Thursday, March 31, 2011

Is Education a PC or a Mac?

link here to article

Bill Gates has advocated improvements in the teaching of science and math. Steve Jobs has argued that the humanities have been key to success of Apple. Wesleyan University has been an advocate of a broad liberal arts education which includes science and the humanities. The President of Wesleyan argues that both are platforms, rather than specific skills, and that the PC and the Mac are really platforms that have been behind the success of both companies. They both have led to complementary developments that have enriched their companies.

What Explains the Decline in Business Investment?

A conservative economist has received a lot of attention from a graph that he published on his blog showing that unemployment is correlated with the decline in business investment. He explains this relationship by arguing that job loss is due to government over-regulation which has affected business confidence and the fall in business investment. What does the correlation explain, however?

Business investment is a broad concept that includes residential real estate investment as well as business investment in plant and equipment. When the business investment data are decomposed it is apparent that investment in plant and equipment is similar to what it was in the same stage of the modest recession in 2001. The big change in business investment has been the busting of the housing bubble. The resulting recession, of course, has cut into consumption and business has done what it always does when consumption falls. It burns down inventory and it puts off investment in plant and equipment.

John Taylor is a smart guy and he knows that business investment includes residential real estate investment. Its hard to understand why he explained the relationship between business investment and job loss the way that he did. It makes sense, however, when we relate it to ideology. Conservative economists have a propensity to explain almost every economic problem on the same enemy. The government, and not the market economy, is always the cause of our economic problems. This was true of the Great Depression and it is the conservative explanation of the Great Recession and high unemployment.

Is the Fed Still too Close to the Banks that They Regulate?

link here to article

We recently posted an article on the reported profits in the financial sector. This article raises questions about the reported profits and, more importantly, about the priorities of those who are supposed to be regulating the banks. The editorial claims that the reported profits may have been inflated by downward revisions to future losses from bad assets that they hold. Since many of those bad assets are in real estate securities the downward revisions may not accurately reflect bank exposure to loss as housing prices continue to fall, and bank penalties for dealing with foreclosures improperly have not been decided. Allowing banks to pay out dividends, and to buy back stock shares, is a way to reward bank executives and other shareholders. It also reduces the cushion that banks may need if they underestimate future losses and penalties.

A Book on Bill Gates that Has the Feel of the Movie "Social Network"

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This article (Via Manan Shukla who has been reading a lot) describes the relationship between Bill Gates and Paul Allen who was one of the co-founders of Microsoft. One part of the story is about Allen's resentment over a plot between Gates and Balmer to dilute Allen's share of Microsoft stock. This was one of the plots in "Social Network". Allen is worth around $9 billion today and he has been successful in several areas. He is also a big philanthropist. Its amazing, however, how things that affected him a long time ago have been festering in Allen's mind so much that he decided to make them public.

What Does the Possession of a US Passport Tell US?

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This article (Via Manan Shukla) provides some fascinating data on the relationship between the possession of a US passport and a host of other variables among US citizens. There is a wide difference between states in the ratio of passport holders and it correlates with the voting patterns of the states. We would expect richer states to have a higher ratio of passport holders but many of the correlations hold even when corrected for income.

More Bad News for Ireland's Banks and the Country

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This article (Via Manan Shukla) paint an even bleaker picture of Ireland's financial crisis than some of our previous posts on problems in Ireland. It is a story of a banking system which is to big to save. The iIrish economy is not big enough to absorb the losses suffered in the banking system. The banks borrowed heavily from banks, especially German banks, in Europe and the government guaranteed the debt. The problem is that the Irish economy is small relative to the total debt burden that the banks and the government have assumed.

Wednesday, March 30, 2011

Right Wing Funding of Tea Party Tactic to Kill Healthcare Reform

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This article describes how a right wing group from Texas is trying to have states take over healthcare as a way to kill it. The question that occurs to me is why a typical Tea Partier, who is dependent upon someone in their family receiving Medicare of Medicaid benefits would want to do this. The only benefit goes to those who want to limit taxes or the ability of government to support those in need.

This Could Describe Many of those in the Tea Party

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I couldn't resist this post. It says a lot about the folks who go around saying how much they love their country. They really hate everything that is not part of their arrested development.

GOP House Votes to End HAMP Program

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The HAMP program has been a failure and the GOP decided to reming voters that it has failed. The House voted to terminate the program even though it will not be approved by the Senate. They did not propose anything to replace the program so they did little to help the home owners who they claimed to be so concerned about in their debate. Its all about 2012 elections.

Housing Prices Begin Decline Again

This graph shows that housing prices in the US have begun to decline after it appeared that they had begun to recovery. This probably reflects the increased sale of foreclosed homes which are sold at distressed prices. This result reinforces the point made by the Inspector General's report on the TARP program below. Government has done little to prevent the decline of home prices and to preserve home ownership which was one of the goals of TARP.

Inspector General of TARP Critical of its Performance

link here to article

The Inspector General agreed with the governments assessment of the TARP program's performance in rescuing the Wall Street banks. The largest banks are 20% larger than the were before the crisis and they are back to pre-crisis levels of profits. They remain "too big to fail" and because investors do not have to worry about defaults, they can borrow money at rates below those available to smaller banks. If the Treasury Departments goal was to preserve Wall Street it has been a huge success.

The report argues, however, that the other objective of TARP has been a big failure. Congress passed the TARP legislation with the assurance that TARP would purchase mortgages from homeowners in order to preserve home ownership and protect home values. The HAMP program, under the direction of Treasury, was a big flop.

Furthermore, Treasury has resisted real efforts to reform Wall Street. The banks have been restored to their prior dominance of the economy at the expense of Main Street and little has been done to keep them from creating the next crisis. It appears, the the Inspector General that, Treasury, which is staffed extensively with former Wall Street bankers, shares too many of the values of the banks that they came from.

Tuesday, March 29, 2011

A Conservative's View of the US as Greece

link here to article

Greg Mankiw is a conservative economist who, for a brief interval, was the head of Bush's Council of Economic Advisors. In this article he paints a picture of the US in which it looks pretty much like Greece looks today after years of poorly running its economy.
Investors will only invest in US debt at very high interest rates and interest payments become a very large part of the total budget.
The US, like Greece, will be forced to accept austerity as a fact of life. Taxes will have to be raised and government entitlement programs will have to be drastically cut or eliminated for many Americans. Just to amplify his message, the IMF is now located in China, which reflects its loss of economic power and influence.

Mankiw is correct about a couple of things. Our political system has failed us in several ways. It has been easier to win elections by providing tax cuts that are paid for with debt and not with cuts in spending. We have the lowest ratio of taxes to GDP of any OECD countries as a result. Most of this occurred under the Reagan and Bush Jr. administrations which he does not mention. We also have failed to deal with the rising cost of healthcare as he mentions. The Obama reform plan does have cost reduction aspects in it, but the GOP is doing what it can to neuter the plan. Mankiw only mentions the rising costs of new technology as the driver of healthcare costs. This is a factor but it is only one of many. Every industrial economy is using new technology as it becomes available, but most are able to provide universal coverage and excellent healthcare at half the per capita cost than the US. They have more efficient systems of delivering healthcare and containing provider price inflation.

Lastly, the US is not like Greece in many respects. It is not likely to encounter problems in the future that are anything like Greece faces. Presumably, Mankiw wrote this article to encourage us to thinks about changes that we need to make today in order to provide a better future for future generations. The message that he delivered appears to be more consistent with conservative efforts to frighten Americans about the future as a result of overspending by government.

US Budget Battle and its Consequences

link here to article

The GOP had started out the battle with Paul Ryan's plan to cut $32 billion in discretionary spending from the 2011 budget. It escalated to a $74 billion cut proposed by the GOP leadership. The Tea Party crowd objected to the House leadership plan and demanded a $100 billion cut. The administration started out with a $20 billion cut and it looks as if it has moved to $50 billion compromise to prevent the GOP shutdown of government by failing to raise the national debt level.

If the next compromise is to split the difference between the Tea Party goal of $100 billion and the new administration target of $50 billion, the result would be close to the House leadership proposal of $75 billion. So it looks as if the GOP, by taking a harder stance on budget cuts, that are believable because of Tea Party demands, will win the negotiation battle at the expense of the American people. Unemployment will rise; economic growth will slow and vital government services will disappear. This will set the stage for the 2012 election cycle with the economy in very bad shape. This will be good for the GOP but bad for the country.

