruptcy protection but he GOP is likely to view that path favorably. They view the GM bankruptcy as the model for the states. GM used bankruptcy to force its unions to reduce wages and to give up pension and healthcare benefits. The GOP would see this as another way to pursue their policy of "defunding the Democrats". Government employee unions have been supporters of the Democratic Party. They have been targets of GOP attacks along with Teacher Unions which also support Democrats. I doubt that the federal government will let this happen but the GOP would relish the opportunity.

The GOP House Throws Another Bone to the Tea Party and to its Campaign Contributors

The GOP House recently passed a repeal of the healthcare reform bill and now it is shifting attention to the Environmental Protection Agency (EPA). It passed the Free Industry Act which is an attempt to limit the EPA's authority to regulate the emission of greenhouse gases. They argue that the Clean Air Act that the EPA has used to regulate greenhouse gas emissions does not give it authority to regulate greenhouse gases because they are not pollutants.

Neither of these bills will get through the Senate and become law but the GOP House wants to build its campaign coffers with contributions from energy companies with this bill and with insurers and other healthcare providers with the healthcare repeal bill. These bills also keep the Tea Party side of its base happy. They hate healthcare reform and the they are climate change deniers.

Obama Selects New Head of Business Advisory Group

Immelt is a good choice. GE is probably our leading industrial company and Immelt is on the short list of progressive CEO's. He has been pushing GE into the energy efficiency markets that Obama has wanted to develop and he has reduced GE's dependence on its financial services divisions to focus on its industrial product divisions.

A Conflicted Public Creates Leadership Problems.

David Leonhardt summarizes the results of a recent Times/CBS News public opinion survey. The results demonstrate the challenge that our politicians face. About 63% of Americans want taxes to be cut. An equal percent do not want Medicare or Social Security to be be cut. The public can't have it both ways because we can't fund Medicare and Social Security at their current and projected levels without increasing tax revenues. The GOP would like to cut taxes and put pressure on entitlements by raising issues about budget deficits. They don't want to tell Americans that they can't have their cake and eat it too so they will propose entitlement reforms that disguise benefit reductions. The Democrats were burned by pushing through healthcare reforms that attempted to make healthcare more affordable and which had some tax increases built in that paid for extending Medicaid to the low-income employed who do not receive benefits at work. They must focus on job creation or get crushed in the 2012 elections. Its hard to imagine that the GOP or the Democrats will have any meaningful proposals to fund entitlements without raising taxes.

Inflation in China May Cause Price of Chinese Exports to Rise

Krugman has been critical of China's currency manipulation for several years. The low price of its currency keeps the price of China's exports down and the export unemployment to developed countries. He now believes that inflation will undue the impact of their currency manipulation. In 2-3 years inflation will cause the prices of goods produced in China to be at the level of goods produced elsewhere. China has responded to the inflation threat by raising interest rates and using price controls which seldom work well. Krugman believes that China's leaders suffer from the American disease. Instead of doing the sensible thing, letting its currency appreciate in value, it is responding to the inflation threat with policies that will be ineffective.

The Most Amazing Innovation Story Ever

Steve Job just announced Apple's results for Q4 and 2010. Every CEO would like to announce the results that Jobs was able to boast about. Revenues were up 71% for the year. I don't think that any company, the size of Apple, has had that kind of revenue growth. Apple also forecasted 60% revenue growth for Q1 2011. They are already a $100 billion company and still growing at an amazing rate. Most of the growth came from the Ipad, Iphone, Itouch trio which gives them a huge share of the mobile market. Mac sales were only up 24% but the that is 8 times the 3% growth in the PC market. Moreover, most of the sales went to first time Mac users. There is also a link between the sales of its mobile products and the MAC. Customers who purchase a mobile product tend to purchase a MAC if they want a laptop or desktop.

Apple not only leads the market in product innovation but it has demonstrated leadership in distribution as well. The Apple stores had $46 billion in sales. Its four biggest selling stores are in China. They accounted for $10 billion in sales. Apple's Itunes business had $4 billion in sales. Apple has changed the way customers purchase its hardware products as well as music and other entertainment products.

