Saturday, April 30, 2011

How Benefit Costs Affect Growth in Cash Compensation

Healthcare price inflation is not only a long term deficit problem. It is a short term problem for wage earners. This graph shows that the rising costs of healthcare premiums paid by employers becomes a large share of total compensation and crowds out increases in cash compensation. Add that problem to rising gasoline prices and rising food prices and one can see the plight of middle class wage earners. Their spending on other needs is very limited.

Voucher's not Solution to Healthcare Cost Reduction

link here to article

Mark Thoma, makes the point that healthcare is not a commodity market in which the use of "market" forces will fix. The great majority of economists would second his points and add to them. It will not make much difference to those on the far right like Paul Ryan because the myth of free markets is what they are selling to the public. Its really like religion that is based on faith rather than on reason.

On the other hand, Thoma believes in Winston Churchill's comment about American exceptionalism. We will keep trying things that don't work until we are forced to try something that will work. Eventually, high costs of healthcare will force us to move to a single payer system as the only way to fix the problem.

Ron Paul on Bernanke Speech

link here to article

Ron Paul is the head of the House Monetary Committee. He is a gold bug and a Fed critic. He believes that the Fed is fueling inflation by pumping up the money supply. This article provides some data that show the link between money supply and inflation to be spurious under some conditions. His presence on the House committee will be a thorn in the side of the Fed and will have the effect of limiting Fed efforts to simulate the economy.

Friday, April 29, 2011

Another Conservative "Think Tank" Bites the Dust

link here to article

The Cato Institute used to have thoughtful libertarian's who provided useful commentary on government and social policy. This article reflects how it has joined ranks with the less thoughtful non-profits funded by the super-rich to improve the fortunes of the super-rich. It now looks more like the Heritage Foundation, The American Enterprise Institute, The Hoover Institute and others that provide the academic cover for predation and help to sell Ayn Rand novels.

By now, everyone realizes that healthcare price inflation is one of our biggest problems in containing future budget deficits. One of the means by which the Affordable Healthcare Act provides for cost control is by creating a panel of healthcare experts who will evaluate best practices and make decisions on what Medicare will fund and how much it will pay providers. The intent is to limit the role of Congress because those running for office tend to engage in a certain kind of extortion. That is, they will intervene to help out an important campaign contributor when given the opportunity. The affordable healthcare act removes an excellent source of extortion from Congress and it makes the US healthcare system more similar to those of other nations that have less expensive healthcare. They all use some means to affect the price of healthcare services.

So how does Cato respond to this effort to control healthcare price inflation? It brings in F. Hayec who provided the Bible for libertarians such as Margaret Thatcher, and Milton Friedman who sold it to Ronald Ronald Reagan. Cato describes the panel as just another liberal use of top down authority that limits human freedom. Somebody ought to tell Cato about the corporation. Every large corporation is a centralized command and control system. Executives at the top determine strategy, and they delegate authority to others who implement policy. They carefully monitor policy implementation by their delegates, and they reward those who are successful in implementing corporate policy. The majority of output in our free enterprise system is produced by centralized command and controls systems that we call corporations.

The High Cost of Denying Climate Change

link here to article

Conservative politicians are paid well to deny climate change. They are paid well because there are costs associated with limiting the impact of climate change. This article suggests that the cost of denial exceeds the cost of dealing with climate change.

Global warming is only one of the problems caused by climate change. We are witnessing other costs today. Because we are trapping more energy within the earth's atmosphere, we will experience more weather extremes than we have in the past. The killer tornado's are one of those events. The number of tornado's detected, and the severity, is the highest on record in the US. Moreover, a combination of melting snow in the mountains and record rains is causing the MissIssippi river to reach flood levels never before recorded in US history.

While politicians take money from energy companies to deny climate change, the insurance industry has a real interest in understanding the issues. They will have to pay for the damage. Munich Re is a large re-insurer that insures the insurance companies against catastrophic loss. They recognize the problem and it will be reflected in insurance premiums.

Thursday, April 28, 2011

Certificate of Embarrassment

link here to article

This NYT editorial on the need for the President of the United States to publish his birth certificate is an embarrassment. Its hard to understand how the US can maintain the respect of the world community when the rest of the world bears witness to our comic book politics. Most of the comments supported the NYT's article. There were, however, a large number of comments that show that efforts to delegitimize our elected President will continue. The underlying factor is racism fueled by politicians who hope to run against a President weakened by silly attacks and a weak economy that the GOP is doing what it can to keep weak prior to the election in 2012. Politics before the people should be the motto of this once great party that has raised questions regarding its place in our political system.

How Much Would You Pay in Federal Taxes and How is it Spent

link here to graph

This site (via Manan Shukla) has information that every American should understand. In this example, they show how much federal taxes would take from a single filer who earned $50 K and filed with the stander deduction. It then shows where the federal government spends the money with an interactive pie chart. That graph is independent of one's income.

Polls show that most American's would like to cut government spending by focusing on the areas that would have little impact. For example, most Americans would believe that cutting international programs would have a big impact yet it is a minute part of the federal budget. Similarly, the GOP has no interest in cutting defense, which is more than 50% of discretionary spending, but it wants to cut parts of the remainder of discretionary spending that appeals to its base. For example, they want to feed red meat to their base by cutting spending on national public radio, family planning, and many other programs which account for extremely minor parts of the budget. This is pure electioneering, but it only works because most American's, especially the GOP base, have no idea about where the federal money is spent. It also pretty clear that mandatory spending on entitlements and interest is huge relative to non-defense discretionary spending. This is the area that requires attention longer term because it is the fastest growing part of the budget. Healthcare costs are the most important area of concern. Spending is rising because of an aging population and the fact that healthcare prices are rising faster than GDP. The GOP plan, under Ryan, has no focus on price inflation. Ryan proposes to shift the cost of price inflation to senior citizens. Moreover, his plan would get rid of Medicare which is more efficient than private insurance companies in collecting premiums and paying benefits. Medicare also negotiates lower prices to healthcare providers better than private insurers. The added cost of private insurer inefficiency and ineffectiveness in controlling price inflation, would add trillions of dollars to the cost of healthcare that would be transferred from retirees to the insurance companies and to healthcare providers.

Business Investment and GDP Growth

link here to article

Business investment includes business spending on assets and new housing construction. Investments in technology and software has turned upwards but investment in new housing construction is at a 50 year low. Although new housing investment is only 2.2% of GDP it is very important for two reasons. It drags spending on things to fill a house with appliances, furnishings etc. and growth in new housing construction has been the key component of GDP growth in recovery from recession.