What is described above is just another political contest over budget negotiations. The outcome will not be good but the real shame is that it does little to deal with our long-term deficit problems. They are all about the rising share of healthcare costs in the projected budgets. The GOP has turned the battle of budget deficits to a way to appease its Tea Party supporters who have no understanding about the central issues. Unfortunately, the administration believes that has been forced into the wrong game and it has chosen to be weak player in the game.

Wall Street Profits Surge in 2010

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The latest GDP figures for 2010 include data on corporate profits. Corporate profits were at a record high in 2010 but all of the gain came from a big increase in financial sector profit which account for 30% of all corporate profits. The financial sector earned this share of corporate profits by providing only 10% of corporate added value. In two years financial sector profits have gone from a $65 billion loss in 2008 to $426.5 billion in 2010. Part of the gain is attributed to the low cost of funds that are obtained from the Fed at almost zero interest.

The banks are worried that financial reform will shift some of its profits to other sectors. For example, if the banks get lower fees for debit card transactions this will shift some of their profits to the merchandize sector.

Monday, March 28, 2011

The Attack on Financial Reform

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The Dodd, Frank reform bill leaves a lot of discretion with regulatory agencies to interpret the intent of the law and to enforce it. The lobbying by the banking industry has been intense against aspects of the bill which limit their risky rent seeking behavior. The GOP has been most eager to show its support for neutering the law. Its approach is similar to its response to the healthcare reform bill. They are cutting the budgets for the agencies that are responsible for enforcing the bill. They can cover their actions by their generic opposition to big government and government spending. They are also trying to staff the agency leaders so that it will be more difficult to make decisions and get things done.

The Obama administration has an opportunity to provide some leadership by choosing the most qualified person for heading up the Consumer Protection Agency. The GOP will oppose a competent leader like Elizabeth Warren but this is a good way to expose its game plan to the public. She handles herself well when faced with tough questions. It would also excite his base which has been looking for signs of leadership. The risk, of course, is that it will be more difficult for him to raise campaign funds from Wall Street.

Do Lower Wages in the US Increase Employment?

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Some GOP politicians are arguing that cutting the number of government workers will help to create jobs in private industry. They claim that this will create more competition for jobs and lower wages. When wages fall, employers will have an incentive to hire more workers.

Krugman explains why that does not work in the US which has its own floating currency and when short term interest rates are already zero. Lower prices increase aggregate demand as follow: There is a lower demand for dollars which leads to lower interest rates which should increase spending. Since interest rates can't go lower than zero, there will be no increase in spending in the US by lowering wages. We get deflation which increases everyone's debt burden because debt must be repaid with more valuable dollars. (Dollars are worth more when they can purchase more at the same price)

In countries that share a common currency like Ireland, lower wages may lead to more employment. For example, Irish workers will be less expansive that German workers who share their currency.

High Finance is Similar to Warfare

link here to article

This article requires a thoughtful read but it makes several very important points that explain our recent financial crisis and predicts the next one that is sure to follow in the US, since our government has decided not to limit the destructive behavior that is implicit in the system.

One of the important insights in this article is that complexity is central to financial firm rent seeking behavior. Profits are limited in an efficient market because both parties to a transaction have equal knowledge. Therefore, banks create financial products that are opaque and complex. For a simple example, read your credit card agreement. It is incomprehensible to most people and lots of money was spent on legal efforts to make it that way. The banks have protected themselves with the agreements and the consumer is taking unknown risks. This is common to even more complex instruments such as CDO's and other derivatives that bankers sell to supposedly sophisticated customers.

The problems with complexity, which Finance creates in order to harvest risk as excess profit, is that it creates unknown unknowns. That is, complexity does not simply amplify risk, it creates unanticipated risks. It is even more of a problem when the players in the system are tightly coupled as we observed in the last crisis. Problems at Lehman, for example, created problems with all of its counterparty's which led to unanticipated problems elsewhere. It also means that a process moves forward faster than we can analyze and react to it. Decisions had to be made quickly and not all of them were good decisions.

Warfare is a complex system that has destruction as its endpoint. Once the war begins both sides have set in motion a game that can only end by the capitulation of one of the parties that must accept defeat. The US, for example, is unable to extract itself from a war against terror which is not a state that can be destroyed. It cannot stop the war without admitting defeat and suffering the political consequences. Our financial system is similar to warfare in the sense that it is predicated on complexity and tight coupling which leads to unanticipated risks that make destruction likely. It is only able to continue in its rent seeking forms of complexity because the state is there to rescue it.

Wisconsin GOP Effort to Discredit Scholar Backfires

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The GOP may have picked the wrong professor to smear. William Cronon is the incoming President of the American Historical Association. The AHA just released this response to the GOP request to the University for access to Cronon's university email account after he published an op-ed critical of the GOP's anti-union actions after taking power in Wisconsin.

The tactic used by the GOP in Wisconsin is standard operating procedure for conservative action groups. Last year, they hacked into university email accounts to fish for anything that might discredit climate scientists. Some of the researchers made snide remarks about climate change deniers. Those comments were spread all over the world and it was enough the change public opinion about the validity of climate scientist's evidence on the environmental threats associated with global warming.

I have lots of friends who have been republican's most of their lives. It used to be a party that had some principles and most of its elected officials put the country ahead of party politics. This is no longer true. The party has been taken over by far right organizations that puts its agenda ahead of that of the country. Their effort to silence academic critics is not part of the America in which most of us believe. It is more typical of autocratic regimes that most American's detest.

Key German Election Votes Against Nuclear Energy Policy

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Angela Merkel's conservative party lost an election in a German state that has been a stronghold of the party for over 30 years. The result reflects the growing strength of the Green Party which has opposed Merkel's pro nuclear energy policy. This result obviously reflects concerns over the use of nuclear energy given the recent crisis in Japan.

Sunday, March 27, 2011

Is $54 million Pay for Ford CEO Too Much?

link here to article

Mark Thoma does a good job of trying to answer this question. Economic theory says that pay is a function of productivity. In that case, the Ford CEO would have earned the $54 million by his contribution to the productivity of Ford employees. Obviously, one cannot measure CEO productivity so we can't use economic theory to answer the question. We can, however, compare CEO's in the US with CEO's in other countries. American CEO's are paid several times what CEO's in Europe and Japan earn. It would be hard to argue that they are several times as productive as their CEO counterparts overseas. Some research suggests that there is a relationship between CEO pay and poor performance. Overpaid CEO's, in that case, reflects weak corporate governance which contributes to poor performance. Mark Thoma also suggests that linking CEO pay to financial results may influence CEO's to make decisions that maximize short term performance at the expense of longer term growth and profitability.

The best study that I have read on this subject is in a book called " Searching for a Corporate Savior". It was written by R. Khurana, a Harvard professor who did a study of the CEO selection process by corporate boards. He concluded that there is no market for corporate CEO's, in the sense that economists refer to markets, where the price is determined by supply and demand factors. CEO pay is determined by a process that is primarily devoted to justifying whatever the CEO and the board agree upon. It is an irrational process that is made to look rational.

Saturday, March 26, 2011

Freedom of Speech in a GOP Led Wisconsin

A professor at the University of Wisconsin wrote an op-ed in the NYT critical of the GOP's misuse of power. The GOP response was to demand access to his university email records. What they hope to find is anything that can be used to discredit him as a critic. This would also have a chilling effect in academia. Anyone critical of government might fear that the government would poke into their private email records. Is this the kind of America that the GOP represents?

One More Time Its Healthcare Price Inflation Stupid

This graph puts the long term US deficit in the proper focus. The current plan is to keep tax revenue as a percent of GDP flat and to make cuts in discretionary spending. The only spending that really matters is healthcare spending. The GOP is trying to repeal the only plan that we have to limit growth in healthcare spending and its base is convinced that cutting the parts of the budget that don't matter is whats important. Getting rid of earmarks in response to their base has little impact on the budget but it has a big political impact. It excites the neanderthals.