Apple's results will attract lots of attention. They have captured the highly competitive electronics market by out innovating its competitors in almost every part of the business. They are also establishing a leadership position in the most rapidly growing Asian markets. The only bad news is that their job creation in the US is far short of their growth in revenue. Only 10% of the jobs that they create are in the US.

Thursday, January 20, 2011

The Short Seller Defense

The Department of Education has been investigating the for profit college industry, including The University of Phoenix and Kaplan. Government support for student loans is the backbone of the higher education industry, including non-profits. Without access to low cost student loans most colleges would be out of business. There is some evidence that the for-profit colleges have been over-selling the benefits of higher education to students who are left with lots of debt but limited access to jobs that enable them to pay off their debt. Many view this as an example of predatory lending that is much like what we saw in the sub-prime mortgage market. This view has been publicized by Steve Eisman who shorted the sub-prime market and made a fortune. He achieved fame after the publication of Michael Lewis's book "The Big Short". An advocacy group, has come to the defense of the for-profit college industry by arguing that short sellers, like Eisman, are attempting to discredit the for-profit colleges and drive down the value of their stocks. This if very much like the claim that Lehman Brothers and Bear Sterns made when they were failing. They argued that they were in good shape financially but that short-sellers were causing them to face liquidity problems.

Fox News Wins. America Loses.

Everyone seems to have seen the obvious connection between Obama's Wall Street Journal op-ed on rebalancing his approach to regulation, and the steps that Clinton took after the disastrous mid-term elections. He has been criticized for taking this step but that is not what bothers me most. Obama and his advisors must believe that he needed to take that step in order to maintain the flow of funding for his 2012 campaign from Wall Street. More importantly, they must also believe that the electorate has changed since his successful campaign for the presidency. He can get more votes by repeating the Reagan myth that government is the problem with the economy. That is, the economy will recover faster if we "get government off of the backs of business". The GOP noise machine has been selling this myth since the 80's and it seems to be working. The public has a short memory about how we got into this economic mess.

The rest of the article is about 12 specific regulatory and legal steps that should have been taken after the failure of the financial system. Its a very detailed analysis of why the banking system failed and how the government has done more to cover up the failure than it has to keep it from happening it again. It was written by an economist with a law degree and lots of experience in banking regulation. Its a long article that you may want to read quickly and keep for future reference.

Wednesday, January 19, 2011

Newly Elected Utah Senator Declares That Federal Law Banning Child Labor is Unconstitutional

The senator refers to an early decision that child labor laws are the responsibility of the states. The federal child labor act of 1938 was upheld in 1941 and overturned the decision to which the senator referred. The court argued that federal government had the right to regulated interstate commerce. Apparently, the senator does not believe that manufacturing in Utah involves interstate commerce.

This particular issue is not as troubling as the implications. Can we expect that the newly elected GOP Congress follow the Tea Party imperative of pushing for a new federalism that gives the states more authority relative to the federal government. This would lead to more State Attorney Generals, like the one in Texas, who argue that the EPA has no constitutional authority to regulate CO2 emissions. Moreover, I would hate to see what would happen to labor laws if they were left to the states.

Given the economic and social problems that we face today and in the future, its hard to imagine that child labor laws in Utah, and the interpretation of the Constitution, are the issues that the new members of Congress should be focused upon.

Sometimes We Just Have to Laugh at the Nonsense

Texas leads the country in CO2 emissions (I can hear the we're number one cheers). Apparently, the majority of its electorate agrees with the state's Attorney General (and the oil companies), that the EPA does not have the right to regulate CO2 because it is emitted by every living thing. Its hard to believe that the Attorney General is simply stupid. Its easier to understand by referring to Upton Sinclair's comment that "Its hard to get someone to understand something when his paycheck depends upon his not understanding".

Lost Output As Result of Great Depression

This graph shows the actual loss of output up to Q3 2010 and the estimated loss up to the end of 2011. Potential GDP is the output of a fully employed economy and it is indicated by the trend line. We will have lost around $3 trillion of output by the end of 2011. The Obama stimulus of $800 billion was well below what was needed to compensate for the loss of private spending during the recession. The GOP explains the loss of output as the result of government regulations that have had a negative affect on business confidence. I guess that the lack of regulation that contributed to the financial crisis that sank the economy has been committed to the historical black box that contains memories that are inconsistent with ideology.

