Monday, February 28, 2011

Overview of Obama's Limited Options for Assisting States

link here to article

The huge decline in tax revenues at the state and local levels has put pressure to cut spending on essential programs and it has led to the loss of over 400,000 government jobs. The GOP would rather increase the spending cuts, which could lead to the loss of up to 850,000 more jobs, than it would to provide more federal support to the states. This may slow our recovery and worsen the fiscal picture for the states and for our economy. Perhaps the GOP believes that a weak economy in 2012 works to its advantage. It also enables the GOP to use the fiscal crisis as the means to attack public employee unions.

Outsourcing the Mid-East War on Something

link here to article

Reports from a study commission found that the number of private workers (200,000), who provide support services for the military in the Mid-East, is about equal to the number of military personnel in the area. They receive wages that are several times those of military personnel and they have overseen projects in which billions of dollars have been wasted. The commission wondered why we have relied so heavily on more expensive private companies for support services when the military does not have to resources or capability to supervise their activities.

One of the explanations for the huge increase in outsourcing public services to private contractors may be political. The contracting firms contribute to campaigns and they remember who made it possible for them to take their share from the government trough.

It's Inequality Stupid

link here to article

Income inequality in America was at its high point in the "roaring twenties" preceding the Great Depression. The Great Depression, and high taxes to fund WW II, changed that picture. Following WW II, the US economy expanded rapidly and all Americans shared in the prosperity. The middle class continued to prosper and expand through the 70's and things began to change with the advent of Saint Reagan to the presidency. He presided over the changes in the economy that began the movement toward the "new gilded age" that we are currently experiencing. Income and wealth distribution in the US today looks much like it did then. Most American's do not understand what has happened. Polls show that Americans believe that income is more evenly distributed than it is and they also show that Americans favor a more equal distribution than they believe to be the case. This article from Mother Jones tells the story with a slide show that depicts the changes that have occurred. This is not a screed against the rich and it is not class warfare. Its just a picture of what has happened since Saint Reagan. Americans respect those who have contributed to growing the economy and they expect them to be rewarded well. What many do not realize is that as the distribution is skewed to the top .01% of the population, the income share going to the rest of the population must fall. Moreover, changes in the tax system have enabled the after tax distribution of income to the top .01% to grow as well. That led Warren Buffet, who is one of our most progressive billionaires, to complain that his secretary's tax rate was higher than his own.

Don't Mess with Texas

link here to article

Krugman messes with Texas. Now that the budget battles have moved to the states, he shows how Texas, which has become the bell weather state for America, has dealt with its budget crisis. Krugman argues that the spending cuts, forced on the state because of its decision to keep taxes, especially for the rich, very low, will be harmful to the states future. Texas is being short-sighted. I would make a more general point. Its decision to cut Medicaid by over 20%, which is funded partly by state taxes, will be followed by many other southern states. In fact, one of the reasons that healthcare reform was resisted by those arguing for "states rights" was because the bill extended Medicaid coverage to more low-income workers. In the south that meant to minorities, and it has been one of the reasons why Tea Partiers, who claim not to be racist, have been against healthcare reform.

The data on taxes and educational achievement that Krugman provided for Texas are typical of those in the south. Taxes in the south are low and they are generally regressive. Sales taxes are a major source of state revenue and the tax incidence falls heavily on those with low incomes since they spend most of their earnings. The best way to maintain this arrangement is to keep the population dumb and happy. The underfunded education system cooperates in two ways. Conservative legislatures are deeply involved in curriculum and the schools provide one of the major sources of entertainment with good football teams and pretty cheerleaders. The news media and the mega churches are part of the same system. It would be unfortunate for America, and for the world, if the south continues to provide the direction in which this country is heading.

Saturday, February 26, 2011

Indiana Governor Shed Unions as Example for Wisconsin Governor

link here to article

Mitch Daniels, Governor of Indiana, and former Budget Director under George Bush who watched tax cuts which were not paid for by spending cuts produce huge deficits, was recently praised in an Op-Ed by David Brooks as the best GOP choice for 2012. This article explains how he runs Indiana like a business. It is pretty much what the Governor of Wisconsin wants to do. Read the article and decide if states should follow his example and operate like a business without unions to represent employee interests.

Wisconsin Fiasco is All About Union Support in Helping Democrats Win Elections

link here to article

Howard Fineman reduces the Wisconsin issue down to election campaigns. The GOP views public employee unions, which are large contributors to campaigns as well as leaders in getting out the Democratic vote. Whats happening in Wisconsin and in other states with Republican governors is about defunding the Democratic party. Its all about elections stupid.

Problems with a World without Economic Leadership

link here to article

England used to set the economic agenda for the rest of the world and it provided public goods like free trade, property rights etc. which enabled the world economy to grow. The US replaced England in this role and its influence on the G7, the world's largest economies, provided similar leadership. Today, the G7 has been replaced by the G20, which includes countries that do not share similar ideas about democracy, the role of government in the economy and how to respond to climate change. The US has seen its authority erode along with the role of the dollar as the world's reserve currency. China is on the rise but it is not ready to assume the role that England and the US had played in providing public goods. The world economy lacks focus and leadership and the rise of political partisanship exacerbates the problems of coming to agreement on many of our important issues that require international agreement. We should be concerned about an economic environment which seems similar to those in the past that have led to disaster. A world without positive economic leadership is a dangerous world.

Simon Johnson is Worried about Growth of Largest US Banks

link here to article

Simon Johnson, who has been a critic of weak financial reform efforts following the financial crisis, views Timothy Geithner as part of the problem. Our US Secretary of the Treasury gave a speech in which he promoted the views of Jamie Dimon, who is the CEO of JP Morgan. Dimon sees big opportunities for US banks in emerging markets and he wants JP Morgan to be a leader in this effort. Geithner refers to this as "capital deepening" in emerging markets and he agrees that US banks must pursue this opportunity. Johnson's experiences with the IMF have made him wary about this prospect. Banker bonuses are a function of return on equity. This leads them to increase debt relative to equity and it exposes them to risk when the loans go bad. Since JP Morgan, and several other giant US banks are to big to fail, the risk is transferred to the US taxpayer. Its also a problem when the financial sector becomes large relative to the economy. Iceland, Ireland and Switzerland allowed bank assets to expand to several times their respective GDP. This made Iceland and Ireland to big to save and they had to rely upon external help. Switzerland's two largest banks had assets greater than GDP and the government was barely able to rescue them from their bets on mortgage securities. Switzerland has taken steps to correct this imbalance and other nations have made changes as well. He worries that Geithner, who is a major policy maker on banking in the US, has been drinking the kool aide being sold by the very large US banks.

Good Analysis of World Food and Commodity Prices

link here to article

The headline news on food prices paints a broad picture of rising prices. The BBC did an excellent analysis and found that the picture is a bit more complex that most imagine. Some prices have gone up and others have gone down. Prices in some countries for a commodity have gone up but not in other countries. Supply and demand changes drive most of the change in prices but speculators who bet on future prices have contributed to the swings in prices as well.

Friday, February 25, 2011

Arable Land Per Capita is Declining

Economics is sometimes called the dismal science because of a hypothesis by a political economists called Malthus. He argued that the food supply was growing in a linear fashion and that population was growing geometrically. Therefore, he claimed that famine would be the method by population was held in check.