Friday, March 25, 2011

Keynes Describes His Conflict With Orthodox Economics

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This is a transcript of a BBC speech by Keynes 2 years before he published his landmark book which detailed some of his thinking in this speech. He refers to orthodox economists as those who hold the view that markets are self correcting and that are better off to let them self correct when there is an economic downturn than we would be if the state intervened in the market. He expresses respect for the orthodoxy that he was taught and he acknowledges the hold that it has on the thinking of economists and practitioners alike. He points out, however, that Marx's attack on capitalism is based upon his understanding of Ricardian theory which dominated the profession. There is a sense that defending the orthodox view is a justification for Marxism which had made a strong attack on the logic of capitalism and the consequences of extending that logic to the future. He was beginning to realize that the doctrine of laissez-faire and Marxism were intertwined and that both failed to explain economic reality.

Keynes's language is arcane and hard to follow for a modern reader but this short article explains much of the debate that we are seeing today as economists and politicians consider how to deal with the economic downturn. Orthodox economists have resorted to the use of Ricardian theory that Keynes was attacking to argue that fiscal policy would not work to end the recession. Keynes also attacks the dependence of orthodox theory on the concept of self adjusting interest rates. The idea is that interest rates will fall in a recession and encourage business to spend on new investment and it will also encourage consumers to spend with the use of cheap credit. Keynes did not believe that business would invest, even with low interest rates, if they were not confident in achieving an adequate return on its investment. He was also aware of the liquidity trap that we have today when interest rates are at the zero bound and business investment is still stagnant.

Kenes considers some of the things that might be done to get out of the depression. One of the things that he considered was the redistribution of income from those who tend to save a large portion of their income to those who would spend most of it and also receive a higher benefit from the spending due to decreasing marginal utility of consumption as income increases. He also talked about ways to encourage business investment and compared the two approaches. His hope was that ultimately there would be sufficient capital investment to produce all of the real necessities of life for everyone and the result could be greater leisure and the enjoyment of the better things in life did not require undue consumption.

GE Puts Imagination to Work in its Tax Department

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I tell my students that there are two things that government does: They collect revenues from taxes and they spend the revenues. The best way to understand government is to figure out who they decide to take the money from and what they spend it on. This article on GE tells us some important things about where the tax money comes from. GE's tax department is regarded as one of the best in the business. This article describes how GE was able to get a $4 billion tax refund on top of its operating profits last year. One of GE's tactics is to arrange things so that its profits are concentrated in low tax off shore countries like Ireland and Singapore. Most multinational corporations operate in a similar way. The result is that the share of US taxes paid by US corporations has fallen from 30% in the mid 1950's to only 6.6% in 2009. At the same time corporate lobbyists are complaining that the corporate tax rate needs to be reduced in order to make corporations more competitive with overseas companies that have lower corporate tax rates. They argue that this will help to create jobs and many of our politicians agree with that argument. GE, which receives a tax rebate instead of paying taxes has reduced US employment by 20% in the meantime.

Some people will applaud GE and its tax department for being so good at what it does that it is regarded within GE as a profit center. They should consider the consequence, however, when multinational corporates like GE pay lower taxes or no taxes, the rest of us pay higher taxes or the government runs budget deficits. This shifts the tax burden to domestic corporations that do not have off shore tax havens, and to individuals who do not pay millions in lobbying to shift the tax burden to others.

Austerity Now Strategy Failing in Europe

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The yield on Irish debt is now 10% and unemployment is 13%. Portugal's debt has become more expensive and the economy is not recovering. Britain has lowered its growth forecast and unemployment has not recovered. Deficit hawks cheered their austerity plans but their economies are lagging behind. That means that tax revenues will continue to fall and erode any impact from spending cuts. Krugman argues that we should be putting people back to work now in order to increase tax revenue and put a plan in place to deal with the real fiscal problems we have in the long run. It seems as if politicians are more focused on what they do best: political campaigning, instead of solving our real problems.

Thursday, March 24, 2011

China Did a Better Job of Dealing with Recession Than the West

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This article describes a balance sheet recession and why it requires a substantial fiscal response. That is what China did and they are out of recession. It is also what eventually got Japan out of recession after a long period of an inadequate fiscal response. Much of the western countries look like Japan in the early stages of its balance sheet recession.

Wall Street Versus the Rest of Us

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This article describes one of the many battles underway in Washington in which banks are attempting to limits aspects of the financial reform bill that will cut into their profits. The focus of this article is on the fees that the duopoly of Master Card and Visa charge merchants for every debit card transaction. These fees add up to $16 billion, and merchants pass much of this cost back to consumers via higher prices. Since there is no competition in this market the fees are higher than they would otherwise be. This is just another form of rent extraction that is quite common on Wall Street, where there is little price competition for many of the fees that the banks receive for services provided. The proposed reform would set the fees to the level that has been set in Europe so the banks can't argue that it would not be profitable, it would just reduce their rent extraction. The argument made by the banks is that it is not a battle between consumers and the banks but between merchants and banks. This argument presumes that merchants do not pass much of the cost to the consumer.

The other point made in this article is more bothersome. Just prior to the last recession, 40% of all corporate profits in the US went to financial service providers. Profits fell, of course in the recession, but they are now approaching their prior peak. We have an economy in which a major share of corporate profits go to financial service providers. It is also an industry that is not subject to price competition for many of the services provided. That is one of the reasons why wages are much higher on Wall Street than elsewhere in the economy. It is also one of the reasons why middle class wages have not grown much over the last 30 years. Historically, is has not been good for an economy to have the financial sector represent such a high percentage of the economy.

Is Owning a Home a Good Investment?

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The graph in the this article shows nominal appreciation in housing prices and price appreciation corrected for inflation (real price). A lot of people have sold a home at a profit or they have heard of people holding a home for a long time selling it for twice what they paid for it. The nominal price appreciation line shows that effect. On the other hand, the real price appreciation line is flat except for certain periods of boom or bust. That means that purchasing a home has not been a good investment. It is, however, a forced way to save money. Part of every mortgage payment increases one's equity in the home which is an asset. If one pays cash for the home it is then simple a way to store money for future use.

Go East Young Man Go East

link here to article

This map shows how the center of the worlds economic activity has shifted since 1980. It illustrates what most of know.

Wednesday, March 23, 2011

San Francisco Fed Study of Recent College Grad Unemployment

link here to article

The last two US recessions have seen recovery's with weak growth in employment. Some have explained this as a mismatch between the skills being sought by employers and the skills of the labor force. In that case we have a structural unemployment problem and not a lack of demand for labor. This study by the San Francisco Fed did what those who assert that we have a structural unemployment problem did not do. They looked at some data. The looked at unemployment data for recent college grads in both the 2001 recession and the 2008 recession. Recent college grads are usually prized because they are easily trained for specific jobs and they are flexible in terms of location. The Fed found that the unemployment rate for recent grads was similar to that of the general labor force and they concluded that the jobless recovery's in the last two recessions are due to the lack of demand for labor. Therefore, we have an unemployment problem that is related to a weak business cycle and which can be mitigated by stimulating the economy.

The Survival of the Least Fit in Washington

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The GOP is blocking the appointment of highly qualified people to key positions in government. We already discussed the administrations problems getting Elizabeth Warren into the Consumer Protection Agency. She is one of several other candidates with excellent qualifications who are being blocked. Krugman compares this with the way in which the Bush administration staffed the Provisional Authority that was put in charge of running Iraq. The primary qualification for an appointment was loyalty to the GOP and its value system. Many key positions were staffed with inexperienced people who messed things up badly. This was also true in the Justice Department. Important jobs were given to interns with degrees from Liberty University whose qualifications were based on loyalty to the Bush agenda instead of legal expertise. We all remember the Katrina fiasco as well and Bush's comment during the fiasco "Good job Brownie" in reference to the head of FEMA who had no previous experience in disaster relief but who was a good friend of one of Bush's old buddies. This is the way that many third world countries are run. That is the direction that we are headed as long as we keep electing people to government whose primary concern is that it not be run well.

Tuesday, March 22, 2011

Detroit as a Symbol of Post Industrial US

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In 1950 Detroit's population was close to 2 million and it was the 4th largest city in the US. The 2010 census shows that the population is now 713,000 and it is the 18th largest city in the US. Over one million residents have left the city. It is now smaller than Charlotte, NC, Austin TX, and Jacksonville, Fla. The loss of population and the tax base has turned a once great city into a ghost town.

Key Ruling against Deutshe Bank on Derivative Sale

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The bank argued that any high school grad could do the math necessary to understand what was being purchased. The court disagreed. This sets a precedent for banks who argue that customers know what they are purchasing when the bank is an advisor as well as a seller.