Tuesday, January 18, 2011

Obama Sounding Like Reagan on Deregulation

It looks like the president is co-opting the GOP mantra on industry regulation. In this op-ed he attempts to show that he understands the pros and cons of regulation. He defends some of the actions that he has taken to impose more regulation on markets but he gives examples of regulations that may impose unnecessary costs on business. He also puts the focus on the reduction of regulatory costs on small businesses which are the engine of job creation.

The GOP will be scratching their heads on this one. How can they argue against themselves? They certainly don't want to invite him into their club either. Perhaps he has taken another lesson from the Clinton administration which frustrated the GOP by reducing budget deficits and taking leadership on fiscal responsibility.

Political Consensus on Universal Coverage Is Over

This article shows the change within the GOP on healthcare reform. The GOP senator, who is the GOP point man in the Senate, (Grassley), once defended Romney's plan which included mandated insurance coverage. He argued that it was the same as mandating auto insurance coverage at the state level. Now he opposes mandated coverage in lock step with the entire GOP Congress.

Nixon once proposed universal insurance coverage as a defense against the drive to move to a single payer plan like that in Canada. Romenycare and Obamacare are similar. They both attempt to move toward universal coverage without invoking the government as the single payer. Without mandates universal coverage is dead. This has to do with the very nature of insurance. The essence of insurance is that unpredictable risk is paid for the entire pool of those who pay the premiums. Those who do not suffer from the risk pay for those who do. Without mandated coverage the pool of the insured would be heavily weighted by those with high risk and the premiums would be unaffordable.

Dave Camp, who heads the Ways and Means Committee for the GOP in the House, states that making healthcare more affordable is the key to universal coverage. He does not explain how this can be done without mandates, but he argues that more Americans will purchase insurance if the premiums are reduced. He wants to empower individuals to make choices like they do when they make other purchases. He does not explain how giving individuals choice will make healthcare insurance more affordable. On the other hand, we know how choice works when consumers purchase other products and services. Only those who can pay the market price have access to the product or service. That is, price would ration healthcare services to those who could afford it. This seems like it is the end of the bipartisan goal of universal coverage.

Monday, January 17, 2011

Competition and Reducing the Cost of Health Insurance

We all may be getting tired of debating healthcare reform but the GOP has decided that repealing healthcare reform is its top priority. This link is to an article that looks at the relationship between increasing competition among insurers and its role in lowering insurer premiums. The Democratic plan attempts to increase competition by establishing exchanges that provide coverage in competition with existing insurers. The GOP plan would give individuals vouchers that could be used to purchase insurance and it would make it possible for more insurers to enter state markets.

The basic idea in both reforms is that selling insurance is like selling widgits. High prices in commodity markets attract more competition and prices fall as the number of insurers increase and compete with each other on price. This does not hold, however, if there are economies of scale in the insurance market. If one looks at the things that insurance companies do to operate their business, it seems likely that operating costs are subject to economies of scale. For example, an insurer with a larger number of customers would have lower marketing and administration costs per customer since the fixed cost of these operations would be divided by a larger number of clients. The big advantage of scale, however, is in negotiating the prices that insurers pay to healthcare providers. For example, hospitals in most large markets have joined together into partnerships that negotiate the prices that they charge to insurers. Small insurers are at a disadvantage to large insurers in the price negotiations. They typically pay higher prices for the same services provided by the hospitals that large insurers pay. Consequently, they would be unable to compete on price with larger insurers. Their operating costs would be higher and they would have to pay more for hospital services. Their premiums would have to be higher in order to stay in business.

Since there are considerable economies of scale in the insurance business, the attempt to lower insurance premiums by raising the number of market competitors will cause premiums to rise rather than decline. Medicare, for example has a very large number of customers and it has lower operating costs than most private insurers. It also has negotiating power with service providers. The best way to lower the cost of healthcare would have been to make Medicare available to everyone. Since this was not considered politically possible, we have to look elsewhere for cost reduction opportunities. Increasing the number of insurers in each market is bound to fail.

Sunday, January 16, 2011

Issues in Auto Market

The current Economist has an article on problems in the global auto industry. The estimate that global demand is for 64 million cars and the industry capacity is 94 million. Europe has 30% excess capacity and Fiat, Ford and GM are losing money in Europe.