This graph tells a different story but it has a similar twist. Arable land per capita is falling in major agricultural regions. The response has been to increase the use of fertilizers to get more yield per acre. The stocks of fertilizer producers has been moving up in response.

Wisconsin Assembly Passes Union Bill

link here to article

The Wisconsin Assembly passed the Governor's bill which now moves to the Senate where Democrats vow to fight passage. The description of the process in the Wisconsin Assembly illustrates how far apart the two major parties are at this point in America. The GOP has a radical right wing agenda that is altering the legislative process in this country.

More from Krugman on GOP Use of Crises to Push Their Agenda

link here to article

Krugman is suspicious of a power available to the Wisconsin governor under law to sell public utilities or hire private operators for Wisconsin public utilities without going through a bidding process. Koch industries, which is in this business, denied any interest in these utilities. He also pointed out that a section of the proposed bill gave the Governor unilateral power to cut healthcare benefits to low income families in Wisconsin. Krugman argues that the governor's actions in Wisconsin have nothing to do with budget issues since the unions have already agreed to pay cuts. The governor has created a budget issue in order to carry out several longstanding goals of ultra conservatives. He showed how The Provisional Authority in Iraq attempted to turn Iraq into an example of the ideal conservative state to illustrate these goals.

Thursday, February 24, 2011

The Financial Times Looks at a GOP That Has Been Pushed too Far to the Right

link here to article

Its interesting to get a perspective on US politics from overseas. I have been rather harsh on the GOP's posturing about deficit reduction. The Financial Times, which is generally right of center, has similar views.

How Long Before the Fed Raises Interest Rates?

link here to article

Mark Thoma answers the question by reviewing economic data which suggests the Fed keep interest rates low in the near-term. There are some positive signs of growth but not enough to change Fed policy. Auto sales are growing but we are still below industry capacity; Output is expanding but we are still well below 2007 level; Job growth of 35,000 was well below forecast and there are no signs of near-term inflation.

The wild cards in Thoma's analysis are a spike in oil prices due to violence in the mid-east and US politics in which both parties want to reduce government spending to appease the deficit hawks and a confused public.

Goldman Analyst Forecasts Slower US Growth with Budget Cuts

link here to article

The Financial Times cites research by Goldman Sachs on the impact of GOP and Democratic budget cuts on economic growth. Both would reduce GDP growth and so would a potential government shut down debated within the GOP. Although the research by Goldman is non-partisan, it will have little impact on either party since both are responding to public demand for deficit reduction being led by right wing deficit hawks and sold to the public by Fox and other conservative propaganda outlets.

Mike Huckabee on Mike Huckabee

link here to article

The three leading candidates for the GOP presidential nomination right now are Romney, Palin and Huckabee who are locked in dead heat. Everyone knows about Mama Grizzly, and Romney has been seeking the nomination since he was born. This article gives some insight into Mike Huckabee, the third leading candidate, who is less well known outside of the bible belt. It may be time for sane republicans to start a new party.

Why Austerity Wil Not Restore Economic Growth

link here to article

The deficit hawks, or those arguing for "expansive austerity" instead of expansive spending, often cite Germany or the UK which have adopted austerity policies, as examples of what we should do. David Leonhardt does a good job of explaining that they have not done as well as the US at this point in the downturn and he makes the case against austerity as the weapon of choice in a downturn,

GDP in the US has grown much faster since 2008 than that of Germany or the UK. Some the growth is the result of the stimulus plan in the US which was much larger, and the negative impact of austerity in Germany and the UK. Without our fiscal stimulus, which was not as great as what was needed, we would look more like Germany and the UK.

The argument for austerity in a downturn is specious. The claim is that government spending will crowd out private spending by absorbing resources that might have been used in the private economy. For example, government borrowing to fund its deficits might drive up interest rates and make it more expensive to fund private investment. Private demand for loans has been weak in this downturn because businesses are waiting for consumer demand to pick up. Interest rates, therefore are very low, and government borrowing is not crowding out private investment. Similarly, the federal government has not absorbed substantial labor resources (only about 45,000 mostly in defense and homeland security). State and local governments have shed 405,000 jobs so the net impact of government has been to add labor resource availability to a private market which has shown little interest.

The case for austerity is certainly a weak case from an economic perspective. It is essentially a moral argument which has historical precedent. Both Hoover and FDR made a moral argument for a balanced budget during the Great Depression. It worsened the economy for Hoover and also for FDR when he raised taxes and cut spending in the face of a rising federal deficit.
World War II led to a big increase in federal spending and it helped to end the US recession. The message is not that we need wars to end recessions but that defense spending seems to be easier to sell to the public.

Wednesday, February 23, 2011

Is the Wisconsin Debate about Deficits or a Culture War

link here to article

This is a discussion, sprinkled with humor, between David Brooks and Gail Collins on whats happening in Wisconsin. Brooks would like to separate it from the culture war and so would Collins. Brooks claims that there are sane people, perhaps outside of Wisconsin today, who could find a way to deal with the issues that have been raised. He does not, however, respond to Collin's concern that one of our political parties has turned public policy debates into a war over values.

Krugman on Economic Fallacies

link here to article

One of the common misconceptions about the Great Depression is that it was caused by the Smoot-Hawley bill that led to the spread of protectionism and a fall in international trade. Krugman states that this misconception, which is not supported by theory or evidence, is part of a broader fallacy. It is part of the fallacy of efficiency which claims that what is good for efficiency is good for the business cycle. His point is that greater productivity is not the solution for an economy in which demand is below what is required to support full-employment. Several well-known economists have been trying to sell this gospel.

Krugman is also not positive about the relevance of technically skilled economists in the public debates on the economy. There has been a revival of the goldbugs who want to return to a gold standard. And some are raising the fear of hyperinflation in an economy with high unemployment. Some even argue that tax cuts do not contribute to budget deficits. These ideas appeal to a public that rejects climate science and evolutionary theory and which rejects evidence that is inconsistent with its belief system.

Tuesday, February 22, 2011

Federal Spending by Category

This graph (Via Brad DeLong) illustrates the growth in federal spending since 1975. It breaks spending as a percent of GDP into 3 categories so that one can see the sources of spending growth. It is apparent that growth in defense spending and healthcare have been the source of federal spending growth. The green line shows federal spending ex defense and healthcare. There has been little growth in this line. There was a small spike due to the stimulus but that is one of the messages from the graph. Almost half of the stimulus was from tax cuts. There was very little stimulus spending. The idea that out of control government spending on the stimulus is the cause of our deficits is simply wrong. The GOP, with lots of help from its propaganda machine has sold the public a bill of goods and this administration has helped them out by agreeing with them that federal spending must be frozen. Its hard to understand why smart people a so bad at defending themselves from the propaganda machine.

Michele Bachman Speaks to Third World America

link here to article

Ordinarily, I would not post anything that Michele Bachman says. I posted this article because it contains almost every sound bite in her repertory. The audience in South Carolina loved it. South Carolina is one of the few states in the US that bans teachers from organizing. It is also the State with the lowest test scores in the country. They are competing for this honor with Texas and other southern states which also ban teacher unions. Michele Bachman and her hero Glenn Beck are part of the price we pay for ignorance.