Last Quarter GDP Report

link here to article

GDP rose 1.8%, which was slightly under estimates. Personal consumption expenditures were up 2.7%, but there was a sharp rise in imports and a decline in exports so net exports were negative. There was a big drop in government spending. Federal spending was down 7.9% and state an local spending fell 3.3%.

A rise of only 1.8% in GDP means that unemployment will continue at elevated levels. Contractionary fiscal policy really is concractionary. Cuts in government spending and slower growth mean declining tax revenues. The loss in tax revenue will have an impact on budget deficits that negate cuts in spending.

Another Take on Bernanke and the Fed Speech

link here to article

The Fed is required by law to take actions which support price stability and employment stability. It has most often been stronger at providing price stability than it has at providing employment stability. Currently CORE inflation is 50% below the target rate of 2%. That implies that inflation is below the target rate and that the focus should be on employment stability. The point raised in this article is that the Fed would take actions to ward off inflation above the 2% target but it is less concerned about inflation below the target rate. In other words, 2% is an upper limit to inflation and not a real target.

Wednesday, April 27, 2011

Bernanke Provides Fed Perspective on Economy

link here to article

The Fed adjusted its growth forecast for 2011 downward and since it sees no threat in Core Inflation it will keep interest rates low and continue with its QE2 purchases scheduled through June. Bernanke acknowledge that the CPI, which includes food and gas, has increased because of rising demand for commodities in emerging markets. He also noted that prices have risen faster than wages which continue to decline. That means the growth in real wages has been negative.

Housing Price Increases and Decreases by State

link here to site

The housing market is a local market. This site (via Manan Shukla) has an interactive tool that shows increases during the bubble by state and declines after the bust by state. As you might imagine the states that had the biggest boom had the biggest bust.

Why Doesn't Reputation Matter on Wall Street?

link here to article

Alan Greenspan claimed that he was shocked to learn that Wall Street bankers did things that put their reputation at risk. He believed that the need for a firm to protect its reputation was sufficient to insure good behavior and that regulation was unnecessary. Market discipline replaced regulation in his mind.

Well Wall Street bankers have certainly lost their reputations but it does not seem to have hurt their business. I have been thinking about that question for some time. Why do customers keep coming back to bankers who sold them securities that they knew to be toxic? Yves Smith reviews a NYT article on that topic and she provides her own answers. She traces the problem back to the time that Wall Street banks went public. Partnerships have to be concerned for the long term because their money is at risk, not the shareholders, and because they depend upon eventually selling their share of the business to junior partners who must keep the business going. That provides one of the reasons for the change in behavior. The other reasons have to do with the growth of the credit and derivative businesses. The shift in that direction made traders, who are predatory by nature, the stars of the business and bonuses were based on short term performance. It wasn't necessary to become a partner to make lots of money and the partners were not dependent on selling their share of the business to junior partners who would nurture the business.

That analysis helps to explain the change in behavior but it does not explain why customers stick with them. Smith argues that customers have no choice. There are only a few banks that have the resources and scale to deal operate the credit markets and the OTC derivatives market in unregulated so customers cannot figure out what they are buying or how much they are paying for the derivative contracts. In other words, monopolies are good businesses. Profits are terrific and customers have no where else to go. It doesn't matter what bank you deal with if they are all predators. Thats where having the right people in place between the bank and the customers is important. Perhaps personal relationships are the only things that really matters.

In Search of the Confidence Fairy

link here to article

Austerity budgets in Ireland and Greece continue to slow growth and increase the risk of default. Yields on their debt are rising despite the fiscal restraint displayed by government. The confidence fairy is supposed to sprinkle dust on economy's that show proper respect from contractionary fiscal policy. As one wag put it "We will continue the beating until morale improves" should be the motto of the austerity crowd.

UK Economic Numbers Look Bad

link here to article

The UK economy has had zero growth for the last 6 months. The growth in the last quarter of 0.5% combined with -0.5% for the previous quarter was disappointing. It looks like contractionary fiscal policy actually does work to contract growth. The government has depended upon a boost in confidence to spur growth. Apparently, the confidence fairy is on holiday. Some may like the government's austerity policy but their confidence does not seem to matter much.

Looks Like a Start of Double Dip Decline in Home Prices

Home prices have continued to decline after a brief period of increase. They are probably very sensitive to any surge in sales. Around 50% of existing home sales are short sales or foreclosures.

Tuesday, April 26, 2011

120,000 Out to Protest Nuclear Energy in Germany

link here to article

Protesters targeted nuclear facilities across Germany to protest the use of nuclear power in Germany. In recent years the Easter protests have been against war's in the mid-east and elsewhere. This year the crisis in Japan has sparked the ongoing efforts of the Green Party to end the use of nuclear energy. The party was successful in assuming the political leadership of one of the German states in a recent election. The state had been under conservative control for 58 years. Merkel has changed her mind about nuclear energy as a result. She temporarily closed 7 older plants and ordered inspections of many others. She said Japan changed everything.

Why is the Public Concerned About the Economy?

link here to article

David Brooks does his usual analysis of the world and has a problem explaining why the public is upset with the direction of the country now that we are out of recession. Paul Krugman does his usual thing of explaining to David Brooks why his view of the economy is wrong. Krugman puts up a graph that shows that there have been disconnects between public sentiment and the economy. This was particularly true in the Bush administration. Public sentiment rose after 9/11 and after the fall of Bagdad despite a weak economy. He then puts up a couple of graphs which show that the increase in jobs is barely able to keep up with new entries into the labor force and that much of the decline in the unemployment rate is because there are more discouraged workers who have been unable to find jobs and have left the labor force. The unemployment rate falls when the number of discouraged workers rises since they are not counted in the labor force. He puts up a second slide that shows that the duration of those unemployed continues to rise well above levels in recent history. Put the rise in gas prices and continuing turmoil in the housing market on top of the unemployment analysis and Krugman concludes that the public has a reason to be concerned.

Greece Deficit to GDP Ratio Above Forecast

link here to article

The problems in Greece and several other Eurozone economies are difficult to solve. The deficit in Greece rose because tax revenues declined and social security costs increased due to the recession. This creates further problems because the government must pay higher interest rates to borrow money because of higher default risk. The government may be forced to cut back further on spending as well, and this may deepen or prolong the recession. Portugal and Ireland face similar problems. Spain has very high unemployment of around 20%. The government has struggled to turn this around but the bursting of the housing bubble had a severe impact on the economy. Since each of these country's is in the Euro Zone they are dependent upon the ECB's monetary policy and it has been tightening because of inflation concerns in the healthier economy's. Country's in the circumstances of Greece would typically use monetary policy to cut interest rates and deflate the currency in order to expand exports to fight a recession. That option is not open in the Euro Zone.