Moreover the trend is toward smaller less profitable cars. This is due to aging population which prefers less powerful cars and because of rising gas prices and environmental concerns.

Growth in China will fall from 30% to 10% because of government policy to restrict use in cities. This will lead China to move to export focus. Geely's purchase of Volvo will provide platform for growth in US and Europe.

The industry will have to cut capacity and increase productiviity to remain profitable. Since this is one of the largest markets in the world, the needed changes will put more pressure on job growth.

Friday, January 14, 2011

A Tale of Two Commentators

David Brooks welcomes Obama's speech and a call for civility in politics. He traces the causes of incivility to a lack of modesty which is broadly connected to a culture that encourages narcissism. Its hard not to like his admiration for the president's speech and the need for a system of government based upon compromise. Its equally hard to appreciate his analysis of the causes of our incivility.

A Tale of Two Systems

Krugman takes the reaction to the Arizona killings to the next step. He argues that the differences between conservatives and liberals are real and that they cannot be resolved. The basic division, as he sees it, is between those who want a free enterprise system with a social safety net and those who view taxation to pay for the safety net as theft. The later engage in strong rhetoric because that is how one responds to a thief. He used the healthcare debate as an example. Some wanted to extend benefits to the uninsured and others did not want to pay for it. He also pointed out that it was acceptable in the GOP to favor a similar plan when it was proposed by a Republican in Massachusetts. The GOP has moved further to the right and Romney is now forced to disown his healthcare plan.

Krugman concludes by arguing that despite our unresolvable differences we should be able to engage in debate over our differences without using inflammatory rhetoric. Frankly, I don't believe that this is possible. The conservative strategy has been to split the populist movement that has always been a powerful factor in American politics. The Tea Party movement is an example of that strategy. It consists primarily of people who have not been significant beneficiaries of the free enterprise system but who have been taught to hate government interference in the market system. It is also tinged with a strong odor of nativism and racism. They see illegal immigrants and people of color as beneficiaries of government entitlements. Most of them should favor a progressive tax system, since few are in the upper income brackets, but they have learned to associate taxes with benefits that go to folks who do not deserve them. They are also beneficiaries of many public programs such a public education system. They distrust public education, however, because they believe that government wants to teach their kids a value system that is alien to their own. As long as we have 20% of the population who share these values, it will be in the interest of the GOP to get them to the polls. To keep them actively engaged in politics it is easier to program them to hate the opposition than it is to present them with issues and get them involved in discussions on how to solve our national problems. A significant portion of populists do not believe that Obama is an American citizen and many believe that he is a socialist, a communist or a fascist. This has not been an accident.

Thursday, January 13, 2011

Japanese Central Bank and US Central Bank Balance Sheets

This graph shows how the Fed and the Japanese central bank have expanded their balance sheets to stimulate slow growing economies. They have assumed some of the bad debt held by the banking system and they have kept interest rates near zero. There is not much else that they can do to expand their economies. Fiscal policy is the only government response available but that is not politically possible. We are dependent upon corporate investment to grow the economy but they have excess capacity today and they will not invest until they see a pick up in consumer demand. Demand, however is dependent upon growth in income and as long as businesses do not see a need to hire more workers that will not happen. We may look like Japan for the next few years with low growth and high unemployment.

President Obama's Speech in Arizona

This is the transcript of our President's speech. It is masterful. He tells us join together in creating the America that the nine year old young girl who lost her lost her life believed to be possible.

The Eurozone Crisis Explained

This link is to a long article by Krugman which explains the problems with a single currency that unites countries with very different economies and political structures. Krugman's specialization is in international trade. He does a great job in explaining the problems and the consequences of failure. Europe's economy is the size of the US economy. Anything that happens in Europe will have worldwide economic and political consequences.

Wednesday, January 12, 2011

The Unreasonable Conservative Response to the Arizona Killings

Rush Limbaugh resorts to conservative talking points to shift the focus on the Democratic Party for the Arizona killings. He argues that the Dem's view him as a victim of the American culture and it will do everything that it can to protect the victim from justice. He also picks up the conservative attack on the Arizona sheriff who attributed some of the responsibility for the killings to the political climate in Arizona. Limbaugh's market is the less well educated portion of the GOP base. Brook's is the reasonable conservative who targets the educated wing of the wing of the GOP and independents.