The Dirty Energy Party

link here to article

This article describes Obama's plan to reduce our energy dependency and stimulate investment in new technologies that will create jobs that will be important in the short-term and in our future. It also describes the steps taken by the GOP House to defund the EPA and the Department of Energy which are instrumental in implementing the plan.

This is all that is left of Obama's plan to reduce emissions and take a leadership role in developing the technologies of the future. He will not be able to sell this to the GOP House. He must sell it to the American public and put election day pressure on the GOP.
This gives him another chance to demonstrate leadership on things that are important to him. It also gives him another opportunity to bend with current public opinion which is being shaped by the GOP.

Wisconsin Anti Union Movement Funded by Koch Brothers

link here to article

The Koch brothers are the biggest financial supporters of Americans for Prosperity. They also were major contributors to the Governors election campaign. The "grassroots" campaign in Wisconsin and other states is funded and supported by Americans for Prosperity. They have also been active in organizing the Tea Party so that it can be more effective politically. The Koch brothers, along with other wealthy conservatives, also fund conservative "think tanks" that provide much of the commentary in the media. The funding of "grassroots" movements like Americans for Prosperity couples the work of idea factories with efforts to get out the vote in local elections. This is plutocracy at work.

Monday, February 21, 2011

What Conservatives Really Want

link here to article

This article describes what conservatives really want in moral terms. It also advices democrats to describe their political ideas in terms of the implicit morality behind them. While one may disagree with the moral framing in this article, after all much of what conservatives want is economic and political gain under the guise of moral imperatives, it is important to understand the moral posturing that is used to justify conservative policies.

A Good Krugman Talking Point

link here to article

Krugman links to an article by a German who is critical of conservative ideology in Germany and who also ridicules the idea that austerity is the solution to our economic problems. He also attacks the thinking behind the use of a common currency in the eurozone.

In his comments on the German article, he takes a point that many have been making and turns it into a couple of ideas that may be memorable. Our deficit has been overwhelmingly been caused by an economic crisis, and eliminating the deficit is now being proposed as the cure for its cause. Instead of using expansionary fiscal policy, our leaders are proposing "expansionary austerity" as the cure for our economic problems.

Bill Clinton on How to Increase Jobs in US

link here to article

Bill Clinton made 4 proposals in a Time interview while he was at Davos. He said that we can no longer use fiscal policy to stimulate the economy because we can no longer fund our debt by internal borrowing. This means that our interest payments increasingly go to foreign investors. This seems like a strange argument because we have been able to borrow at very low long term interest rates from foreign investors to fund our debt. This is a reason to take advantage of inexpensive debt in the short-term and grow the economy along with the tax revenues that come with growth to pay the interest on the debt.

His second point is that we should follow Germany's lead and export more to emerging markets like China. Exports certainly would help to grow the economy but it would also help if we had BMW's and Mercedes and sophisticated manufacturing tools to sell to China. Outside of military products, agricultural products and financial services we don't have lots of stuff to export to emerging markets. Moreover, China is able to fund our debt because they have a trade surplus which provides them with dollars that they need to invest. Their trade surplus is partly due to our import of consumer products but it is also due to the outsourcing of production by US firms to China that are imported to the US for sale.

This third point is that we should take a leadership in climate change technology to fuel job growth in a growing market. This is what Obama would like to do but it is politically impossible with GOP opposition.

Lastly, we should encourage immigration of highly skilled workers into the US so that they can build the new businesses that we need to provide jobs. This seems like a strange argument to make because it assumes that we have a structural unemployment problem and not a cyclical unemployment problem. Many of our high tech start ups have been founded by international entrepreneurs but they have not created a large number of jobs. A lot of the work that gets done is outsourced in low-wage countries. If anything, we need to do more to develop the high tech entrepreneurs in our own country instead of depending on immigration. Moreover, most of the high tech immigrants compete with US engineers and do not start up new companies. This is one of the reasons why many of our technical graduates have found better opportunities on Wall Street developing quantitative trading tools and products and why engineering salaries have not grown in production environments.

Clinton does make one innovative suggestion but it seems rather strange as well. He argues that we should put payments that go into unemployment insurance into a trust fund instead of using them to pay unemployed workers. Employers could then use the trust fund to retain workers during a downturn instead of firing them. Obama has tried something similar by giving employers a tax credit for hiring new workers but that has not worked very well. Employers only hire labor when they can't keep up with demand.

Which Team is Obama On?

link here to article

The president is going to have to decide whether is going to take a stance on the GOP attack on democratic leaning unions or whether he believes that the GOP will self destruct by over-reaching. The GOP has excited its base by playing up to the Tea Partiers. The president risks losing his base if he is seen as missing in action. It won't help him in 2012 if he is successful in obtaining contributions for his campaign by remaining neutral and his base stays home.

Krugman Puts the Wisconsin Situation in Perspective

link here to article

One of the reasons why Krugman is disliked by so many conservatives is that he describes reality better than most people and conservatives have a distaste for those who expose the myths that they use to hide reality from themselves and others.

The reality of the Wisconsin Governor's attack on selective public employee unions is purely political. The Governor believes that he can take advantage of the current economic and political environment to advance his career (he compared himself to Reagan when he broke the air traffic controller's strike). It also puts him in step with others in the GOP who view democratic leaning unions as the enemy. That is why he excluded GOP leaning police and fire unions from his attack. In general, conservatives who ignored the budget deficits created by the spend and borrow fiscal policies of Reagan and Bush, are using the fiscal crisis created by irresponsible bankers and government regulators to attack one of the counterweights to the power of the financial and political elite. A democratic society without checks and balances to powerful elites is democratic in name only. There are plenty of examples of such societies in other parts of the world that provide a good model for the GOP. Some are under attack by democratic movements in the Mid-East. There are, of course other countries that provide a bad model for the GOP. They include most of the democratic countries in Europe.

Saturday, February 19, 2011

How Convincing is the Case for Free Trade?

link here to article

Most economists are strong supporters of free trade. The case for free trade is usually made by claiming that society as whole benefits from free trade. This does not mean, however, that the distribution of benefits from free trade are fair. Its apparent that the benefits from free trade have tended to go disproportionately to those at the top of the income distribution. There is a risk that economics will lose relevance by advocating free trade without dealing with the redistribution of the benefits from trade.

Cutting the Defense Budget Won't Solve our Long-Term Deficit Problem

link here to article

Many liberals point to our large defense budget and suggest that we could solve our budget deficit problem by cutting the defense budget. Krugman shows that even large cuts in the defense budget will not compensate for the rising cost of healthcare spending. He believes that much of our spending on healthcare is wasteful and unjustified but he is consistent with his argument that the discretionary spending part of the budget is the wrong place to be looking for deficit reduction.

Boeing Learns About High Cost of Outsourcing

link here to article

This article describes the huge cost over run and the delays in the 787 Dreamliner as a result of its decision to outsource a large share of production to US and international vendors. In essence, Boeing retained the assembly process, which is the least profitable part of the production process, while outsourcing the most profitable processes to external vendors. in addition, Boeing enabled its vendors to acquire and retain the technology and skills that they developed at Boeing's expense.

Boeing was warned about many of these problems by internal sources before making its decision to outsource much of the production. Certainly, others have learned similar lessons as well. It is said that experience is the best teacher. This may be true but in Boeing's case it was a billion dollar teaching experience. Curiously, Krugman has a post on Boeings experience that relates to economic theory which explains why many firms grow to be very large. There is a cost advantage in retaining control internally because of the higher costs associated with contracting out production to third parties.