Share of Income Going to Pay Rent at 50 Year HIgh

link here to article

Economists believe that a household can best afford to rent when the rent does not exceed 30% of income. Unfortunately, 26% of households are paying more than 50% of their income for rent. That is the highest percentage in 50 years. It is explained by falling income due to the downturn and by rising prices for rents. The supply of affordable rental housing is down because developers cut back on projects in 2009. Demand is up due to foreclosures which have turned owners into renters, and by an improving market for 20 somethings which has enabled many to stop living with their parents.

Given the high share of income for low to moderate income households going to rent, and the rising prices for gasoline, there is not a lot left over for these households to spend on other than bare necessities. This does not auger well for the recovery.

Monday, April 25, 2011

Switzerland Raises Bank Capital Requirements Above Those Proposed In EU or US

The swiss economy is heavily weighted towards banking. It is taking on its big banks in a way that is not happening in the US or UK where bankers have more influence over government. They are also thinking about shutting down the tax avoiders from the UK who manage hedge funds in Geneva and head back to London on weekends. Who knows maybe some day the US will shut down the hedge funds and other tax avoiders in the Cayman Islands.

Small Crimes Don't Pay but Huge Crimes Do Pay

link here to article

This article, posted in The Economists Voice, is about someone who went to prison under the 3 strikes law for stealing a slice of pizza. It contrasts the jail term with that of a convicted tax evader who stashed $4.9 million in foreign bank accounts and got caught. He had to pay back taxes and a penalty but only received 24 months of probation. The maximum penalty is advertised as 20 years in prison which certainly should act as a deterrent to tax evaders. Why not evade taxes if the worse thing that can happen is probation? On the other hand, avoid engaging in petty theft.

Analysis of Progressive Budget Plan

link here to article

Ezra Klein writes in the Post about the House Progressive Caucus's budget plan. He asked several budget analysts to comment on the plan. There were many favorable comments and some suggestions for a better way to do things. Most believe that it is far superior to the Ryan plan which some say does not really reduce the deficits. Most of the discussion is about tax policy changes which are anathema to Ryan and not given much thought in the Obama plan which is not that far from the Ryan plan from an ideological perspective.

The good news is that we need a wider spectrum of choices to choose from than we are offered by Ryan or by Obama. Hopefully, this will shift the debate from the current framing which is between the far right and the center right.

New Home Sales Data Not Good

This graph, from calculated risk, makes two interesting points. The first point is that all but the 2001 recession show a common pattern. New home sale declines were a factor in each of the recessions and increased sales of new homes led the way out of recession. That is because all but the 2001 recession were triggered by the Fed's increase in interest rates and all of the recovery's were triggered by the Fed's cut in interest rates. This was the pattern in the "Great Moderation" that we discussed in a prior post.

The second point is that the drop in the Great Recession was much larger than in any other recession and it has not turned around. New home sales are around 300,000 rate and they are over 700,000 in normal years. Over half of the home sales in the US are distressed sales, and new home construction will not recover until the distressed inventory is cleared.

What the NFL Teaches Us About Executive Compensation

link here to article

Tom Brady had one of the best years ever last year as an NFL quarterback for the Patriots, and he was highly paid for his performance. Salary's in the NFL are based primarily on performance. This is exactly what everyone learns in economics 101. Individuals are paid for their marginal contribution to revenue. Some economists still use economics 101 to explain why US executives are paid many times more than executives in other parts of the world. For example, N. Greg Mankiw from Harvard, and former Bush administration Chief Economist, goes to the textbook and argues that the market has put a premium on their marginal contribution to revenue. The CEO of The American Enterprise Institute tells us a similar story that we posted below. The high wages of executives are based upon merit and if we raised their taxes we would destroy the economic system based upon merit.

This article gives a better explanation of executive compensation, and Tom Brady is fortunate that he is paid for performance and not in the way that we pay our top executives. CEO's in the US are paid on expectations and not on performance. Their compensation comes primarily from stock price appreciation which is based upon beating market expectations. They tell the market what to expect in earnings and the stock price will increase if they beat expectations. Consequently, the CEO is rewarded for setting expectations and then beating them. The total focus of the CEO is on the management of the stock price which is a function of expectations. This also means that the CEO behaves in way that moves the stock price in the short term, even if it means that longer term prospects might be diminished. This might be called expectations capitalism.

If Tom Brady were paid on meeting expectations, instead of by his performance, he would not have done as well. The expectations market in the NFL is based upon beating the point spread. The Patriots did so well in their first 8 games that expectations increased each game on the spread by which they would beat their opponents. Eventually, expectations got so high the the spreads became too large even for Tom Brady, and the patriots had a bad season relative to expectations. On the other hand, a quarterback from Cleveland earned a lot less than Brady because he did not perform as well, but he beat the point spread more frequently than Brady. The NFL represents the way capitalism is supposed to work better than it works today as a system of expectations about asset appreciation or depreciation.

A Progressive Plan for Reducing Budget Deficits

link here to article

If a business were running at a deficit it would have two choices for shedding the red ink. It could cut costs and it could increase revenue. The GOP plan for reducing the deficit, cuts taxes even further, which forces drastic cuts in spending on social programs to balance the budget. The Obama plan is not as bad, but it does not go far enough. His plan lets the Bush tax cuts for the rich expire according to current law, but it leaves the tax cuts for the middle class. It makes small cuts in defense spending, and it includes mechanisms for reducing healthcare price inflation, but it doesn't cut spending enough to compensate for lost revenue from tax cuts to the middle class.

There is a link to a plan in this article from the progressive caucus that reduces deficits faster than the Ryan plan or the Obama plan. It raises taxes for most people, it makes the social security tax less regressive, and it makes substantial cuts in defense spending. If deficit reduction is the goal, this is the best of the lot. But deficit reduction is not the goal of the Ryan plan. The goal of the Ryan plan is to cut taxes for the wealthy, and pay for the huge tax cuts with huge cuts in social programs. The goal of the Obama plan is to make compromises with the GOP in order to keep the government running.

The Ryan plan has no chance of becoming law, yet it has been all over the media. The progressive plan has no chance of becoming law but it has received little attention. Apparently, the only "serious" way to reduce the deficits is to make huge cuts in spending on social programs. Any plan that brings taxes as a percent of national income closer the norm for the rest of the industrial world is off the table. The implication is that there is only one "serious" way to balance the budget. It must come from spending cuts, especially on programs that provide benefits to ordinary Americans. We can no longer pay for tax cuts like we did under Reagan and Bush by borrowing, but we have been sold on the benefit of tax cuts even if they are paid for by reducing the security of the average American.