Why Was Unemployment In Germany in Recession Lower Than US?

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This study by Brookings Institute attempts to isolate the factors that contributed to Germany's better employment numbers during a recession in GDP declined more than it did in the US. We know that businesses in the US cut employment rapidly and drastically at the first signs of recession in the US. It explains the different response by business in Germany to the fact that they had not increased employment during good times prior to recession and that labor laws gave them more flexibility in assigning hours so that overtime premia were reduced.

Some economists in the US argue that safety net for workers is better than that in the US and that this kept consumer demand from falling as dramatically as it did in the US.

What Do Americans Know and Think About Rising Wealth Inequality?

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This article (via Manan Shukla) looks at what Americans know about the level of inequality and it finds that they are poorly informed about it and that their ideal distribution would be more equal. There are some discussions by a selected group of commentators with different outlooks, but the comments to this article show that opinions on this topic are all over the map. It would be more helpful to examine the sources of rising inequality and to also look at policies that may have contributed to the rise in inequality. Inequality is not the issue. The rise in inequality should be our concern.

Economists Need to Understand the True Cost of Goods

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This short article (via Manan Shukla) tells a simple but profound story told by an economist living in Chile. He lives in an area that has some of the best dairy products in the world and he was surprised to find that the butter he was offered in a restaurant came from overseas. The butter from overseas had a lower price than local butter because of government subsidies which overcame the cost of transport. The cost of transport to the environment, however, is not part of the cost structure that economists would consider relevant. Environmental damage is not internalized so it does not exist.

UK Jobless Recovery and Budget Policy in Conflict

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The conservative UK government continues to push for cuts in government spending in the face of a weak recovery. The Financial Times has argued that government policy will only make the economy worse. The government, however, believes that fiscal austerity will improve business confidence and help to stimulate the economy. Their belief in the "confidence fairy" is very similar to that of conservatives in the US.

This article does not mention the recent inflation numbers in the UK. Despite the weak economy, and falling wage income, inflation is over 4% in the UK. Well below the 2% target rate. It is driven by rising commodity prices and increases in the prices of some common household items. This may make it difficult for the Bank of England to keep interest rates at their current level. If the central bank if forced to raise interest rates, the economy will be hit with a double whammy. Fiscal austerity and higher interest rates will slow growth even further.

Existing Home Sales Down and Prices Fall to 2002 Level

link here to article

The latest report on existing home sales show the housing market will continue to be a drag on the US economy. Sales were well below forecast and prices are at a 9 year low. Short sales and sale of foreclosed homes were 39% of existing home sales and this may account for the fall in prices. Prices for existing homes are well below the cost of new construction. Inventories are 30% higher than they were before the recession and they are also a drag on the market. The inventory numbers may even understate the real level since banks have not put all of their non performing inventory on the market.

Rising employment may help the market over time but the weak housing market prevents the economy from growing fast enough to bring unemployment levels down at a faster rate.

AT&T's Legal Challenges in T-Mobile Acquisition

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AT&T will have to pay Deutsche Telekom $3 billion penalty if its acquisition is not approved by the US government. Its acquisition of T-Mobile will result in a duopoly in the US mobile telecom market. AT&T and Verizon will dominate the industry and this raises anti-trust concerns. How will this affect consumer prices and the degree of innovation in the market?

AT&T must feel confident that it can overcome those objections. It will follow the traditional method for overcoming anti-trust objections. They will redefine the market as a system of local markets in which there are more than two competitors in each local market. That is, the national market share of the duopoly is not the relevant way to look at the market. They will also argue that only large providers can provide the level of customer service and access the broadband spectrum that is necessary to meet the national goal of wireless internet service everywhere. They must also be prepared to make some concessions in order to appease regulators. They may have to allow virtual mobile operators access to their network to provide services as well.

UK Banks Borrow Heavily from US Conservative Response to Bank Crisis

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Demos, a formerly left leaning, organization has written a pamphlet critical of the work done by the Independent Banking Commission (IBC) in the UK. The IBC Preliminary Report will be released in April and the final report is expected in September.
The Demos response was authored by a former MP Kitty Ussher and this article shows that her response makes many of the recommendations found in the Financial Crisis Primer which was published by conservatives who dissented from the majority report of the US commission which has already filed its report

This article begins its criticism of the Demos pamphlet by describing how the Demos Board was taken over by conservatives in 2009 following a funding crisis in 2008. The Board includes George Osborne who is Chancellor of the Exchequer in the conservative UK government.

The IBC preliminary report is extremely critical of the UK banking industry and it recommends some very serious reforms that are much stronger than those recommended by the US commission. They include breaking up the large banks that do investment banking and retail banking along with higher taxes on banker compensation.

The Demos pamphlet attempts to show that the combination of investment banking with retail banking was not a cause of the banking crisis and that the imposition of higher taxes would cause banks to move to countries with lower tax rates. It also criticizes the suggestion that the share of UK GDP, due to the banking industry, should be reduced in order to lower its dependence on the banking industry.

The IBC report goes much further than the US commission in its reform recommendations. Large banks in the UK, particularly Barclays, do not like it and large US banks will not like the implications as well.

Monday, March 21, 2011

How the iPhone Forced the Sale of T-Mobile USA

link here to article

Popular demand for the iPhone on which AT&T had marketing rights, which have now been extended to Verizon was damaging to T-Mobile revenue. The lost 390,000 monthly contract customers since the introduction of the iPhone. This came at a time in which they would have had to make large investments in LTE technology and in the purchase of additional network spectrum.

The deal gives Deutsche Telekom 8% ownership of AT&T and around $20 billion in cash. This gives them benefits from the US market through AT&T ownership and it allows them to use the cash to modernize its European network.

GOP Attack on Warren Is On Schedule

link here to article

To the surprise of no one the GOP has stepped up its attack on Elizabeth Warren who is putting together the new Consumer Protection Agency that was part of the financial reform bill. One might ask why they don't want a competent person to head up the new agency and there are several answers. Krugman points out that banking interests do not want someone with her skills looking over their shoulders, and the GOP, of course, has been sucking up to the banking lobbies for campaign contributions. Krugman also believes that there is an ideological reason. The GOP has sold the country on the idea that government regulation is bad since the Reagan administration. The banking crisis exposed that myth since most people believed that deregulation of the banking system facilitated the financial crisis. The GOP never wants a good myth to be demystified so they are back to their old game of blaming government regulation for everything, including the financial crisis. The last thing they want to see is an extremely competent regulator heading up the Consumer Protection Agency.

Krugman points out that Warren was one of the few leaders who was vocal about lending practices prior to the crisis. She believed that consumer debt, which had doubled as a percent of income, was dangerous to households and to the the economy. The agency responsible for mortgage lending did not see this as a problem. Alan Greenspan, who headed up the Fed, had faith in the ideology of consumer sovereignity. Consumers can be trusted to make decisions that are in their best interest so he did not heed the warnings about lending practices from other members of the Fed who raised concerns about predatory lending practices. It turned out that they and Warren were correct. Predatory lending was bad for consumers and it was bad for the banking system and the global economy.

Another reason for opposing Warren, which Krugman did not mention is that Warren has written a book on the hollowing out of the middle class in the US. In her book she argues that real household wages for the middle class have been relatively flat for 30 years. In order to maintain their standard of living, women responded by entering the work force. For a time, two income households were able to enjoy a standard of living that one member of the household had been able to provide. Before long, even two wage earners were not enough to maintain a middle class standard of living. That is when households, with the cooperation of government, began to maintain their standard of living by taking on excessive debt. Warren's concern for the middle class, and her analysis of the underlying problem, which is flat growth in wages, is not a story the GOP likes to have told.

The administration understands the opposition to Warren very well. The question, according to Krugman, is whether they will see it as an opportunity or as choice that is too risky. The Treasury Department is rumored to oppose Warren's selection and the administration has to be concerned about raising campaign contributions from Wall Street which was one of the largest contributors to Obama's 2010 election campaign.

Sunday, March 20, 2011

Krugman Explains How He Came to View Financial Crisis Differrently

link here to article

Krugman, is seen as a radical economist, particularly by those who know nothing about economics. His views on a couple of topics are also slightly different from those of economists who do understand economics. He believes that he learned a couple of things from his experience with prior crises in the 1990's that changed his thinking about conventional approaches to economic downturns. He explains those experiences in this article.