Should The Central Bank Support Partisan Fiscal Policy?

link here to article

The Guardian has an article on this issue. The current head of the Central Bank in England made recent comments in support of the conservative government's fiscal policy. Central Banks manage the money supply and interest rates and they have usually taken a non-partisan stance in setting monetary policy. Otherwise monetary policy could be used to stimulate the economy when the "right" party is in office and it could be used to contract the economy when the "wrong" party is in office. Since Central Bankers are not elected to office, many feel that it would distort democracy to have Central Bankers aligned with a political party. The Central Bank in England is currently keeping interest rates low, which should stimulate the economy, while fiscal policy is being used to reduce the role of government in the economy. Many have been critical of Alan Greenspan's role as head of the US Fed when he was the Chairman. His comments on the economy were held in high regard by Congress and he tended to support Bush's fiscal policy, which led to very high budget deficits since large tax cuts were not paid for by cuts in spending.

Robert Reich puts the GOP Strategy into Perspective

link here to article

Reich views the attack on public employee unions as a strategy to divide middle and lower class Americans against each other and to distract them from what's really happening in an economy in which most of the gain in income is concentrated in the top 1% of income earners. Its an effective strategy of divide and conquer. Many Americans have been led to believe that public employees have better compensation than private employees. The recession has amplified the concerns of many American's and it has given the GOP an opportunity to use the Reagan playbook that was used to break the Air Traffic Controller union.

The GOP also has a plan to cut the federal budget deficit by reducing spending on programs like family planning that provides red meat for their base. They understand that the budget plan proposed by the house has no chance of becoming law but that does not matter. They want to show the Tea Partiers that voted them into office that they are on their side. Efforts to organize the Tea Partiers into a more cohesive and active political organization are encouraged by the House's passage of a bill that will not survive. For some strange reason, the GOP has convinced their base that cutting government spending will create jobs. In fact, the danger is that it will prolong the downturn.

The GOP plan against Medicare and Social Security is also a divide and conquer plan. They hope to divide the young against the old. Many young people have been led to believe that Medicare and Social Security will not be there for them when they need it. This undermines support for these essential programs among the young.

Reich also goes after the Supreme Court which is the most partisan court that we have had in recent experience. There is not much that can be done about this since the partisans on the court will be there for a long time.

Friday, February 18, 2011

Glenn Beck links Wisconsin Situation to Islamic Brotherhood and other Nonsense

link here to article and video

If you want to understand why our democracy is ineffective you just have to watch the "education" that Glenn Beck delivers to the Tea Partiers every day. Ruppert Murdoch sponsors this nonsense because it is good business; Beck has a huge following, and it serves Murdoch's political interests but this is public disgrace.

Words of Wisdom from Warren Buffet that Raises Questions on Executive Pay

link here to article

JP Morgan's CEO was just awarded a huge stock option bonus. According to Warren Buffet Jamie Dimon is over paid. Buffet invests in companies that have pricing power. Companies that have pricing power do not need great management. JP Morgan and other Wall Street banks have pricing power, and that is why they are so profitable. Buffet did not refer to Wall Street's extravagant bonus plans but the simple explanation for Wall Street's bonus plans is that the banks are extremely profitable because they do not compete on price.

Buffet has made a related point in another context. He said that if you put a manager with a good reputation in a business with a bad reputation, it will be the reputation of the manager that will suffer. There are many more examples of this paradigm than that of the corporate savior who comes in and rescues a failing business.

Of course it is also possible for businesses with pricing power to lose their advantage and eventually fail. Buffet owns newspapers because there is usually only one major newspaper in a city and they have pricing power. Changes in technology, however, have made newspapers less profitable and many are failing. There is little that management might have done to deal with the advent of new technology that has led to declining revenues from advertising and from subscriptions.

There are also examples of businesses with pricing power that have failed because of management failure. The US auto industry is a classical example of the failure of management to respond effectively to changes which turned the auto industry into a globally competitive market. Most businesses and most managements, are not very effective at dealing with changes that make currently profitable practices unprofitable.

I think that Buffet raises a very important question for economics. If management does not add much value to a business with pricing power then how can we justify the fact that the top 5 managers from F500 companies collect up to 10% of corporate profits in compensation?

Obama Takes a Soft Line on Wisconsin but His Administration is Active Behind the Scene

link here to article

Obama tried to stay out of the Wisconsin in his speech in Milwaukee but his administration is working behind the scene to set up resistance to the GOP move against public employee unions nationally.

Krugman Exposes Fake Deficit Reduction Clowns

link here to article

Non-defense discretionary spending is only a small sliver of the federal budget and it has not been growing as fast as other areas of the budget. So where have the deficit hawks from both parties concentrated their budget cutting? You guessed it.

The fastest growing part of the federal budget is healthcare. There are good examples of plans to cut healthcare costs. Do you know where they are? You may have guessed it but probably not. They are in the current healthcare reform bill that the GOP wants to repeal. Why do they want to repeal it? Because they taught their base to hate it and they want to keep their base happy in the next election cycle. Paul Ryan has a healthcare plan that passes increases in healthcare costs on to Medicare beneficiaries rather than reducing the cost of healthcare. Although he is the current GOP luminary on budget issues the GOP won't tough Medicare because thats the most important area to work on deficits but not the most area to win votes.

The current healthcare reform bill contains several methods of lowering the price of healthcare services. If you did not guess this, its not your fault. The administration has done a poor job of explaining the bill to the public and the GOP has done a better job of telling the public lies about the bill that their base wants to believe.

The other two problems with the fake deficit reduction crowd is that they conflate healthcare with social security by referring to entitlement reform. They are are not serious about taking on meaningful reduction in healthcare expense growth but the GOP would love to privatize social security. They will huff and puff about entitlements but their real goal is the privatization of social security. Bush has stated that his biggest disappointment was his inability to privatize social security. This will always be on the GOP agenda because the potential benefits to Wall Street are very high.

Krugman also reminds us that a budget deficit occurs when federal spending is greater than federal tax revenues. The GOP wants to cut taxes by extending the Bush tax cuts. Their approach is focused almost entirely on spending cuts. The Obama administration has also proposed cuts in discretionary spending to keep the GOP from owning the deficit reduction crown. There are no proposals to raise taxes to fund services that the American public likes but does not want to pay for.

Thursday, February 17, 2011

Weak Growth in Job Openings Contradict Claims of Structural Unemployment

This graph, via Brad DeLong, shows that our current unemployment rate is due to weak demand for labor rather than an oversupply of job vacancies for which there are not job seekers. We have a cyclical unemployment and not a structural unemployment problem.

Energy Intensity Closely Related to Per Capita GDP

This graph shows the relationship between energy use and prosperity as measured by per capital GDP. Energy intensity is measured on the vertical axis and per capita GDP is measured on the horizontal axis. The size of the bubbles measure population. There is a strong positive relationship between energy use per person and GDP per capita. The US and OECD economies have the highest per capita GDP and their per capita consumption of energy is also very high. The link between prosperity and energy intensity makes it very difficult to deal with climate issues. China and India with their large populations are low on energy intensity but it is bound to increase as GDP, and therefore, per capita GDP increases at twice the rate of the US and OECD countries.