There is a lesson in this analysis. The lesson is that political economy is all about values. The Ryan plan makes the values of the GOP apparent in a way that has seldom been so clear. The progressive plan makes the values of the Democratic party under Roosevelt and Johnson very clear. The Obama plan makes the values of the Democratic party since Clinton very clear. The public needs to understand these value systems and make a choice.

Sunday, April 24, 2011

Fed's QE Plan Not Creating Growth

link here to article

When the Fed cuts short term interest rates to zero, it has to look for new ways to stimulate the economy since short term rates cannot be cut below zero. It decided to emulate the Japanese plan to fight off price deflation by purchasing longer term Treasury's in the secondary market. The idea is that reducing the supply of longer term bonds in the secondary market would increase prices and lower interest rates. Since the Treasury sold an equal amount of bonds in the primary market, the plan has only kept mortgage rates and long term rates from rising. This put a floor on economic decline but it has not stimulated economic growth. Moreover, it complicates the exit strategy when the Fed decides to end QE.

The growth problem does not seem to be interest rate related. Large corporations can borrow at low rates and they are flush in case. They are waiting for demand to increase before they invest. Small businesses do not have the same access to cash so they are not investing either.

A Fiscal Conservative Destroys the Ryan Plan and Obama's Plan

link here to article

David Stockman was in charge of Reagan's budget team. He is a true fiscal conservative and not one like the current crop in the GOP who are using budget deficits for political purposes. He wrote a book on the Reagan administration that was critical of its fiscal policy because it did not pay for tax cuts with spending cuts. Reagan started the GOP trend of paying for tax cuts by borrowing. In this article he points out the flaws in both the Ryan plan and the Obama plan for achieving fiscal responsibility. Neither plan will bring long term spending in line with tax revenues. Ryan refuses to consider raising taxes, and in fact , he wants to reduce taxes as a percent of GDP even further. His plan does nothing to reduce healthcare inflation and his focus on cutting discretionary spending is not workable. He is critical of the Obama plan because he only wants to increase taxes for the wealthy and that won't increase revenues enough to bring he budget in balance. Obama's longer term plan on healthcare is better than the Ryan plan but it is light on cost reduction.

Stockman points out the problems that we face longer term by depending on the central banks of the world to fund our debt. Over $4 trillion of our debt is held by central banks, and that represents about half of our debt. Private investors have only needed to fund half of our debt. He does not believe that this is sustainable. The central banks cannot continue with this policy forever and then we have to deal with private investors who might demand higher yields.

Stockman has some suggestions on what needs to be done but his most important contribution has been to show us that neither party has a plan to fix our long term fiscal problems.

Saturday, April 23, 2011

How to Defend the Rich against Progressive Taxation

link here to article

There are several highly funded conservative "think tanks" that employ clever folks like this guy whose salary depends upon his cleverness in making the tax system less progressive. He starts out by telling us that Obama was booed for telling an audience that it was a good idea to increase taxes for the rich and then he tells us why the audience was correct and why Obama was wrong.

His principle point is that income is at least partially a function of merit and that meritocracy is good. Everyone can agree with that point but it has nothing to do with the issue as to whether the rich should pay a higher share than they do in taxes. Our tax system has become less progressive over the last 30 years. In fact, when income taxes and the payroll tax are taken into consideration along with regressive state and local taxes, we have an almost flat tax system. The issue that Obama was talking about is returning the highest marginal tax rate back to where it was in the Clinton administration, and before Bush lowered the highest marginal tax rates. It is not an attack on meritocracy, it was about the progressiveness of the tax system. Obama believes that the tax system ought to be more progressive, and those who get paid by the rich to defend the rich would like the tax system to be as regressive as possible. In fact, the Ryan plan would make it less regressive by eliminating the taxes on capital gains, interest and dividends.

In summary our, clever fellow from the American Enterprise Institute has turned the debate away from the progressiveness of the tax system into a defense of meritocracy, which is more defensible than arguing for alms for the rich. I wonder how clever folks like this sleep at night or look themselves in the mirror. They know what they are doing to earn their living.

Frankly, I would support a more merit based income system as would many economists. For example, I would want to see the merit argument that would justify the greater share of corporate income that goes to top corporate executives relative to their peers 30 years. How much better are they than their peers? How much better are they than the top executives from Europe or Japan that explains why they earn many times what they earn? Moreover, how we can use the merit argument to justify the compensation of the top financial executives, and their facilitators in government and elsewhere, who brought the world economy to its knees? Perhaps we have a reverse merit system in place. Our highest paid executives on Wall Street did the most damage to the economy. We should talk more about merit and compensation and less about merit and the progressive tax system.

US Debt Picture

link here to article

This article has some good graphs which illustrate the US debt picture over time. It also makes several good point on how to think about the debt. The national debt is an accumulation of annual deficits and surpluses. Surpluses are rare. We had 3 surpluses in the Clinton administration (which conservatives, of course, attribute to Reagan's prior policies). They were quickly expunged in the Bush administration by his decision to cut taxes and give the surplus back to the "people". This brings us to a fundamental point. Deficits are a result of an imbalance between tax revenues and government spending. Tax revenues are affected by tax policy and by the state of the economy. Clinton's budget surpluses, for example, were a consequence of a booming economy which increased tax revenues, and a fiscal policy in which tax rates were increased and spending was reduced. The Bush deficits came from a moderate recession which reduced tax revenues and from tax policy which also reduced revenues. The decline in revenues, along with increases in spending, which were supported by GOP congressmen who now view government spending as the enemy, resulted in very large deficits in the Bush administration. The deficits in the Obama administration are primarily the result of the recession which has cut tax revenues severely. They were also affected by a stimulus package which consisted of tax cuts and an increase in government spending. The Bush tax cuts have also been extended into the Obama administration.

Since the national debt is an accumulation of past deficits, it has increased substantially primarily as a result of declining tax revenues produced by recession and tax policies initiated in the Bush administration. Moreover, it will continue to increase as long we have high unemployment and low growth in tax revenues. The only good news is that the government is able to borrow at low interest rates and this has kept the cost of debt service down.

The real national debt problem, however, is not our short term budget problems which can be improved by an improvement in the economy. The long term, problem is that government spending on healthcare will increase for two reasons: an aging population consumes more healthcare and healthcare prices are inflating at around 7% annually (which means they will double every 10 years). The Ryan plan for reducing the longer term national is based on shifting half of the burden of Medicare price inflation to retirees and away from government, and by turning Medicaid over to the states in block grants which fixes the federal contribution to Medicaid which is shares with the states. He also repeals the Obama healthcare reform bill which extends Medicaid to 16 million who are now uncovered by health insurance. His plan does nothing that healthcare economists believe will cut the rising cost of healthcare to Americans. The Ryan plan also cuts non-defense federal spending to levels that few believe to be possible. He also plans further cuts in taxes that primarily benefit the wealthiest Americans who receive a good share of their income from capital gains, dividends and interest.