Most economists had come to believe that conventional monetary policy had solutions to most of our economic problems. The Asian Crisis in the late 90's showed that conventional monetary policy could not solve the economic problems for countries with their debt denominated in foreign currencies. It was necessary to use capital controls to limit the flow of foreign capital into these countries to stabilize their economy's and to prevent future problems from currency speculators. Most economists are opposed to restrictions on the free flow of capital across international borders.

His experience with Japan's long-term recession taught him another lesson. Monetary policy was used to bring interest rates down to zero and it had no effect on economic growth. He became more of Keynesian when he realized that fiscal policy was the best way to stimulate an economy that was caught in a liquidity trap. Conventional monetary policy, which has a focus on interest rates, is not useful when interest rates have fallen to the zero boundary.

Krugman believes that these two changes in his viewpoint explain the major differences between his views on our current situation and those of most economists who are opposed to capital controls and the use of fiscal policy. I believe it goes deeper than that. Krugman also has a value system that may be less common among economists and especially among conservatives. He believes that conservatives want to restore our country to what it was like before the New Deal. He believes that we had a better country in the post war period prior to the Reagan era when conservatives began their attack on the institutions developed in the New Deal. They want to use government to benefit those most able to influence government to their advantage. One of their tactics is to convince others that government is the problem and not the solution. They do not seek to destroy the state, their view of the state is best described by Jay Galbraith in his book "The Predator State".

Study Shows that Growth in Wages Lags Growth in Productivity

link here to article

Conservative politicians have done a good job on turning one class of workers who have not benefitted from productivity growth, against another group of workers who also have not benefitted from productivity growth. Its not uncommon to hear a private industry worker complain about the higher pay received from public employees. In other words, conservatives have been engaged in the politics of resentment. They call it class warfare when people complain about the rich, but it is not class warfare when one group of middle class workers complain about the other. Its easy to see why they like that kind of class warfare. This study by the Economic Policy Institute (EPI), shows that there has been little growth in wages, compared to growth in productivity, in both classes of workers. Productivity has grown almost three times the rate of wage growth. Moreover, 56% of the growth in real wages has gone to the top 1% of wage earners.

The EPI study only showed the growth in productivity and wages for the last 30 years. If they had shown the data for the years prior to the 1980's they would have seen another picture. During that period there was a strong relationship between growth in productivity and growth in wages. About half of the growth in productivity went to wages in the pre-1980 period. Economics textbooks displayed the data from that period to show how wage growth depended upon growth in productivity. Today the message would be that growth in productivity only benefits top executives. This is probably what Ronald Reagan meant when he referred to "Morning in America". It would be better to call it "Mourning in America" from the standpoint of the middle class.

We should also note that the change in the relationship between productivity growth and wage growth was not accidental, or due to some strange abstraction that we all the labor market, it has been closely connected to changes in public policy. The GOP attack on public employee unions today is simply a continuation of GOP policies that began with Reagan.

US Navy is Planning for Impact of Climate Change

link here to article

The US Navy places more faith in a study by The National Research Council than they do the on commentary from Fox News and talk radio. The study showed that arctic ice is receding at 10% a decade and that the Navy will have to protect the sea lanes that will develop. The study accepts the scientific research on climate change and indicates that the Navy will have to be prepared to deal with unpredictable natural disasters. They estimate that $100 billion of the Navy's coastal assets are at risk to rising sea levels. Perhaps tea partier's would pay more attention to climate change if they heard about it from the Admiral in charge of the study. It would be more effective if a historian could show that our founding father's were concerned about climate change but the military would be an acceptable alternative.

Saturday, March 19, 2011

Larry Summers Interviewed by International Magazine

link here to article

Larry Summers played a critical in shaping economic policy in the Clinton administration and in the Obama administration. This is an extensive interview which took place after he left the Obama administration. He had several comments about China but the one that I found most interesting was the idea that concerns about China's economic growth might be good for the US. It would be good if it functioned like the US concern over Russia's Sputnik that caused the US to invest in education and scientific development. (That is what the Obama administration would like to do but it has been held back by GOP opposition.) His view of the US economy is that economies do not function normally when they are in a liquidity trap as we are at present. Interest rates can't fall below zero and even historically low interest rates have not stimulated investment. Business will not invest until demand exceeds its capacity to produce. Banks have the money to lend, and there is an ample supply of creditworthy customers, but they are not borrowing to increase capacity. Concerns about inflation during a liquidity trap are overblown but things sometimes feel like they take forever to happen but then they happen faster than we had imagined.

Investment in new homes has played a critical role in recovering from previous recessions. The Fed was able to accomplish this by lowering interest rates. This can't happen today because of the extensive inventory of existing homes on the market.

The economic challenge over the next decade will be the fixing the problems of the middle class which has had little growth in income and a decline in its sense of well-being. It has benefitted from lower real prices for many consumer goods e.g., TV sets but its has seen rising prices for some critical services such as health care and child care. That is why the Obama administration
focused on health care reform. The goal is the provide greater access to healthcare while reducing the costs of healthcare. The biggest challenge will be to find jobs for less educated males who expect to find work with their hands.

The GOP Strategy for Defunding the Democratic Party

link here to article

An essential part of military strategy is to deny the enemy access to the means of conducting warfare. That is why airplanes attack factories that produce weapons and why the military attempts to bloc access to vital commodities such oil. This article is not about military strategy but it describes what the GOP is doing in a similar way. They are trying to defund the Democratic party by attacking the institutions that are essential for conducting political campaigns. That means limiting access to campaign contributions and limiting the access of potential democratic voters to the polls. The GOP attack on ACORN was to prevent it from mobilizing the black vote. The GOP attack on unions is to deny the Democratic party access to union funds and the mobilization of voters. Of course, the GOP portray's the attack on unions as an attack on overspending by government which produces large deficits, but this is primarily to disguise its primary purpose. Its all about winning elections and having access to the power of the state. The attack on government spending, and government taxes, also mobilizes its populist base in the tea party which helps to get out the vote. The democrats, on the other hand have a less strategic approach to winning elections. They focus on policy issues and wrapping the issues up into appealing campaign slogans. Of course, they also compete for campaign contributions from unaligned contributors, but they do not attack the conservative institutions that are the foundation of the GOP's ability to conduct political warfare.

Hyper Globalization and the Nation State

link here to article

Dani Rodrik's recent book on the Globalization Paradox is reviewed here in The American Prospect. The basic idea in his book is that markets need states to operate effectively but the advancement of globalization weakens the nation state. Hyper-globalizaion weakens the markets they cherish as well as the state's capacity to reflect the wishes of its citizens.

Some people view states and markets as substitutes for each other. They have the idea that there is capitalism and socialism and that they oppose each other. In fact, markets and states complement each other. Some do it well and others do it less well. There are no examples in history of pure laissez-faire economies. Britain advocated free trade but it benefited from its colonies and the extensive role of the state in facilitating business interests. Economists cooperated by making the theoretical case for free trade which has been a fundamental tenet of economics ever since.

Rodrik argues that the post war Bretton Woods era was the ideal middle ground of moderate globalization. There were moderate tariffs and tight regulation of global capital movements and speculations on currencies. After the collapse of Bretton Woods, we moved towards hyper-globalization. Global businesses could escape regulation at home and economists supported the movement by arguing that an institutional underpinning would catch up, and that it would have no effect on the domestic institutional arrangements. Hyper-globalzation may have resulted in greater efficiencies, but at the cost of increased instability. In particular, global finance outran domestic institutional arrangements and international arrangements are weak and ineffective. The scope of workable globalization limits the scope of desirable globalization. Its desirable to have effective markets, democracy and competent nation states. With hyper-globalization we can only have two of these at best.

Friday, March 18, 2011

Royal Bank of Scotland Failure

link here to article

Sir Fred Goodwin filed an injunction to prevent publication of his illicit affair with a subordinate during his tenure at RBS. This has been all over the tabloids but the important story is about his narcissistic leadership and the failure of corporate governance at RBS during his tenure. Shareholder's lost 90% of their equity, and he helped to bring down the economy in the UK. To make matters worse, he walked away with a huge pension, granted by a compliant board, to compensate him for the decline in value of his stock options. Although this is about Sir Fred Goodwin and the failure of RBS, it is a story that seems rather common. Wall Street and the RBS look pretty similar. So does the compliance of the corporate board and the government.