Obama's Response to Wisconsin Public Employee Situation

link here to article

Obama states that the Governors actions in Wisconsin seems like an attack on unions. He finds that distasteful but he equivocates enough on the issue to show that he will not take a position against it. Wisconsin is only the beginning of a GOP attack on public employee unions which tend to vote Democratic. It does not seem like this administration is willing to take a position on the issue.

Paul Ryan's Reaction to Protests in Wisconsin

link here to video

Rep. Paul Ryan compares union protests in his state capital to protests in Cairo. He does not approve of the protests in Madison so apparently he views the protests in Cairo negatively. Whats happening in Madison should not be surprising since the new Governor has unilaterally decided that the state employee's union and its contract is irrelevant. Whats happening in Wisconsin is part of a national trend and Ryan's response is similar to the way in which the issue is viewed by many. Things are tough in the private sector and public employee's should not be exempt from the changes in the private economy in which risk and cost is being shifted from the employer to the employees.

Food Price Inflation, Revolts and the Role of Speculation

link here to article

Recent revolts in the Mid-East and elsewhere have been viewed as a demand for political change. They are also related to the rapid increase in the price of basic food supplies. Prices of course respond to changes in demand and supply. Poor crop yields in parts of the world, along with a rise in demand in emerging markets, have contributed to the rise in prices. It is also possible that speculation in the trading of commodity derivatives may have an influence of the wild swings in commodity prices. Trading in derivatives have been shown to effect price swings in other commodities such as oil. The price of oil is affected by changes in supply and demand but the price of oil futures is also used to set prices in OPEC. This raises questions about the contribution of speculation to the wild swings in the price of food commodities.

Living Without Discretionary Fiscal Policy

link here to article

Krugman has come to believe a report by an IMF official that politics makes it impossible to implement fiscal policy effectively when there is serious recession. Our experience in the US as well as the experience in Japan and in parts of Europe demonstrates the difficulty. There is always a political reaction against government intervention into the economy by politicians and by conservative economists who support the political reaction. There is more support for monetary policy, but it is ineffective when interest rates approach the zero bound as they have in the US today.

The official target rate for inflation is also a problem. It is set at 2% in the US. During a recession prices tend to fall and that may stimulate spending and encourage a recovery. Unfortunately, if this occurs when inflation is at the target rate of 2%, a fall in prices can lead to a deflationary spiral that is hard to stop. Krugman argues that the inflation target should be reset at 5% in order to use monetary policy more effectively during a recession.

How Goldman Killed AIG

link here to article

Data from the report by the inquiry commission describes the role that Goldman Sachs played in bringing AIG down. Goldman had purchased insurance from AIG on its mortgage backed securities that required AIG to post collateral if the value of the securities fell or if AIG lost its AAA status. Since the securities were not traded on an exchange, Goldman could determine the value of the securities by marking them to its view of the market value. This led other banks with insurance from AIG to also demand collateral. This ultimately brought AIG down and caused the government to pay off claims against AIG. During this period, Goldman had also taken a short position which benefited from the fall in the value of the securities it had insured. The Commission stated the Goldman owed the world an apology for its behavior.

Wednesday, February 16, 2011

What do We Know about Climate Change and What Can Be Done?

link here to presentation

Brad DeLong's presentation on the science of climate change, what we know about solutions, and what the impediments are to solutions.

What is the Risk in the US Fiscal Crisis?

link here to article

Brad DeLong considers the risk factors in this Economist article and describes what he believes to be the most important risks. He believes that the major risks are political. Things will be OK as long we don't do dumb things. Of course, given our current political climate the risk to a fiscal crisis are substantial.

Climate Justice as Human Rights Issue

link here to article

The former president of Ireland explains why climate justice is a human rights issue and she describes how one poor country responded to a threat from climate change.

GOP Spending Cuts and Job Loss Except in Speaker's District

The GOP House Majority Leader is advocating cuts in the federal budget that would lead to a loss of one million jobs according to one estimate. This is part of the GOP plan to reduce budget deficits by eliminating earmarks and cutting spending in programs that they do not support. Of course, they only support these cuts if they don't affect their own district. For example, the proposal includes spending $450 million for a fighter plane engine that the Pentagon does not want. The engine is manufactured in two cities in Ohio that happen to be part of the House Speaker's district.

All Sectors of US Economy Affected by Downturn

This graph shows the change in unemployment by sector during our downturn. It shows that all sectors of the economy have been affected and that no sector stands out as the primary cause of job loss. The data do not support claims that unemployment is high because construction workers, for example, lost their jobs and do not have the skills to take the jobs that are available. That is, unemployment is primarily due to a lack of demand for labor than an increase in structural unemployment, and a higher rate of the "natural" unemployment rate.

Government Spending Has Not Acted as Stimulus to Economy

This graph shows total government spending over a 10 year period. It is apparent that there has not been a government stimulus to the economy during our recession and weak recovery. State and local spending declined because of falling tax receipts and federal spending did not compensate for the fall in state and local spending. This debunks two arguments that dominate in the media that government spending is out of control and that the stimulus did not work.

Tuesday, February 15, 2011

Krugman Destroys the 20%/80% Fallacy as an Explanation for Rising Inequality

This article by Krugman on rising inequality explains the real problem of rising inequality. He attacks our Fed Chairman for attributing the problem to educational inequality but he could also attack our president along with conservatives such as Tyler Cowan and David Brooks (who are posted below) who attempt to divert attention from the real problems of rising inequality.

The 20% versus the 80% fallacy looks at the inequality between the top 20% and the bottom 80% as the inequality problem. It is very clear that most folks in the top 20% have a better education than those in the bottom 80% and that education is therefore correlated with higher income. This is one of the common ways that income inequality is explained away. If only we could provide everyone with a better education we would have less income inequality. The problem is in the education system and not in the nature of our economic system or in our politics.

Krugman shows us that the real income gains in the US have been concentrated within the top 1% of income income earners. It is a diversion to restrict our analysis to the top 20%. He shows us that those in the 99th percentile, which requires around $400,000 of income, had their incomes grow by 87%. Those in the 99.9th percentile earned a minimum of $1,600,000 and had their incomes grow by 181%. The biggest gains went to those in the 99.99th percentile, with an entry income of around $6,000,000. This group saw its income increase by 487%. Its hard to explain the different growth rates within the top 1% as a consequence of superior education. Moreover, the level of education within the top 20% is probably very similar, and cannot explain why the growth in income has been concentrated within the top 1%.

It is very clear from Krugman's analysis that the wealthiest Americans have seen the greatest increases in their incomes and that their gains cannot be explained away by focusing on educational attainment. The concentration of income within to top 1% is also a problem in democratic society. Our economic system and our political system is contributing to a Plutocratic form of government in which political power and income are highly correlated. Of course, this is precisely why the focus has been on the top 20% versus the bottom 80% and why the education system has been viewed as the source of inequality.