Few believe that the Ryan plan will become law but the vision that it paints for the future is the conservative vision for the future of an America with less government provided support for ordinary Americans and more benefits for those who need them the least. A progressive plan for the future has recently been released which will be discussed in future post.

Princeton Review Ranking of "Green" Colleges

link here to article

This is a good idea. Higher education should be at the forefront of this movement. You may be surprised by the leaders and the laggards.

Why This Economic Downturn is Different

link here to article

This article reports on the demise of the new home construction market. Fewer are being built and it is more difficult to sell those which are being built. Existing home sales are driving the market and many of these sales are foreclosures or short sales which drive down prices. !.4 million construction jobs have been lost but this understates the job loss because the sale of new homes generate lots of other sales and services which are in decline. Just imagine what goes into a new home and all of the services that are generated by getting a mortgage, closing the sale, and landscaping the lot and you get the picture.

It has been common to refer to the 30 year period prior to the financial crisis as the "Great Moderation". We had several modest recessions during that period and very fast recovery's. That is because all but one of the recession was triggered by the Federal Reserve and so were the recovery's. This was done very simply by raising interest rates to slow down economic growth when inflation was a threat. This reduced the sale of interest rate sensitive purchases, and new construction sales fell and reduced economic growth. The recovery's were produced by lowering interest rates and restarting the sales of new homes. Alan Greenspan was viewed as a wizard by his ability to moderate business cycles, which can be affected by stepping on the brakes or pushing on the accelerator of new housing starts.

This recession and recovery are different in several respects but real estate is at the center. The collapse of the housing bubble brought down the global financial system with it, and we experienced a sudden and dramatic decline in global economic activity. One of the consequences was a hugh decline in tax revenues, which along with the cost of bailing out the banking system, had a major impact on the public balance sheets, which limited government response to the recession. The fall in housing prices led to a large decline in household wealth as well. Households were no longer able to borrow against the rising value in their homes and they began to reduce their leverage. In effect, we had a balance sheet recession in which households, government and the banks had to restore their balance sheets simultaneously. That is why this recovery has been longer and why it continues to depend upon restoring order to a housing market that will continue to be distressed until the glut of impaired mortgages are washed out of the system and home prices are stabilized.

Public Broadcasting Versus the Murdoch Model

link here to article

This article is about the BBC's problems in the UK. It is primarily funded by public subscriptions to its TV service. It is also an enemy of the conservative government because of what they call a liberal bias. Murdoch doesn't like the BBC as a competitor either because it is supported by taxes and he must find advertisers to pay for his conservative publications. This raises two questions: what is meant by a liberal bias in the news, and what is the better model for producing the news? Liberal bias has come to mean taking an objective view of world events when government, or other powerful institutions, prefer a more supportive role. It can even mean favoring scientific information and data when reporting on events over claims that are only supported by popular opinion which is molded by the Murdoch's of the world. The BBC, and NPR in the US which is also funded with taxes, are not dependent upon the market model that dominates the media. Therefore, it is more difficult for advertisers to influence content and it is not essential to build the largest possible audience in order to increase advertising revenues and please stockholders. The market model is pitted against the public model and conservatives will always find reasons to prefer the market model. They are doing that with healthcare in the US, and many would turn public education over to the market model. We really have to ask ourselves whether the market model is the answer for everything and whether the public is better served by information channels that are not dependent upon the profit motive.

Thursday, April 21, 2011

Germany Planning for Nuclear Free Energy Policy

link here to article

This article explains what Germany has been doing since the Japan disaster. They have closed some of the older nuclear facilities and they are arguing about the costs associated with a nuclear free future. The debate seems to be over different estimates of cost and about dealing with industry customers of energy who worry about becoming uncompetitive in the international market. It does not seem to be focused on whether to move toward more renewable and less risky energy.

Musing on Plutocracy

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Yves Smith reviews several recent books on the advent of plutocracy and how it can happen in a democratic society. There are many good insights in the books under review and she makes her usually insightful comments as well. One of the problems under discussion is the media focus so much of our attention on the horse race between the political parties. Most people have very little information about what is really happening in government and their understanding of the issues is weak. Consequently, those who want to alter the playing field to their advantage have an open field to play with. Most people will not realize how things are being changed until after it has happened. Most writers trace the beginnings of the plutocratic revival to the Reagan and Thatcher regimes. One author finds the beginnings in the Carter administration. Yves traces it back to the reaction to the 60's and the Vietnam protest era that was a real threat to the system of control that was in place. I think that she is closer to the truth. The conservative plan to change the game from a dialogue between the far left and the center left into a dialogue, like we have today, between the far right and the center right, began in the early 70's. It has been very effective.

One of the debates that we have been currently having over the financial crisis is over deregulation and how it happened. The simple answer is that deregulation is much easier to implement. The regulator simply does nothing and we have deregulation. On the other hand, advocates for greater regulation actually have to do something that takes effort.

In any case, I do not intend to do a total review of Yves review. It is well worth reading in its entirety.

Purchasers of Healthcare are Not Consumers

link here to article

The Ryan plan to privatize Medicare is one variation on a theme from the Bush era. It was called consumer based healthcare. The idea was that if people had to pay for healthcare they would consume less. That is true, and that is what economists call the rationing function of the price system. Krugman attacks the idea of the sick patient as a consumer as nonsense. It is nonsense for a variety of reasons, but he hits the nail on the head for one of the nonsensical assumptions. The patient is not a consumer who purchases healthcare by searching around for the lowest price. The patient depends upon the judgement of medical professionals because they have more knowledge and have earned the patient's trust. Moreover, doctors have to make decisions about what to do for patients when they are unconscious and unable to make a purchase decision.

Krugman did not touch on another issue, but it is a critical distinction between healthcare and the purchase of commodities. If a consumer complained that he was unable to purchase a luxury car because it was unaffordable, most of us would not take up a collection to assist the purchase of the luxury car. On the other hand if someone could not afford an expensive life saving operation, we would expect that some way would be found to fund the operation. That is the major reason why healthcare is an entitlement in most of the industrial countries in the world. The US is an exception, and one of the reasons is that people like Paul Ryan, who has excellent coverage through his government subsidized insurance, views healthcare as a luxury car within a market system that rations access by the price system.