Yves Smith on Proposed Settlement on Mortgage Modification with Banks

link here to video

Yves Smith was recognized as having one of the 25 best financial blogs by Time magazine. I would put her blog Naked Capitalism in the top 5. In this interview with BNN she gives a very thorough set of answers to the questions raised. She has a very dim view of the potential for this to work. In the first place there is no agreement on what to do among those in government who are trying to put an offer together. The state AG's have to agree on what to ask for and the administration and congress are not in agreement either. The banks are lobbying hard against it as well.

The banks also have a conflict of interest. If they write down the first mortgage, they also have to write down the second mortgages which they have not written down to their market value. Investors, who own the securities that include these mortgages would like a settlement because the market value of their securities are down to 30% of face value. They would prefer write downs that would bring the value of the underlying security up to 50% of face value.

If a settlement can be reached the implementation will not be easy. The organizations that service the mortgages do not have expertise or the software needed to manage the modification process and that is not what they get paid to do. They get paid to collect the payments or to foreclose on mortgages. The modifications will also have to be substantial to stimulate the housing market because the total value of the gap between the market value of houses and the mortgage value is $480 billion.

Smith is not bullish on the housing market. New housing starts are on an annual rate of 479,000 and they need to be 1.2 million in order to provide for population increase and replacement of older houses. Some believe that the gap between new housing starts and what is needed is positive but Smith argues that there is an overhang of 6-8 million homes in inventory that need to be bled off before new construction can increase. There is little chance for the housing market to recover either as long we have 9% unemployment.

FDIC Sues Washington Mutual Directors and Wifes

link here to article

The FDIC filed this complaint against Wa Mu directors and their wife's yesterday. The wife's were included because they accepted property that the directors conveyed to them prior to being seized by the FDIC. Wa Mu executives behaved badly but its hard to understand how their bad behavior differed from that of other executives that headed up banks that needed to be rescued by the government. The SEC decided not to pursue charges against the heads of failed Wall Street banks, e.g. Lehman, because the suits are expensive to bring to trial and because they are difficult to win. Perhaps the FDIC expects that the case will be settled out of court and they will collect some revenue from the insurance companies who provided them with director insurance. Ironically, Wa Mu was regulated by the FDIC. If the executives were taking risks that endangered the firm, what is their responsibility?

Thursday, March 17, 2011

Michigan's GOP Governor Steps up to the Plate

link here to article

The Tea Party crowd elected GOP governors in 2010 now they are paying the price. Wisconsin and Ohio eliminated public employee unions which is a direct attack on unions everywhere. Now the Michigan governor plans to cut taxes for business which he will pay for by taxing pensions. States are in a tough position and it makes some sense to look at tax breaks given to retirees. It makes no sense to use them to reward businesses with tax cuts.

Using Search Theory to Better Understand Long Term Unemployment

link here to article

Peter Diamond won a Nobel Prize for his work in search theory. His work applies well to our current problem of long-term unemployment. Some economists have argued that long term- unemployment is due to mismatches between the skills that employers are seeking and the skills that are available among the unemployed. They point to the large loss of jobs in the construction industry and suggest that it is hard to find a job for a carpenter, for example, in the computer industry. One of the consequences of this analysis is that the unemployment rate is not a function of the business cycle; therefore, it does not make sense for government to take actions to stimulate aggregate demand. Diamonds, work in search theory suggests that both employers and workers behave differently in a recession that is triggered by a financial crisis. The degree of uncertainty, from both perspectives, differs from what we might find in a normal economy or during a mild recession. He takes issue with the idea that long-term unemployment is due to structural factors in the labor market. There is more friction in the search function and that may explain some of what we see. In any case, there is little empirical support for explaining away long-term unemployment away by calling it structural unemployment. It makes better sense, given the uncertainty, to make efforts to increase aggregate demand.

Free Trade Debate Continued

link here to article

This article should be read after the article posted below. The issues are made as clear as they can be from the typical economists point of view. It is not an issue, however, that can be decided by economists. Some of the cows will do very well and others will not do as well. Economists cannot be the referees in this discussion.

The Case for Free Trade

link here to article

This article describes the economics of free trade very well. I am posting it to read along with a follow on article on the topic.

Why are We Complacent About Unemployment?

link here to article

Manan Shulka asked me why there is no outrage about what is happening in the economy. David Romer, participated in an IMF conference of economists who discussed issues in the macroeconomy and he raised the flag about the lack of discussion about the high unemployment rate. Krugman provides his answer. The graph that he posted shows that although unemployment is high, the rate of layoffs has fallen. Those who are employed are less concerned about losing their jobs. Meanwhile, the politics of austerity mean that nothing will be done by governments to deal with those who are currently unemployed. There is an implicit assumption that nothing will be done so why talk about it.

Wednesday, March 16, 2011

The Case for a New Economics to Meet the Challenges of the 21st Century

link here to article

Political economy had its origins in a world with apparently infinite resources. One of the challenges for the 21st century is to develop a political economy that recognizes that the carrying capacity of our planet and its resources are finite. This problem is even more apparent today as the future use of nuclear energy is called into question. An economics of the 21st century will have to deal with the limits to growth imposed by nature. Neva Goodwin argues that our current approach to economics is primarily devoted to understanding how economy's work. To meet the challenges of the 21st century we will need to understand how economies can be made more adaptive and resilient to meet the challenges that we face.

One of the changes Goodwin proposes is that we must view GDP as an intermediate goal instead of a final goal. The purpose of economic activity should be well-being and not growth per se. Market systems provide many advantages but we need boundaries, rules and safeguards against the internal tendency of markets toward the concentration of power and the lack of an internal motivation to work for the public good. She is concerned that economic thinking is biased towards maintaining the status quo and against public goods. It tends to avoid concepts that cannot be assigned a dollar value. For example, the standard use of discounting puts a dollar value on future benefits that might be derived from limiting the impact of global warming below the real value. Some things, as the commercial tells us, are priceless. What is the dollar value of loses to life and property that are most likely to be affected by rising sea levels and other affects of global warming?

Goodwin, along with her colleagues at Tufts University's GDAE Institute, has developed a contextual concept for the teaching of economics in the 21st. I have been using materials from GDAE in a macroeconomics course that I am teaching at the Bainbridge Graduate Institute in the Seattle area. I believe that the contextual approach that GDAE has developed is much better suited for dealing with the challenges that we face than the typical approach which views economics in a social, political and cultural vacuum under the tacit assumption that economics is a part of nature, and not something developed within a culture. The political debates that we are witnessing today reflect different value systems and these debates will shape the economic system that we must understand in the 21st century. Hopefully, we can do it right.

The contextual approach to economics posits three spheres: the for- profit sphere, the core sphere which consists of families and communities, and the public purpose sphere composed of non-profits and government. The object of the contextual approach is to bring these spheres into greater harmony. What we are seeing today is a dominance of the for-profit sphere which has created meta-externalities of culture and politics on the core and public spheres. Our current economic crisis is the result of developments in the for-profit sector that place winning over integrity and the capture of government to limit the boundaries and rules that might bring the for-profits sector into greater harmony with the core sphere and the public good. Families and communities have been forced to deal with the loses and uncertainties that are a consequence of this dominance.The economics profession has not been helpful in developing greater harmony. Economic theory has become increasingly mathematical and obscure to a public that needs to be better informed, and its focus on internal consistency has led to the use of assumptions that achieve consistency at the expense of relevance to the real economy. Contextual economics at least has the value of relevance.

Tuesday, March 15, 2011

GOP "Leaders" Continue to Follow Their Base

link here to article

I did not post this article to reinforce its major point that this is the wrong time to be cutting foreign aide, tsunami warning systems etc.
My point is that the GOP continues to follow its base which is largely misinformed about deficit reduction. The public believes that cuts in foreign aide would make a large contribution to deficit reduction and they also have agreed with the GOP's approach, in general, to focus on cuts in discretionary spending which is a small part of the federal budget. This article should be read in the context of the broader post that follows.

I would also like to make a point about the media. The last paragraph in the article makes the most important point. That is, the GOP continues its attack on the least important part of the federal budget because it is part of its 2012 election campaign strategy which is based on a false claim that it can make substantial reductions in budget deficits via cuts in the least significant portion of the budget. Moreover, they pretend that cuts in spending, without increases in tax revenue, are sufficient to reduce deficits to their appropriate level. It should also state that the Obama administration is proposing an alternative plan to cut discretionary spending in order to defend itself against the GOP strategy. Both parties are guilty of leadership failure.