Tyler Cowen's Explanation for Rising Income Inequality

Tyler Cowen is an economist at George Mason University. George Mason has been the recipient of grants from leading arch conservatives such as the Koch family. It's faculty has, not surprisingly, produced lots of material on political economy that gets published in the Wall Street Journal and cited by other conservative opinion makers. Rising income inequality has become a problem in the US and in many other countries. It clearly, was a major cause of the revolt in Egypt and one of my recent posts called it the next wild card in the economy. Consequently, conservatives feel compelled to explain away the problem in socially accepted terms. Tyler Cowen makes his attempt at an acceptable explanation. In this article he tells us that we should ignore the problems of rising inequality within the top income bracket, we should focus on the inequality between the lower income brackets and that problem has nothing to do with the nature of our economic system. High returns on education account for the rising inequality and our education system has been unable to keep up with advances in technology that produce the high paying jobs.
In short, according to Cowen, the problem is access to education. Since it is common knowledge that a college education provides access to higher paying jobs, his explanation will ring true to many Americans. It also locates the blame for inequality on those who have not invested in education. It has little to do with our economy or with political changes that have contributed to rising inequality. You will notice that Tyler Cowen is also the subject of a post on David Brooks that I made today.

Monday, February 14, 2011

The Problem of Political Leadership in America

Kuttner contrasts the leadership that took place after the Great Depression and the political leadership today. Many of our iconic infrastructure projects were undertaken to lead the country out of the Depression and to provide the infrastructure that has helped the country to grow. Other countries, like China, are making the infrastructure investments that will pave the way to the future. In the US we have one party that has an internal battle about how much they should cut investment for our future in order to appease its political base. The other party is led by a president that believes in making investments for the future but appears to have been tamed by the results of the last election. He has chosen to take the practical route of following public opinion rather than leading the public in the direction that we should be taking. His pragmatism may be due to his recognition that the media have become the primary source of opinion formation in the US and that he is unable to harness it to his advantage. The consequence is that our leaders are following an electorate whose information and opinions have been shaped by the media.

The Future of the Stock Market

The major role of the stock market is to allocate capital to its most productive uses. It does that when innovative companies raise money selling ownership of its business to the public with an IPO. Most of what happens in the stock market today, according to Salmon, consists of speculation about the potential rise or fall of the prices of the shares of mature companies. This enables investors to own a pieces of the corporate pie but it is a shrinking piece since there are fewer companies listed on the stock exchanges as IPO's decline and public companies go private. According to Salomon the money on Wall Street is being made by designing and selling credit derivatives and betting on the direction that they will take. Small investors don't participate in this market or in the sale of public companies to private investors.

Saturday, February 12, 2011

Are the New GOP's Talking Points Really New?

Take this quiz and see how well you answered the question.

Friday, February 11, 2011

Top Ten States with Worsening Education and Employment Growth

This is another of those top 10 lists that everyone likes to produce. I was surprised to see Colorado on the list because it had been moving in the other direction. Some states that should be on list such as Mississippi, Louisiana and other southern states are not on the list because they haven't gotten worse.

Sense and Nonsense as Usual from Brooks

I'm always impressed by the ability of Brooks to make several good points to establish credibility and then to reach very bad conclusions. I have got into the habit of reading his last paragraph first to see what point he really wants to make before reading the whole article.

He is absolutely correct when he argues that the discretionary budget is small relative to parts of the budget that are mandated by law. Therefore, many of the proposed cuts in discretionary spending may be harmful to our future and they really wont make a big dent in the growth in federal spending since it is being driven by growth in entitlement spending. After that he goes downhill.

One problem with his analysis of discretionary spending is that he does not mention that our defense budget is equal to that of the total spending on defense of the 15 countries with the largest defense budgets below the US. This part of the budget is untouchable because the majority of Americans believe, along with our elected officials, that we need a strong defense but most are not aware of how much we spend on defense relative to the rest of the world.

Brooks makes the common error in his analysis of entitlement spending of lumping social security with health care spending. Social security has been running at a surplus for years Tax receipts have been greater than benefit payouts and the government has been borrowing from this surplus to fund other spending. In the future tax receipts will fall below benefit payments but this can be fixed with minor changes to its tax or benefit structure. Spending on healthcare is another story. It has been the fastest growing part of the budget and it needs to be fixed. Growth in spending has been driven by price inflation. Prices charged for healthcare services and products have inflated at around 7% annually. There is no way of controlling the growth in healthcare spending without dealing with price inflation. We spend twice as much per capita on healthcare as that of the next country below us in per capita spending and we are the only rich country in the world without universal healthcare. Our system is inefficient and costly but we have been unable to do much to fix it because of politics. Lumping the healthcare mess with social security is a mistake because it opens the door for the GOP to privatize it and turn the program over to Wall Street for plundering.

Brooks argues the we need to get federal spending under control in order to deal with our large budget deficits. This plays right into the hands of the deficit hawks who focus on spending cuts and ignore the revenue side of the equation. We have budget deficits when tax receipts don't cover government spending. Our current budget deficits are primarily due to the fall in tax receipts as a result of recession and a slow recovery. They are also a result of extending the Bush tax cuts that primarily benefit the wealthiest Americans.

In summary after reading the Brooks op-ed one is left with the impression that everything would be fine if we cut spending on entitlements which includes social security but says nothing about rampant price inflation and inefficiency in our healthcare system. Moreover, there is little real discussion of the contribution of tax policy and a slow growing economy to our deficit problem.

Krugman on The GOP's Chairman of the House Budget Committee and Lincoln

Krugman noticed that the GOP does not describe itself as the party of Lincoln anymore. When Obama won Virginia, N.Carolina and Florida in the last election it did not go unnoticed. Richard Nixon's southern strategy has been at the heart of their electoral politics for a long time. They need a "solid south" to win national elections and to send GOP reps to Congress. They did what any business would do if a competitor was attracting its best customers. They put the southern strategy on steroids. They put some money behind the organization of the Tea Party in the south and in much of rural America. Underneath all of the rhetoric within the Tea Party are the lingering ideas of the old confederacy. They include racism, states rights, militarism, nativism and a host of conspiracy theories. The GOP has mixed the Tea with its traditional focus on tax cuts as the foundation of its electoral strategy. The GOP and much of its electorate are indifferent to reality. They are fundamentalists who have no patience for facts that run counter to its belief system. This may be a dangerous path to take. The GOP House is already showing signs of disorder as its newly elected members, supported by the Tea Party, are testing the ability of the House leadership to develop a common strategy.

The Chairman of the Federal Reserve has been a lifetime Republican. Its hard to imagine how he must feel about his party after the ignorance displayed by Paul Ryan who is regarded within the GOP as its brightest star.

Thursday, February 10, 2011

Unemployment Rate is Understated Versus 2000 Participation Rate

This graph illustrates the unemployment rate over time. If we hold the participation rate (percent of population in the labor force) equal to its peak at 2000, the unemployment rate would 4.7% higher. That is equal to 6.7 million more unemployed workers. Many are from the construction industry which is suffering from the bursting of the real estate bubble and are out of the labor force.

What is the Natural Rate of Unemployment?

Milton Friedman developed the concept of the natural rate of unemployment. If we divide unemployment up into 3 categories, one of the categories, cyclical unemployment, is due to lack of demand for labor. The other two factors are frictional, which reflects the time it takes to match job seekers with those looking to hire, and structural unemployment which is a mismatch between the skills in the labor force and the skills needed by firms. The combination of frictional unemployment and structural unemployment is used to determine the natural rate of unemployment. Friedman claimed that efforts to reduce unemployment below the natural rate would accelerate the rate of inflation.