Video of Paul Ryan Being Booed by His Constituents at Town Meeting

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Paul Ryan was asked why he favors cutting taxes for the top 1% as part of his plan to cut budget deficits. He began the usual defense which asserts that it will hurt small businesses and force them to cut jobs. The jeers from the audience drowned out his defense. It did not pass the laugh test in his own district.

Wall Street Journal Editorial Page is a Lie Machine

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The first thing anyone should do when someone quotes the Murdoch owned WSJ editorial page is to laugh. Most of what they write does not pass the laugh test. Jeff Sachs reports on the lies that they are spreading about taxes. They claim that raising taxes for the rich will not help to cut deficits. They go so far as to claim that taxing their entire adjusted gross income would not help. Sachs gives their speculation the acid test. He reviews the data from the IRS and shows what the impact of would be if the tax rate was increased or set at 100%. The WSJ failed the test but its not a laughable matter. Millions will read the editorial, or it will be recited by the Rush Limbaugh's of the world as proven fact because it was in the WSJ. Jeff Sachs's rebuttal will be ignored by most of the media.

Wednesday, April 20, 2011

Public and Private Debt has Dropped and Not Inflation Concern

This graph shows that non-financial debt rose rapidly during the housing bubble and it fell rapidly after the bust. Inflation hawks keep telling everyone that increases in the money supply will create inflationary pressure. If debt is falling then money supply is not rising. Besides money can't cause inflation unless it is being spent. GDP is certainly not growing fast enough to spike inflation. Maybe the inflation hawks are really gold bugs.

Tea Party Populism in Europe

link here to article

The recent elections in Finland showed greater popular support for a populist party that opposes the bailout of countries in the Eurozone. The party also opposes immigration. It increased its share of the vote from 5% to 19% and will be a factor in Parliament.

There has been rising reaction in Europe from those who believe that their economic problems were caused by the banks and that the banks have been let off of the hook at their expense. The Tea Party in the US also opposed the bank bailout but it has no opportunity to express their concern in the two party US presidential system. They are aligned with the GOP which initiated the bank bailout and which has opposed reform of the banking system. The Tea Party is also opposed to immigration but it gets support from the GOP on that issue.

In any case, there is rising populism in the US and in Europe. It is bound to have a political influence on policy responses to current and future crises in the banking sector.

What did You Pay in Taxes on $100K and How Was it Spent

link here to article

This article has a nice graph that shows where the taxes went and how the federal government spends the tax revenue.

Wal Mart CEO Expects Price Inflation

link here to article

One of the factors restraining inflation in the US has been the low prices on imported goods coming from Asia. Wal Mart's CEO has a good insight into future price increases using its greater than $400 billion pipeline of products that it is purchasing from around the world. He does not believe that retailers will absorb the price increases and that they will pass on the increases to consumers. China, for example, is worried about wage inflation and it may have to pass on some of this cost to its importers. Other country's in Asia face similar inflation problems.

Historically, wage inflation has been the biggest source of concern about US inflation. Many economists play down the risk of US inflation in an economy with high unemployment and low growth in wages. It appears, however, that rising inflation in Asia may erode one of the factors that have held retail prices down in the US.

More on Risk in US Economy from S&P

link here to article

S&P's reduction in its outlook for the US economy received a lot of attention. In particular, there has been a lot of discussion about the ability of our fractured political system to deal with projected increases in the national debt. Another aspect of the S&P report is now receiving attention. They have a real concern about our ability to deal with the next financial crisis. They estimate that it could cost around $5 trillion when it hits and that the US economy has been weakened by its response to the last crisis and less able to afford another bailout. They are primarily concerned about systemic risk due to the widespread use of credit derivatives and the complex interconnections between the players in this market. It is the most profitable sector in the banking industry and little has been done to reduce systemic risk, perhaps for that very reason. There is also a concern that US banks are still holding assets on their books that may not have been written down to their true market value. This makes them vulnerable to a slow economic recovery. Spain has been cited as an economy with a damaged banking system holding bad loans. Some have compared the US banking system's risk profile with that of Spain. Its pretty clear that we are not out of woods yet and that there is more uncertainty in our financial system than many believed.

The Untouchable Part of the Federal Budget

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The defense budget for a nation that is not threatened by a nation state capable of attacking it, is more properly called an offense budget. Our troops are spread all over the world defending other nations from potential enemies and making the world safe for US enterprise. Nevertheless, even though it consumes half of the federal governments discretionary budget, and it is loaded with wasteful spending on weapons that benefit the districts of many in Congress, it is not part of the Ryan plan for cutting federal deficits and it is not a substantial target in the Obama budget plan. This editorial suggests some ways to cut the budget without encouraging some suicidal nation from attacking us. It won't happen for a lot of reasons, but we need to keep pushing for cost containment anyway.

Why US Healthcare Spending Per Capita is Highest in World

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Per capita spending on healthcare in the US is double that of the next highest nation even though we have 40 million citizens without healthcare coverage. The healthcare reform bill created a 15 member panel of experts that would have the authority to determine the growth in payments to healthcare providers. In fact, the main difference between the US healthcare system and less expensive systems elsewhere in the world is that they have more effective methods of limiting growth in payments to providers and they are able to deliver quality healthcare to more of their citizens. A substantial group in Congress wants to eliminate the most effective means of restraining the cost of healthcare that is in the reform bill.

The worst argument made against the panel was made by Paul Ryan. He argued that the panel would ration healthcare. He obviously understands nothing about rationing or he is a complete idiot whose brain has been affected by reading too many Ayn Rand novels. His proposal for reforming healthcare is based upon the most widely used rationing method in the world: The price system is a rationing system. Only those who have the means to afford a product are able to purchase it. His plan gives vouchers to retires so that they can purchase insurance on the free market. The problem with his proposal is that the value of the voucher would grow at a slower rate than healthcare premiums. Over time, that is an effective way of rationing healthcare tho old fashioned way, via the price system. Ryan's plan for reducing future budget deficits only works by shifting the cost of price inflation in healthcare to retirees which would effectively limit access to healthcare. Ryan believes that healthcare is a market like the market for any commodity but he fails to recognize that the market system rations commodities via the price system. Moreover, he is unaware of the literature on the economics of healthcare which shows that it has few of the features found in commodity markets.

Only The Poor Pay Taxes

link heerto article

The alleged quote from the wife of billionaire who was told that she owed the IRS some tax revenue is not true. What is true, however, is that income has been growing rapidly for the richest Americans and much slower for ordinary Americans. At the same time, the effective tax rate for the richest Americans has dropped substantially. Effectively, our government has been using tax policy to redistribute income to the super rich since the Reagan administration. This article is loaded with graphs that illustrate the effect of changes in tax policy on after tax income and the uneven growth in income since the 1980's.