Sovereign Debt Issues In Europe

The link is to an article on Portugal's successful sale of public debt. It is one of the countries in the eurozone that has serious fiscal problems that present a risk to the eurozone. Economic growth is very low and it may have a recession in 2011. Nations with low growth and high debt levels have trouble servicing their debt and they may require help from European Central Bank (ECB) and the IMF. Portugal has a relatively small economy; therefore, the ECB and the IMF have the capacity to deal with its crisis. On the other hand, Spain also has serious fiscal problems and a 20% unemployment rate. Italy has similar problems. These are much larger economies and the ECB does not have the capacity to rescue them if they are unable to sell sovereign debt at reasonable interest rates. CitiGroup recently published a study suggesting that one or more of the eurozone countries could default on its debt or require restructuring. The situation in Europe serious and it would have repercussions on other economies, including the US, if it would worsen. Europe is one of the most important markets for US corporations and it is big export market for emerging market economies. Events in Europe could delay economic recovery in the US and slow growth elsewhere.

Mr. Reasonable Conservative on the Arizona Killings

One can always count on David Brooks to provide the "reasonable" conservative response to any issue. He typically points out the excesses of the left and the right and then he puts a stake in the ground for a middle right position. His response to the Arizona killings matches this pattern. He asserts that pundits on the left have blamed Sarah Palin and others for the killings. He then performs a psychiatric examination of the killer and argues that he is one of 40,000 mentally ill individuals who are responsible for 50% of rampage murder in the US. Therefore, politics, inadequate gun control, and an atmosphere of inflammatory political news coverage on talk radio and cable news had nothing to do with the killings.

First of all, there has been lots of criticism of the rhetoric on talk radio and cable news. Nobody, that I am aware of, blamed the media, or politicians like Palin, as directly responsible for the rampage. They argue that unbalanced individuals can be influenced by the political environment in which they live. Its hard to imagine that the language and rhetoric that permeates the media does not influence behavior. Secondly, his target was a politician. This is totally ignored by Brooks, since he wants to explain the killers actions by an appeal to an apolitical psychological diagnosis that he performed. Moreover, his diagnosis of the killer suggests that he had strong anti-government sentiments. The area of Arizona in which he lives, and the rhetoric on the right, conveys a similar anti-government sentiment.

Of course one of the anti-government slogans of the right is to support almost unlimited access to guns. Brooks says nothing about the romance of the right with guns and its fight against gun control. To do so would take away one the major talking points of the GOP in its defense of "individual liberty" against an oppressive government. To ignore this issue while he simultaneously attributes 50% of rampage murders to individuals among the 40,000 mentally ill with a potential for violence is disingenuous at best. We do not have a system that would deny access to guns for more than a handful of the 40,000 that put us at risk. Brooks is very selective about the data that he chooses to use in his analysis.

Tuesday, January 11, 2011

The New Global Elite Have No Nationality

This is a longer version of a previous post that describes the denationalization of the new elite .The Russian oligarch has more in common with George Soros than he does with his own countrymen. They see themselves as members of a global elite that share a common culture and a common set of interests. This raises questions regarding their lack of concern for the plight of those who are bounded geographically. Unlike Ayn Rand's hero John Galt, they do not isolate themselves in a specific location they tend to isolate themselves by ideology.

Tea Party Leader Defends Right to Bring Guns to Political Rally

Chris Matthews interview with Tea Party leader on right wing gun fetish.

Monday, January 10, 2011

Very Strange Pattern of Gifford Hits on Wikipedia

This graph is hard to explain. There was a surge of hits to Rep. Gifford's Wikipedia page several days BEFORE the shooting in Arizona.

How do We Explain High Corporate Profits and High Unemployment?

Corporate profits are at record levels but unemployment is 9.4%. It looks like we are having a two tier recovery. The high end is coming back but the low end is struggling.

Sunday, January 9, 2011

Myths about Why the Southern States Seceded

An interesting article on the causes of the Civil War. Lincoln personally was against slavery but his primary motivation was to preserve the Union. Freeing slaves in the South would have expropriated the largest single asset of wealthy Southerners. The asset value of the slaves exceeded the asset value of every other asset class in the country.