Our current rate of unemployment of 9% reflects all three of these factors. If the structural rate has increased over time for one reason or another, then a smaller portion of the unemployment rate is due to the lack of demand for labor. Consequently, it would not make sense to use government policies to lower the unemployment rate by stimulating demand for labor. On the other hand, if there has been little change in structural factors, then the high rate of unemployment is due to a lack of demand for labor and government could use fiscal and monetary policy to stimulate demand without accelerating the rate of inflation.

There have been some studies, that indicate a mismatch between labor force skills and job openings. Most of the information, however, has been anecdotal reports in the media in which some employers report difficulty in finding workers with the right skill set. The San Francisco Fed study, referred to in this article, indicates that there might be short term spike in structural unemployment but that cyclical factors are largely responsible for the 9% unemployment rate. As you might imagine, conservatives prefer to keep government out of the unemployment situation, so they argue that the problem lies in a workforce that does not have the proper skill set. Others point to the Clinton administration in which the unemployment rate was below 4% and there was no spike in the inflation rate. They find it hard to believe that labor force skills would have eroded to the point where structural factors are responsible for the high rate of unemployment. They look to factors that have affected the demand for labor such as offshoring production, low wage growth, high levels of household debt to income etc. as the more important factors.

The Top 20 Publications in Economics

This is a listing, with a brief summary, of the 20 most seminal published articles in the field. The list was selected by a mixed committee of economists who used citations as well as other factors to compile the list.

Wednesday, February 9, 2011

New York Fed Research Links Bush Law to Increase in Foreclosure Rate

This study by the NY Fed shows that changes in the bankruptcy law during the Bush administration made it difficult for households to use bankruptcy protection to reduce their unsecured credit card debt. Banks, however, had the power to retroactively raise interest rates on credit card debt as a penalty for late payment. Their research indicates that the inability to use bankruptcy protection on unsecured debt caused defaults on secured mortgage debt. The increased rate of foreclosures contributed to lower housing prices and led to even more foreclosures as more mortgages went "under water".

GOP Chair of House energy committee Denies Human Impact on Climate

Fred Upton pledges his allegiance to Exxon and Koch Industries, who purchased his soul with a modest contribution that will have a very high return on investment. He will lead the attack on the EPA which has the authority to limit CO2 emissions.

GOP House Brings Fed Chairman in for Lecture on Inflation

Paul Ryan led the attack on Bernanke's plan to use monetary policy to promote employment growth. He held up an article in the Wall Street Journal to inform Bernanke about the fear of inflation. Bernanke, who does not depend on newspapers for his information, responded by citing recent figures on the slow rate of inflation in the US and he explained that inflation was unlikely in the US given the slow demand for products and very low growth in wages. The Fed is required by law to use its authority to promote price stability and employment stability. Bernanke expressed surprise at the GOP effort to limit the Fed to inflation control.

The Fed Identifies Firms that Represent Systemic Risk to the Economy

The financial reform bill left a lot of the specifics up to regulators. The Fed took a big step forward in identifying firms that put the economy at risk if they were to fail. These firms, mostly banks, will be required to hold more capital to support their assets. The Fed also extended its definition to include large hedge funds and other kinds of firms that represent systemic risk to the economy. This is a major step forward and it got the attention of the firms that were identified. Let the lobbying begin.

Tuesday, February 8, 2011

Democracy and Ignorance Don't Mix

This is one of the great failures of our education system. This is not rocket science. A simple pie chart is all that is needed to show where the money goes. That along with a pie chart showing where the money comes from and how the sources change over time should be part of every civics course. Our electorate is not stupid. They are ignorant and that is one of the reasons why they are easily misled by politicians and by the nonsense that floats around the internet.

Monday, February 7, 2011

The "Barge"Economy in the US

Harold Meyerson picks up and expands a story that we have been pursuing on this blog and elsewhere. When Jack Welch was CEO of GE he said that the ideal company would be able to put its business on barge and put it anywhere where the currency and changes to the economy indicated the best opportunities. Well it has been done. America's multinationals, which account for 74% of US sales, have put their companies on barges and that is where the jobs have been going and this has been very good for corporate profits which are at historic highs even as they have shedded US jobs. Those jobs are not coming back and even though the Obama administration understands the problem, they have no plan for dealing with issue. They are married to a vision of an economy that rewards the top executives of multinationals and their stockholders along with a banking system that no longer has a mission of allocating capital to its most productive purposes in the US.

Meyerson, contrasts Germany with the US to make some important points. Germany has a export based economy despite average hourly wages that are much higher than those in the US. How have they done this? At a deep level our economies operate with a different philosophy. US corporations along with those in the UK, are guided by a single goal of increasing shareholder value. This differs from the German economy which operates under a goal of satisfying the needs of its stakeholders which include its labor force. The German banking system is also very different. The banks in each locality serve the businesses in their locality. The small business sector has access to the funds needed to innovate and develop the new businesses that the economy requires. The US banking system no longer operates under the premise that local banks are there to serve local businesses. Changes to banking laws have opened up local markets to competition from national banks that have no particular concern for local businesses. Many of these banks have moved to the loan origination business where they originate the loans and sell them to Wall Street.

In a Democracy, one would imagine that the electorate would look out for its own interests. This requires an electorate that is informed and empowered to take actions to improve its well-being. We do not have that kind of electorate in the US. The media has done of poor job of informing the public and and it even engages in disinformation. How could it be otherwise when the media are owned by multinational corporations and when corporate advertisers influence program decisions by discretion in what programming they will fund with their advertising dollars.

Quo Vadis Huffington Post

This article raises questions about the future of the Huffington Post following its sale to AOL for over $300 million. AOL has been one of the worse destroyers of value after mergers and acquisitions than any firm in the media industry.

Right Wing Exploitation of the Internet

As a follower of bloggers like Krugman, who often take positions that challenge corporate or state interests, I often read some of the comments to their posts. It has become predictable that the number of slanderous comments and repetition of false claims increase whenever an issue is raised that threatens important interests or prevailing ideology. These commentators do not debate the evidence that led to the conclusions that they do not like. Instead bloggers like Krugman are personally attacked by labeling them as "lefties", "socialists" or even worse. The above link is to some research that has been done which explains how these attacks are funded and organized by right wing astroturf organizations which instruct Tea Party members, and others with similar views, on how to use the Internet to serve their purposes. This article barely touches the surface but it is instructive.

Worldwide Food Production Down Because of Climate Change

Krugman looks for an explanation of rising food prices which are leading to political unrest in poor countries and links declining food production to weather factors. 2010 was one of the warmest years in history. Rising sea temperatures has caused flooding in some parts of the world and Russian wheat production declined as result of high temperatures and draught. Temperatures in Moscow reached 100 degrees for the first time in history.

Krugman doesn't expect the usual suspects to buy into his argument but he believes that we are just seeing the beginning of the impact of global warming on weather patterns.

Sunday, February 6, 2011

JP Morgan and Madoff

This article raises questions about the relationship between JP Morgan and the Madoff Ponzi scheme. JPM is being sued by The Trustee who is trying to recover money for those who suffered losses. The article refers to the specific page in the suit that implicates JPM. There is also a link to an article by Peter Goodman who states this is consistent with the changes on Wall Street since the boom. He argues that they are no longer banks and have become casinos that get a cut on every bet.