Given the changes in tax policy, it is not surprising that the nation with the lowest tax rates in the industrial world should have fiscal problems, especially in an economic downturn. The good news is that there is plenty of room for growth in tax revenues in the US.

Tuesday, April 19, 2011

Memo's link UK Role in Iraq to Oil Interests

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This article (via Manan Shukla) reveals government discussions with UK oil interests prior to Iraq invasion. The memo's support what most observers believed about the main reason for the invasion. Cheney's energy task force in the US played a similar role according to many observers as well. Maps of the Iraq oil fields were among documents connected to the task force. Does anyone really believe that we would have attacked Iraq if its main export was figs?

NRA Controlled by Nuclear Industry

link here to article

This article claims that the Nuclear Regulatory Agency can't regulate the industry since it is funded by the companies it is supposed to regulate. A brief history of its performance appears to support the claim.

Supreme Court Hearing on Critical Global Warming Case

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The court will have to decide whether to uphold or overturn a decision by two conservative lower court judges that allows states and localities to bring suit against electric utilities that are responsible for a major portion of US carbon emissions. Curiously, the electric industry's defense is based upon the concept of federal preemption. They argue that the EPA has jurisdiction over the regulation of greenhouse gases and that state and local governments do not have standing. Of course, simultaneously the industry, with the help of the GOP House, is doing everything that it can to prevent the EPA from regulating CO2 emissions on the grounds that they are not a health hazard.

The decision made by the lower courts could not have been made any stronger in its rationale for its decision. We will have to wait and see whether the Supreme Court has any respect for its own precedents.

Bank Regulators Which Oppose Regulation

link here to article

The Office of the Comptroller of the Currency played a large role in the financial crisis. It prevented state's and localities that attempted to curb predatory mortgage originators by arguing that it has the responsibility for regulating national banks under federal law. Some thought that this was typical bureaucratic behavior of turf protection. In fact, the OCC felt that it was in business to protect its "clients". Joe Nocera, reports that the OCC is up to its old tricks. It is trying to protect its clients from state attorney generals who want to sue banks that have engaged in illegal foreclosures. The OCC is also trying the block the new Consumer Protection Agency from taking actions against its clients.

Frankly, I expected this kind of behavior from the OCC under the Bush regime. I don't understand why this administration tolerates a regulator that opposes regulation.

Income Redistribution from the Poor to the Rich

Dean Baker reports on the Ryan plan and makes the point made in the post below about shifting the cost of healthcare inflation to retirees. He makes another point, however, that he thinks is even more important. The non-partisan CBO reports that ending Medicare will increase income to health care providers and insurance companies by $30 trillion over the planning cycle used by the CBO. That is because Medicare pays lower prices to providers than private insurers, and because Medicare is more efficient than insurance companies. The Ryan plan is a reverse income redistribution plan. It shifts income from ordinary Americans to wealthy Americans by privatizing Medicare and by the $2.9 trillion in tax cuts that go primarily to the wealthiest Americans.

Why the Ryan Plan Sucks and Why They Always Lie

This graph shows the relationship between the growth in healthcare prices and the CPI which measures the general growth in prices. Its pretty clear that healthcare prices have and will grow faster than the CPI. This illustrates how the Ryan plan will reduce our deficits. He wants to eliminate Medicare and give seniors a voucher that they can use to purchase healthcare insurance. The value of the vouchers would increase annually at the rate of the CPI. That means that beneficiaries would have to pay the difference between the CPI and healthcare price inflation. His solution fixes a major source of future budget deficits by passing the cost of healthcare inflation to senior citizens. His plan does nothing to lower the price of healthcare services.

So what is he lying about? He claims that he wants senior citizens to have the same kind of plan that members of Congress have. They get vouchers that they use to purchase health insurance just as he proposes in his plan. There is an important difference, however, that he neglects to mention. The value of the vouchers that he gets as a member of Congress increase each year at the rate of healthcare insurance premiums and not at the rate of the CPI. That is an important difference and not a little fib. Its a big lie!! I realize, of course, that we expect all politicians to lie to us. The GOP, in particular, has no other choice but to tell us lies. The party exists to serve the interests of the most reactionary segments of our society. Its very existence is predicated on its ability to convince ordinary Americans that it is serving their interests. It is pretty good at that with the help that it gets from conservative "think tanks" and its own media outlets.

Monday, April 18, 2011

S&P Downgrades Outlook On US Debt

link here to article

S&P downgraded the outlook for the US fiscal position to negative. It left its credit rating at AAA. Hopefully, this will encourage our politicians to work seriously on the long term debt problems that we face. In my view, the S&P action reflects the gridlock that they perceive in Washington. Both parties seem more concerned about the 2012 election cycle than the state of the economy. The GOP plan reflects the short term focus of the Tea Party no-nothings on immediate cuts in spending and its radical changes to Medicare and Medicaid do nothing to curtail price inflation. The plan shifts the cost of healthcare price inflation to seniors and most people know that this will not hold when the impact is felt by seniors. The GOP uses the spending cuts to fund tax cuts rather than the deficit as well. The Obama plan keeps tax cuts for the middle class and only wants to end the Bush tax cuts for the rich.

Is Increasing Income Inequality Really a Bad Thing?

link here to article

Joseph Stiglitz wrote an article in Vanity Fair, that we posted some time ago, on the problems with rising inequality. This prompted a bitter response from a writer for The Economist. The above link is a rebuttal from another writer for The Economist who restates the points made by his colleague and points out his disagreements on the salient points. For those who are interested in the debate the article by Stiglitz, and the two responses in The Economist, provide a good foundation for discussion on the debate.

1000 Economists Agree on Something Good

link here to article

This article includes a letter to the G20 meeting in support of the Tobin Tax which collects a small fee on every financial transaction. It would be an easy way to raise billions in a time of need and it might have a an added benefit of limiting financial transactions that speculate on price changes on almost everything with a price.

The idea of the Tobin tax has been around for some time. The big surprise is getting 1000 economists to agree upon its implementation.

Lower Corporate Taxes Might be Responsible for Tax Revolt

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This article describes the history of tax policy in the US. Corporations used to contribute more to government revenue than individuals. They have been successful in cutting their effective tax rate by lobbying government and by funding political campaigns. This has shifted the tax burden to individuals. One of the results has been the current attack on government spending. Even though total government spending as a percent of GDP has been relatively constant, Tea Partiers, for example have focused on spending rather than on the shifting burden of taxation away from corporations and onto individuals. They have been taught well by the spokespeople for the elites that they purport to hate.