Sarah Palin's Target List

This is a link to the SarahPac post which shows Democrats who voted for healthcare reform. Each is targeted by using the cross hairs of a gun. We can't blame Palin for what happened in Arizona but we can blame her and others who use violent images to inflame their base. Palin often uses the slogan "Guns and God" to describe the difference between her base of "real Americans" from the liberal base of elitists who don't believe in the real God and who want to take away their guns. The killer was able to purchase the automatic weapon used in the Tucson attack at a legitimate weapons store.

Is Obama the Next Reagan?

Frank Rich compares Reagan's comeback with the recent upward movement in the polls for Obama. He does a nice job of exposing the myths about Reagan. He achieved sainthood within the GOP by doing precisely what they say we should not do today. He ran huge budget deficits by cutting taxes, which he did not pay for with spending cuts. He also increased spending substantially which exacerbated the impact of the tax cuts on the federal budget. He paid for the tax cuts, and higher spending, by borrowing. Dick Cheney advised Bush Jr. to do the same thing. He told him that Reagan proved that deficits don't matter. He meant that they do not matter to the electorate. Cheney had it right. Deficits don't matter to the public unless the GOP and its propaganda machine puts the focus on deficits when "tax and spend" liberals are in office.

Reagan was surprised by the impact of his tax cuts on the budget because he was told that cutting taxes would increase national income and tax revenues. Bush Sr. called this "voodoo economics" when he was running against Reagan for the GOP nomination. But it did not matter. He lost the nomination and Reagan was anointed with sainthood because running huge deficits improved the economy and decreased unemployment. He was forced to increase taxes in his second term but he was careful about where the taxes were raised. He did not raise taxes for the rich.

In addition to running huge budget deficits during his regime, Reagan also started the trend toward the deregulation of the economy. His message of "getting the government off our backs" resonated with an electorate that confuses prudent regulation with bureaucracy. Clinton and Bush Jr. continued with the deregulation trend, especially in the financial sector, which eventually produced the collapse of the financial system.

Given the reality of the Reagan presidency, how does one explain his success with the public? Rich explains it by stressing Reagan's ability as a leader. His sunny personality, and the conviction that he had about his principles, is what the electorate responded to. They desire a strong leader and that is precisely what they have found lacking in Obama. Rich's advice to Obama is to be more like Reagan as a leader. That may be good advise but it won't help him as long as we have high unemployment, and that is quite likely. Perhaps his best chance of winning reelection is the absence of strong candidates in the GOP. Romney, and even Mr. 9/11 are warming up for the nomination but there is not a Reagan among them.

Saturday, January 8, 2011

Eleanor Roosevelt on GOP Response to FDR Speech

Eleanor was displeased to discover that the GOP members of Congress were more motivated by political interests than by the national interest. She believed that partisan interests should be put aside to deal with the national mobilization required in the war effort. She could not understand why the applause to FDR's speech came mostly from Democrats.

Inside the Clinton Administration As Key to Understanding Obama's Next Two Years

This link is to an article written for the New Republic that it chose not to publish. It is about Gene Sperling's work in the Clinton administration. Sperling has just been appointed to the Obama cabinet so it is important to know more about him. However, I found it as a valuable lesson about the Clinton administration and the almost impossible job or being the president in a severely divided political environment. When Clinton took office the GOP blocked his efforts to invest in needed programs by claiming that they would lead to large budget deficits. Later, when there were large budget surpluses, the GOP had to find new reasons to block Clinton's programs. Sperling may be just the person that Obama needs to deal with a hypocritical GOP. In any case, those who are interested in learning more about how government really works will find this article very worthwhile.


Friday, January 7, 2011

Healthcare Repeal War is Heating Up

David Brooks is one of the leading conservative opinion makers. He has a platform in the NY Times and he is a regular on PBS News. This article is on the battle over repealing the healthcare reform bill. I just want to point out his sources for the conservative approach to healthcare reform. His sources are two of the top conservative "think tanks" which are promoting reforms that attempt to ration healthcare via the price system. The government will commit to the payment of benefits that tend to inflate in cost. Instead the government will provide vouchers to citizens which have a fixed value that does not rise with the cost of healthcare. That is, citizens will be at risk for cost increases instead of the government. It is always easy to determine the GOP talking points on any issue by paying attention to the output of their "think tanks" that David Brooks and other conservative opinion makers rely upon.