Saturday, February 5, 2011

Inequality as the Next Wildcard

Kenneth Rogoff, posted an article about one of the big topics at Davos. He argues that inequality within countries has been rising even as inequality between many countries has been falling. Ordinarily, countries are able to deal with inequality by redistributing income. However, many countries are unable to redistribute income because of the fiscal burdens they are dealing with in response to the financial crisis and the worldwide recession. For example, Spain has a 20% unemployment rate but its government is unable to increase its debt burden in response to the inequality problems that it faces. He views the recent problems in Egypt as an issue that many countries may have to face in the future if they are not able to resolve their problems through democratic processes.

He does not refer specifically to rising inequality in the US but he does not believe that governments can raise taxes on the rich because they can take their businesses elsewhere. In fact, the CEO of JP Morgan, and the CEO of Barclays in the UK made that point at Davos. In any case, this could become an issue in the US and it has not been addressed by government. Most of the economic proposals from the administration, such as improving access to quality education, do not reduce inequality in the short term.

Bill Proposed in Arizona to Enable State to Nullify Federal Law

The proposed bill would create a committee that would decide whether a federal law or executive order was constitutional. In a sense, this committee would replace the Supreme Court, at least in Arizona, as the government entity that interprets the constitution. I doubt that this bill will amount to anything but it reflects the influence of Tea Party activists at the state level. Several states are proposing laws that would give them the authority to reject aspects of federal laws. This kind of activity was the precursor to the Act of Secession that triggered the war between the states. Supreme Court Justice Scalia, who believes that the Constitution should be interpreted according the original intent of our founding fathers, gave a lecture on the Constitution to a congressional group organized by Rep. Michelle Bachman who is closely connected to the Tea Party. He believes that the Supreme Court has the authority to determine the constitutionality of federal law, but his actions encourage the Tea Party crowd because it believes that it understands the original intent of its authors.

Comments by CEO of Largest Bond Fund

PIMCO's CEO stated that Greece's debt was unsustainable and that Europe should absorb its debt to bring it to 90% of its GDP. He believes that the current rescue plan, which imposes severe fiscal austerity, would curtail growth and cause political unrest. Greece needs to grow its way out of its fiscal mess. He also said that PIMCO is not buying Irish, Portuguese or Greek debt.

He also stated that the US was exporting inflation to the rest of the world with its expansive fiscal and monetary policies. The US needs to adjust itself to a long period of slow growth and high unemployment in response to a changing word economic order. His comments echo those of many critics of US economic policy in Europe and Asia.

Friday, February 4, 2011

Job Growth is Slowing Down

This graph shows job growth in our current downturn versus job growth in previous downturns. There is no comparison with that of previous recessions. In fact the rate of job growth has slowed down in recent months

Analysis of Ryan Plan to Reform Medicare

The Ryan plan is consistent with other GOP approaches to reforming healthcare. He advocates a voucher plan that would be used to purchase healthcare. The value of the voucher would grow by GDP plus 1% annually. This transfers the risk of growth in healthcare costs from the government to the individual. The article provides information of healthcare cost growth in Oregon which shows that healthcare costs are growing faster than GDP plus 1%.

Fox News Searching for Climate Change Deniers

True to form, Fox News has decided to continue with its disinformation campaign on climate change. They understand that its customer base wants to remain critical of the science on climate change. All they need to do is find anyone on the fringe of the science to feed them red meat. Its not essential that they prove to their customer base that claims about global warming are false. They only need to convince their customer base that there is doubt in the scientific community. Since their customer base believes that the response to global warming may have some financial cost, they will not support efforts to limit climate change as long as there are any doubters in the scientific community. This is all that the Tea Party crowd needs. It fits in with their view of government. Cut taxes and limit the role of the federal government just as they believe the Constitution demands.

You may notice that I referred to those who watch Fox News as its customer base. Ruppert Murdoch has built his media empire by carefully cultivating the populist base in the UK, Australia and the US. There is a business purpose and a political purpose to his methods. One GOP politician commented that he believed that Fox worked for the party. He now believes that the GOP works for Fox News. It has become dependent upon yellow journalism to nurture its base.

Global Warming Means Extreme Changes Climate

whenever I hear or read someone claiming that the extreme cold and snowy weather proves that global warming is nonsense I can only roll my eyes and despair. My despair is a response to ignorance. People tend to believe what they want to believe. If people who know nothing about climate science, like Rush Limbaugh, or people who do know climate science but have sold out to the energy companies, or to a political party, tell them what they want to hear, they will believe it. This article, informed by climate scientists, tells us that global warming is about CLIMATE CHANGE. We are seeing some of these changes today, and unfortunately, they will worsen as as our planet continues to warm.

Thursday, February 3, 2011

The Wheel of Doom

This chart is from Meredith Whitney's presentation on the risk in state bonds. It has precipitated a large withdrawal from state bond funds and PIMCO, which is the largest bond fund has been critical of her report but the wheel of doom does make some sense.

Simon Johnson's Testimony to Senate Banking Committee

I have highlighted some of the statements by Johnson in his testimony on Tuesday:

Employment recovery from the Great Recession is very different from previous post war recessions. Employment fell 3-5% from its peak and returned to peak in 12-24 months during recovery in prior recessions. The 2001 recovery was an exception with employment falling 3% and recovery to peak taking 4 years. Employment fell 6% in the Great Recession but it is still down 5% after 3 years.

Non-financial corporate profits fell 20% from peak to trough during the Great Recession. By Q3 2010 they returned to the 2006 peak. There seems to be little incentive for corporations to resume hiring in the US. They see better opportunities in emerging markets.

The slowdown in new household formation may have an impact on the housing market. In the decade before the crisis 1.1 million new households were formed per annum. Since the crisis, new household formation has dropped to 600,000 per annum.

The largest 6 banks in the US are bigger than they were before the crisis. Their assets as a percent of GDP have increased from 56% before the crisis to 64% after the crisis. They were only 15% of GDP as recently as 1995. These banks have implicit support from the US government which lowers their cost of capital and has improved their credit ratings. They may becoming to big to save. Ireland provides an example of being to big to save. Loans from European banks to the three largest Irish banks fueled the housing bubble in Ireland. The European banks assumed that the Irish government would not permit them to fail. It turned out that the bail out of the Irish banks exceeded the capacity of the Irish government's finances. The IMF and the European Central Bank had to finance the rescue operation.

Fannie Mae and Freddie Mac failed as a result of poor risk management and they required a government rescue. They were not, however, the principle causes of the financial crisis. They were marginalized by the Wall Street Banks which captured the major portion of the mortgage backed securities market from them by bringing riskier products to the market.

Research indicates that US politicians share the values of America's wealthiest citizens and that lower and middle income Americans are not being heard. There are many reasons why this might have happened but the consequences are uncertain.

Tuesday, February 1, 2011

Corporate Tax Rate and Efficiency

The GOP complains about the corporate tax rate which is higher than many countries. However, few companies pay the 35% tax rate. They find lots of ways to legally avoid taxes. One of the problems, other than the falling contribution to taxes by corporations, which shifts the burden elsewhere, is that many corporations make bad business decisions because they are trying to cut taxes rather than thinking about the business decision.