Our Economic Problem in a Nutshell is Ignorance and Leadership Failure

link here to article

A recent public opinion poll reveals disturbing facts about the public's understanding of many issues that impact budget decisions that have to made today and in the future. One of the reasons for the public's confusion is a lack of leadership in Washington. Neither party wants to face the most difficult issues.

The GOP plan is to reduce budget deficits by cuts in discretionary spending. For example, they plan to cut the budgets of programs like the EPA which they do not like. The public is against cutting the EPA budget by 2 to 1. The GOP healthcare strategy is to replace Medicare with a voucher plan. That plan is opposed by 76% of the public which does not want changes in Medicare. The GOP is in a pickle because Medicare must be cut by $1 trillion and Social Security must be cut by $1.2 trillion over 10 years if tax revenues are not increased. The public supports the GOP's efforts to keep taxes low. About 61% of the public agree that taxes should not be increased. The public also supports the GOP plan to cut some aspects of discretionary spending. For example, 70% believe that cutting foreign aide would have a big impact on deficits. Foreign aide is 1% of the federal budget. Even large cuts would have little impact on the deficit. The majority of the public (53%) also agree with the GOP that cuts in government spending will increase employment. In fact, cuts in state and local budgets have led to large cuts in government employment. Private industry does not make employment decisions based upon cuts in government spending. Moreover, in England the conservative government's fiscal austerity plan has led to a decline in business confidence which does contribute to employment.

In general, the majority of the public favor Obama's approach to the economy over the GOP approach. Perhaps that is because Obama's tax plan is raise taxes on the wealthy, which a majority support, while retaining the middle class tax cuts. This is a problem because raising taxes only on the wealthy don't substantially reduce deficits. On the other hand, they do not support government mandates in the healthcare reform bill. Without mandates the plan does not work. That means that the healthcare cost reduction aspects of the plan will disappear as well.

The depressing conclusion is that our politicians and the media have done a poor job of informing the public about the hard choices that must be made. Part of the reason is that there are real differences of opinion between the two parties but another reason is that both parties understand that the public would like to retain most of the benefits that they receive from government but they don't want to pay for them. Instead of trying to lead and inform the public they have taken the path of least resistance. Leadership is a dirty word in politics.

Monday, March 14, 2011

European Bank Exposure to Sovereign Debt is Extremely High

link here to article

This article describes the debt exposure of several European countries to Greece, Ireland, Portugal and Spain. The total exposure, including derivatives is much higher than earlier estimates. Germany has the most exposure and it is having political problems with the risk that it is taking to insure the survival of the Eurozone.

How Exporters May Be Affected by Japan's Rebuilding Projects

link here to article

The earthquake in Japan has been described as its worst disaster since WW II. It will take an enormous government program to rebuild the areas destroyed by the earthquake and tsunami. The chart in this article shows the how countries that export to Japan may be affected by the rebuilding. Australia, which is a major commodity supplier should be big benefactor after the rebuilding effort gets underway.

The Mortgage Dilemma and Politics

link here to article

Robert Kuttner discusses the issues involved in putting the mortgage mess behind us. The GOP has enjoyed the best of all political worlds. They have been able to turn populist reaction against the banks against the democrats by pinning the republican bailout of Wall Street on Obama. At the same time they have been the strongest defenders of banking interests in banking reform legislation and in the recent legal mess around mortgage servicing. The Obama administration has been less politically adept and it is divided over the mortgage issue. Tim Geithner and the Treasury Department are on the side of the banks which do not want to write down the values of the at risk mortgages that are on their books because this will impact profits and bonuses. Elizabeth Warren and several state Attorney Generals would like to fine the banks for purportedly illegal actions against homeowners and use the funds to reduce the principal on mortgages that are at risk in order to reduce foreclosures and improve the housing market. Kuttner does not understand why the administration does not take actions that would help the housing market and build populist support for democrats. Paul Krugman has a similar take on this problem in a related post.

Problems in Japan Put US Energy Policy on Hold

The Obama administration views nuclear energy as an essential component of its energy policy. It has been able to put together a coalition of environmentalists and republicans to resume construction of nuclear plants. Its doubtful that this will happen until investigations of Japan's tragedy reveal more information about safety issues. The disaster in Japan shows how fragile energy policy is to unexpected events. We have had a coal mining disaster and an oil disaster in the US. These are the other pillars of the three legged energy policy stool.

Are Banks Different From the Rest of Us?

link here to article

Krugman claims that the banks are different. When they break the law the prosecutors are put on trial. That is how top GOP lawmakers have responded in defense of banks being prosecuted by State Attorney Generals. They are accusing the Attorney Generals of extortion. They believe that when the banks take actions to increase shareholder value they are only doing what they should be doing. Moreover, we should not do anything that might affect their profits because we depend on them to turn the economy around. Krugman believes otherwise. He thinks that the economy would turn around faster if we could stop housing prices from falling further. That would require banks to take actions that would maximize the present value of mortgages that are at risk. That would benefit those who invested in the mortgages and households that cannot afford their mortgages. The banks are generating fees from servicing the mortgages at risk at the expense of investors and households.

Japan's Central Bank Responds to Economic Concerns due to Earthquake

link here to article

Japan's economy is at risk due to earthquake. The Central Bank has taken actions to pump up the economy by adding liquidity. Short term interest rates in Japan are already close zero, just as they are in the US, so the Central Bank is doing what the US Federal Reserve has been doing. We call it quantitative easing when the Fed purchases long term treasury's and other assets.

Sunday, March 13, 2011

China Funding Development in Columbia

link here to article

China is discussing the funding for a major development project in Columbia. They do not require structural changes in the economies of developing countries as a condition for aide. They hope to gain access to commodities for import to China and to open up exports from China. This is in contrast to the "Washington Consensus" which has lost favor in Latin America. Columbia and Mexico are the remaining adherents to the Washington Consensus which requires structural changes in the economy e.g. privatization of utilities and industry, deregulation of banking and open access for capital markets. China has been funding development in developing countries at a much high level than the World Bank which is dominated by the US. This has led Kevin Gallagher to ask whether it signals the end of the Washington Consensus.

Household Net Worth Up but Real Estate Still Falling

link here to article

Household net worth peaked at $65.7 trillion in Q2 2007. It fell by almost $17 trillion in the recession but it is up $8 trillion from the trough. The gain in net worth is due primarily to the increase in stock prices since the trough. Real estate values are still falling. They fell $260 billion in Q4 2010. They are down $6.3 trillion from their peak during the housing bubble.

The increase in stock prices is good news and it will stimulate consumption by a small amount. On the other hand, the net worth of most households is in real estate which continues to fall in value. Most households will continue to pay down their debt to reduce leverage. That is not good news for the economy.

Saturday, March 12, 2011

Analysis of US Exports of Military Equipment

link here to article

Exports of defense equipment has been one of the strong spots in a weak economy. Some of the sales went to authoritative regimes that are currently under attack by internal advocates of democracy. Most of the sales went to US allies. This article provides some insight into the largest purchasers of US defense products that must be approved by the State Department.

Glenn Beck's Website Does the best Analysis of the NPR Sting

link here to article

There has been a lot of discussion among pundits about the ethics of James O'Keefe's most recent sting operation. He set up a fake muslim organization and invited the chief fundraiser from NPR to meet with the board of the organization about a potential $5 million contribution to NPR. O'Keefe's organization taped and edited the meeting and released it to the public. It resulted in the resignation of the executive and the CEO of NPR.

Glenn Beck's organization viewed the edited version that was released to the public as well as the unedited version and determined that the edited version was materially misleading. The NPR executive believed that he was dealing with a respectable muslim organization and not with the Muslim Brotherhood which is poorly regarded. Moreover, although some opinions were expressed about the Tea Party by the NPR executive, they were made in the context of what Republican acquaintances had told him about the Tea Parties takeover of the GOP.

The edited and unedited versions of the video are available via this link. I must admit that I was surprised that Glenn Beck's organization produced this analysis which is more informative than all of the discussion that I have seen elsewhere.