The Texas Miracle Coming Apart

Krugman has picked up on the Texas budget problems that we posted yesterday.

Understanding the Decline in the Unemployment Rate

The press is reporting a drop in the unemployment rate to 9.4%. This sounds like good news but one needs to understand how the unemployment rate is calculated in order to evaluate the drop in the rate. The rate is calculated by dividing the number of unemployed by the size of the workforce. The workforce consists of those with jobs and the unemployed who are looking for jobs. Since large numbers of the long-term unemployed have stopped looking for jobs, they are not part of the workforce and the size of the workforce has decreased. The 100,000 jobs that were created is not sufficient to cover the monthly entry of new workers into the labor force.

War and Inflation

An interesting article (via Manan Shukla) on the relationship between war and inflation. Simple economic analysis shows that prices should rise during warfare because government spending on war consumes resources that would otherwise be available to produce products for private consumption. The result is that private spending must decline in response to increased government spending or prices will rise to ration private demand. During WW 11 much of our private production was turned over to military production. We stopped building autos, for example, and we built tanks and engines for military aircraft. The government was forced to ration supplies such as gasoline which was need for warfare and it invoked price controls to fight off inflation. Consumers paid for WW 11 by the rationing of consumer products. They also paid for the war directly by purchasing saving bonds to finance military spending and by paying very high taxes on income.

Since WW 11 government has found ways to pay for warfare without rationing consumer production, and without raising taxes. Rationing and high taxes make the cost of warfare apparent and citizens are unwilling to pay the price for warfare unless they perceive a powerful threat to their safety. The Iraq war was financed with debt instead of taxes so it was relatively painless from a financial standpoint. Moreover, government demand for resources to expand military production did not require a reduction in consumption since we could import manufactured products to support consumption. The result is that two of the major constraints on a state that wants to conduct warfare were eliminated. The Vietnam war was also financed with debt instead of taxes and government spending on social programs was expanded by Johnson's "Great Society" programs. The result was inflation which became apparent in the Nixon administration which led him invoke wage and price controls.

The Vietnam war also taught our politicians another lesson. The use of the draft to expand military operations led to resistance, especially among college students who were subject to the draft. The media also did a good job of reporting on the war and popular support for the war eroded as the war progressed. The elimination of the draft and cheerleading for the war in the media, especially among cable networks like Fox, has diminished the last remaining impediments to the military state. The recession has tamed inflation, but since the war has been funded with debt, it will rear its ugly head when we return to a full-employment economy. We are already seeing some signals for price inflation during our downturn. The producer price index (PPI) for finished goods is up at an annual rate of 5.5%; the PPI for intermediate goods is up 8.8% and the PPI for raw materials is up 60%.

Thursday, January 6, 2011

Washington Post Cartoon Ridiculing GOP House's Deficit Reduction Plan

One picture is worth 1000 words. The cartoon illustrates the GOP's effort to cut the budget deficit by focusing only on reductions in discretionary spending and excluding any effort to deal with healthcare costs which are the major source of future deficits.

The GOP House Begins the Healthcare War

The GOP House has begun its effort to restore the American economy. It has decided to do this by going to work on the 2012 election cycle. They realize that it is impossible to repeal the healthcare reform bill since the Democratic Senate will reject any bill that they propose, but they believe that continuing their attack on the Obama administration is the red meat that their base will respond to. I believe that this will actually improve Democratic chances for 2012. First, it shows that the GOP's priorities are wrong. Its the economy stupid. Secondly, the Dem's will do what they failed to do during the healthcare debate. They will point out the benefits that the plan provides to most Americans that the GOP wants to eliminate. They will also argue that the CBO believes that repealing the plan will cost billions and increase long-term deficits. This is another chance for the Dem's to show that the GOP is not really concerned with budget deficits.

The second prong in the GOP House's attack will be rule changes that gives Jim Ryan, and his budget committee, authority to attack the Obama budget under the pretense that their plan will reduce the deficit. The Dem's can attack the rule changes and they can show that deficit reduction is not the real purpose of Ryan's attack on the Obama budget since his plan increases the deficit by over $1 trillion by the use of gimmicks that can be easily made apparent.

Why We Can't Have Low Cost 30 Year Mortgages Without Government Guarantees

This article explains the problems with the the 30 year mortgage market. Private investors and banks do no want to take the default risk and the interest rate risks associated with these products. The interest rates on such products, without a government guarantee, would increase the interest rate and create more problems in the housing market. This problem cannot be fixed by getting rid of government sponsored entities like Fannie Mae, Freddie Mac and the FHA which are the only purchasers of these products today. GOP proposals for getting government out of the market are dead on arrival.

Is Texas the Next Ireland?

The Texas state budget deficit of $25B is the highest of any state. We do not hear much about the Texas problem even though its problem is the most severe. The reason may be that Texas, like Ireland, is a very business friendly state. Taxes are low and regulation is at a minimum. Its not easy to explain the Texas problem by invoking the standard GOP talking points, but it offers a good example of what happens when states are affected by recession and declining tax revenues. The problem is recession, and not out of control spending, which is the GOP explanation for every budget deficit problem.

This article shows how difficult it will be for the GOP controlled state to deal with its huge deficit problem without dealing with the problem of declining revenues. The only alternative would be to cut social programs like education and Medicaid which are the largest programs in the state budget.

How Can We Explain the Differences Between Republicans and Democrats

The Economist struggles with the answer and invites comments. What do you think?

Its Demographics Stupid

This graph illustrates the impact of an aging population in many of the advanced economies. Countries like Japan, Italy and other european countries will lose ground to emerging markets with more favorable demographics. The US and China will suffer less from the age disparity and will continue to be the leading economies in 2050.

The Good and the Bad Plutocrats

An interesting analysis of plutocracy in America (via Manan). They are different from plutocrats in the past since many came from middle class backgrounds and made their fortunes the hard way. They are the winners and the others are the losers. There is no sympathy for those who lack the talent or the drive to win at the game. They recognize that globalization will benefit the multinationals and those who own their stock. The US middle class will experience a declining standard of living but a new middle class will develop in emerging economies and provide customers for multinational products and services. This could lead to class struggle and a rise in protectionism or they may go quietly into that dark night.

The good guys are those who produce real wealth like Steve Jobs and Bill Gates. The bad guys are those who got rich by moving money around without adding value. The solution is to raise taxes on the plutocrats. The good guys will be glad to pay the taxes and the bad guys will scream and threaten to move their game to a more plutocrat friendly environment. That would be good for us and bad for those places that welcome them.

Wednesday, January 5, 2011

Back to Work After Very Long Tour of America

We left Boston two days after Xmas to visit friends in S.Carolina and family in Atlanta. We then drove from Atlanta through the South to reach our destination in the Phoenix area where we will reside for the next 4 months. I hope to have some interesting posts coming your way as soon as I get reconnected with the rest of the world after spending the greater part of my time driving across the South.

One of my memories from driving through S.Carolina was a billboard with a huge confederate flag and a simple message: "Never Forget". The Civil War has not been forgotten in the South. Much of the anti-government sentiment in the Tea Party reflects resentment toward the role of the federal government as a cultural change agent. There has also been a marriage between the military culture and religious fundamentalism that is not obvious outside of the South and rural America. I was reminded of my old Boy Scout motto of God and Country that I learned as a child. This is the America that Sarah Palin refers to when she tells her base that Democrats are not real Americans. This sentiment was also evident in a billboard that I saw as I entered Alabama. The billboard had a simple message: "Where is the birth certificate?" These are powerful forces that cannot be taken lightly. They are being organized and exploited by politicians who may not really appreciate the forces that are being unleashed. I am reminded of what happened in Europe in the 1930's. They are anti-intellectual and anti-democratic forces.

Saturday, January 1, 2011

Obama Strategy Choices with GOP House

An interesting analysis of the advantages of small wins by compromising on values versus a win by losing on value issues that define the party. Since the compromise choice is not available for the next two years Obama might shift to energizing his base for 2012 by fighting hard on issues that excite the baes.

John McCain picked Mama Grizzly to excite his base and it worked. He lost the election, however, and he blames it on the choice of Palin.