Graphic Geologic Description of the Asian Pacific Earthquake

link here to article

All of us are sympathetic with the Japanese who have endured one of the largest and most destructive earthquakes in history. Some may want to have a better understanding of geological factors that made such a powerful quake possible. These slides describe the plate shift that led to the earthquake and the resulting tsunami.

Should the Government Attempt to Reduce Childhood Obesity?

link here to article

A recent Pew Poll found that 60% of those polled believe that the government should play a role in dealing with this problem. This finding reversed the results of prior polls in which a majority oppose government intervention. Many groups did not agree with the majority, however. Only 33% of those sympathetic with the Tea Party agreed and disagreement was higher in states with the highest levels of childhood obesity. Not surprisingly, the high disagreement states were concentrated in the deep south. This was true even when minority groups were excluded from the analysis. The author of the article makes the point that groups who would like to regulate our bedroom behavior are most likely to oppose efforts to regulate our kitchens.

Review of the Movie "Inside Job"

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This reviewer saw the movie which has been recently released in Europe. He wondered how the movie might affect the views that the rest of the world have about the US. The movie describes the how the recent financial crisis and its aftermath illustrate how far the the US has come from its ideals of democracy and a sharing of the wealth created by its economy. What is presented is a system that is permeated by the corruption of our ideals. The reviewer concludes that the picture is accurate in its portrayal. Our economic crisis was enabled by a corrupted system of elites from business, government and from academia. They broke the bank but they are not the ones who are paying for it. Instead leaders in the US and in other western capitals, have determined that the people must pay for their sins. The medicine that they are proposing is austerity. That is, austerity for those who depend upon their pensions and other components of the safety net that was developed to protect ordinary people in an economic downturn.

The reviewer claims that the movie depressed him because it is true. I have not seen the movie but it is now on my short list.

Friday, March 11, 2011

NYT Editor Interviews Paul Krugman

link here to video

The Editor of the NYT Editorial Page interviews Paul Krugman on a variety of topics. Most of the questions deal with issues that he has posted in the past but the video gives a better sense of how he thinks about the issues. Its pretty clear that he has given a lot of thought to the issues and his responses are more nuanced than one might imagine.

Thursday, March 10, 2011

George Bush's Education Secretary on Education Reform

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Diane Ravitch was a firm believer in the use of vouchers, charter schools and the no child left behind bill passed in the Bush administration. Her experience with these programs during her tenure in the Bush administration changed her mind about these education reforms, which she views as threats to the public schools. Given what is happening in Wisconsin, which just passed an anti-union bill which will affect teachers, it may be timely to learn more about the experiences that Ravitch had that altered her views on education reform.

Data on Longterm Unemployment Look Bad

These two slides show that the duration of unemployment during this downturn is well above the duration during recent downturns. They also show that the number of the long term unemployed is high relative to recent past. Since some studies have shown that the median duration of unemployment is much lower than the average duration, the implication is that the average duration level is driven by large numbers of long term unemployed. The policy issue is becoming how to to deal with the long-term unemployed.

How Will Libya Oil Shutdown Impact Oil Prices?

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This article, and the comments that follow, provide good insight into the rapid rise in oil prices. Demand for oil is not sensitive to price in the short term and supply in inelastic in the short term as well. Therefore, small changes in supply can cause wide swings in the price of oil short term. The Saudi's have played the role of responding to supply shocks elsewhere in the world by altering production. The question is whether they can raise production to compensate for a supply shock from Libya or elsewhere.

The GOP Dilemma on Medicare

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The GOP positioned itself as the defenders of Medicare in the debate over healthcare reform. They argued that the reform would cut benefits for Medicare. They took a similar position in the 2010 elections. Their democratic opponents would cut benefits if they were elected. This helped them to get elected but now they have to convince the electorate that they have to destroy Medicare in order to save it. We should remember that Medicare and most of the government's safety net programs are not in the DNA of the republican party. Krugman provides us with the poster used by Reagan to fight against the passage of Medicare. Why was Reagan against Medicare? He gave the same reason that the GOP gave against healthcare reform. It is socialism so it must be Anti-American.

Patriotism Leads to Adultery

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One of the GOP's leading candidates for the nomination in 2012 explains why he committed adultery in each of his last two marriages while his wife's were critically ill. The devil did not make him do it. His love of country made him do it. He was working so hard for his country (not his political advancement) that it clouded his judgement. He asked God to forgive him for his mistakes made for a good reason ( and perhaps to vote for him in 2012).

Newt's confession and plea for forgiveness will appeal to many in the GOP. Its similar to what they do at revival meetings. I'm sure that Newt knew that his infidelity would come up sooner or later and that it was best to get it out of the way early. Patriots will understand that love of country has no bounds.

I am sometimes asked why I am so hard on the GOP. After all, there are two sides to every story and their side should have equal time. My answer from now on will be to ask whether I should give equal time to hypocrites like Newt who wrapped himself in family values before he found it necessary to use the flag as a disguise. In my view, Newt is the archetypical prototype of the modern republican.

Wednesday, March 9, 2011

Has the Internet been good for the economy?

link here to article

This article is a short critique of a book that argues that the internet has not led to growth in GDP. Although the Internet may not have increased GDP, it has undoubtedly improved well-being. It has lowered the time and costs associated with collecting and transmitting information. This is an important benefit in itself.

Financial Times Warning about Focus on Current Mid-East Issues Impact on Climate Change Issues

link here to article

Two of leading economists on climate change raise concerns about the impact of current events on our efforts to deal with climate change. This short article lays out many of the most important issues that are critical in our ability to deal with climate change.

Income Inequality and Mobility

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This article (via Mark Thoma through Brad DeLong) analyzes income mobility data in the US. Its hard to argue against the data which show that income inequality has been increasing. One tactic has been to argue that the data only provide a snapshot of inequality in given year. It does not matter if inequality is rising as long as different people are moving into the top 1%. Of course there is some mobility but its hard to debate those who claim that is substantial since this is undefined. Conservatives also claim that income mobility is rising. They can point to several young entrepreneurs as examples. The claim that mobility has been rising can be answered with data. The data examined in this article do not support the claim. In fact, other studies, not discussed in this article, show that mobility in the US below that of many countries in Europe. The claim that America is the land of opportunity for all is not supported by mobility data.

Karl Rove's PAC Funding TV Attacks on Obama for Supporting Public Employee Unions

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This article has a link to the TV ad which will run on cable channels. It claims that government employees earn 47% more than private employees because democrats give them what they want in order to get their votes. The attack is directed towards Obama. It has a clip of his speech to a teacher's union. It very clear that campaign 2012 is underway and that the GOP is going to do what it can to undermine public employee unions in the mind of the public and connect Obama to the unions.

As an aside, its hard for me to understand why contributions to PAC's like this one headed up by President Bush's chief political operative, are deductible from the taxes of contributors. It is hard to argue that the PAC's serve an educational purpose.

GOP attack on National Labor Relations Board and White House Response

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The House GOP budget proposes a 18% cut in the budget for the NLRB. Since the 18% cut in the budget would be implemented over the next 7 months the impact of the cut would be amplified and it would curtail much of the planned activity to the NLRB. Some commentators have linked the GOP attack on the NLRB to its campaign against public employee unions.

The NLRB posted a protest against the GOP budget plans on its website. The White House told them to take the post down (it is published in this article). The rationale for the White House's action is that White House will lead the negotiations with the GOP and that agencies affected by the GOP budget proposal should not mount separate defenses of their budgets. Some democrats have criticized the White House for a lack of leadership and a willingness to compromise with the GOP over budget cuts. It would appear that the GOP and the White House are both thinking about the budget in terms of the 2012 elections. The GOP will use spending cuts as a central plank in its platform. The White House does not want to be viewed as indifferent to cuts in spending when households have been forced to cut spending due to income shortfalls.

Many economists argue that GOP imposed spending cuts and those proposed by the White House will slow our economic recovery.
Its easy to understand why the GOP would like to have a poor economy prior to the 2012 elections. The White House must believe that public opinion has been influenced by GOP claims and that it would rather not run against public opinion.

Estimating the Earth's Carrying Capacity

link here to articles

A series of presentations on this topic were discussed at a meeting of American Association for the Advancement of Science. This is a link to the presentations. Jason Clay made one of the presentations and his attention grabbing talking point was that we must produce as much food in the next 40 years as we did in the last 8,000 years. He then proposed some sustainable ways in which this challenge might be met.