Healthcare Economists Find Problems in Ryan's Plan

link here to article

This article contains a letter written by healthcare economists who oppose Ryan's plan to change Medicaid and Medicare. The letter boils their disagreements down to a few easily understood concerns. Its doubtful, however, whether it will have any impact. We are dealing with people who have faith in a certain way of looking at the world. Facts mean little to the faithful.

Meet a Conservative Turncoat

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David Frum has been a devout libertarian most of his adult life. In this article he explains why we need a social safety net and why conservatives must incorporate it into their ideology or lose future elections.

Greenspan Comes out Against Bush Tax Cuts

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Greenspan supported the tax cuts in 2001 when we had budget surpluses from Clinton administration. He now claims that we can't afford to cut taxes and pay for them with borrowing anymore. It would have been nice if he had said this in 2001 but this is better than continuing to support the impact of the tax cuts on our deficits.

Saturday, April 16, 2011

Comic Book Politics in US as Seen by Financial Times

link here to article

Clive Crook calls it as he sees it. The US Constitution was set up to make big changes in the country very difficult. That is what the checks and balances are about. Consequently, the system depends upon compromise. With the advent of the tea partiers, the GOP has moved to the far right and there is little room for compromise with a center-right democratic president who they have painted as a socialist. Everyone knows that healthcare inflation is the major problem in achieving fiscal stability. The GOP plan does nothing to contain healthcare inflation or to resolve the long-term deficit problems. It reduces the deficits by shifting the burden of healthcare inflation from the government to Medicare beneficiaries. That of course will be politically untenable when it occurs so it won't work as planned. The Obama healthcare plan has some features that actually deal with price inflation but it is regarded as cost containment-lite.

We thought that we got rid of our image problems to the rest of the world when we got rid of W. We still look to the rest of the world like a third world country. The problem for the rest of the world is that the country with comic book politics has the most powerful military force in human history.

Ryan Budget Plan is Actually Designed for US Leadership as Low Tax Country

This graph (via Mark Thoma) shows that the US has almost the lowest tax incidence of any country in the world. The Ryan budget plan reduces taxes by around $4 trillion. This should get us to # 1 in the world. USA, USA, USA

Heritage Analysis Supporting Ryan Plan Flawed and Contrived

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Macro Advisors is a highly respected macro analysis firm. It studied the Heritage model that was used to support the Ryan budget plan. Their response is highly technical but its conclusions are easy to understand. The Heritage model showed that the economy would grow immediately in response to fiscal austerity. Macro Advisors did not believe this finding. They concluded that the model was manipulated to produce a result that would not otherwise be produced by the model they used.

The Heritage simulation also showed a result that Macro Advisors considered hilarious. The simulation showed that 4 million unoccupied houses would be built by 2021. They would be unoccupied because new household formation is not growing fast enough to occupy them!!

Macro Advisors was concerned that the legislature would use a flawed and contrived model to conclude that the economy would not suffer from the implementation of the Ryan plan. That of course, is exactly what the GOP House has just done. We should take a lesson from this. Conservative think tanks like Heritage, Cato, American Enterprise exist for a reason. They provide the analytical cover for conservative game plans. If you go to Heritage's website and read its mission statement, you will find that its analysis of the Ryan budget plan is consistent with its mission.

To Frack or Not to Frack

Joe Nocero, a business writer for the NYT's makes the case for natural gas. His article is in response to an article in the NYT by a scientist from Cornell who opposes natural gas on the grounds that its methane footprint is too high.

GOP House Approves Ryan's Budget Plan

Let the games begin. The GOP House approved the Ryan budget plan which cuts taxes by trillions for the rich and pays for the cuts with reductions in spending. It also turns Medicaid over to the states where it will be cut substantially and it privatizes Medicare. The GOP is counting on support from tea partiers to sweep the 2012 elections and to enact the Ryan plan into law. They have given the democrats an opportunity, however, to battle against a real plan. Campaign contributions are bound to flow into the GOP coffers from business interests so they will be armed to the teeth with money and foot soldiers.

GOP Battles Environmentalists at State Level

This article describes a host of attacks against environmental programs in GOP controlled states. They package it as part of their plan to reduce government spending but it serves business interests in their states.

Friday, April 15, 2011

Kevin Drum's Favorite Part of the Obama Speech

link here to article

Obama made these points very well. They will not influence the GOP base which no interest in facts that fail to confirm their belief system. Obama may have just as well told them that there is no God. In this case he told them that Fox News only tells lies but it is the same thing. The speech may do well with independents and it might ignite some sparks in the Obama base which has been waiting for him to get bad and defend himself against at lies. After all we did have budget surpluses under Clinton and we were on the way to paying down our debt until W decided to give the tax money back to his friends, and to insure his second election by giving the drug benefit to senior citizens.

The GOP May Have Found the New Ronald Reagan

link here to article

A recent poll found that Donald Trump is the favorite among current pretenders to the GOP throne by a wide margin. He leads the second best candidate by 9%. The GOP base may be strongly influenced by his position on Obama's citizenship. Trump has taken the position similar to the "birthers" in the GOP base. The majority of the GOP base would not vote for a candidate that did not affirm their naive view on Obama's citizenship. That makes sense because it is something that is easy for them to understand. They are uncomfortable with a black president who is smarter than their image of blacks will permit. When asked about this, they respond by saying that he is only good at reading from a teleprompter.

Donald Trump also fits the Reagan mold since he has used his celebrity to his advantage and he has good stage presence. Who can tell someone that they have been fired better than The Donald? They can probably imagine him saying that to unworthy government employees.

Atlas May Shrug at Film Designed for Tea Party

link here to article

Reviews on early showings of the film have been so bad that the producer has enlisted help from Tea Party advocates to go to church and celebrate Ayn Rand's gospel of laissez-faire capitalism.

If those in the Tea Party, who can read books with long words, take a close look at Ayn Rand's literature they might stay away in droves. My comments on her work follow: Ayn Rand was a vigorous exponent of secular humanism. There was no place for God in her books. Man was his own God and the system that enabled his ascendency was capitalism. Her work was largely in response to her family's experience in the USSR. They lost their property during the revolution and she migrated to the US. She had a fantasy of free market capitalism that did not really exist. For example, she took aim at those who exploited relationships and connections to succeed in business rather harshly. Her hero in The Fountainhead, Howard Roark, was a brilliant architect whose work was his own reward. He was contrasted with Peter Keating, a mediocre architect who became successful by giving the market what it wanted. That is, mediocre products. They both needed each other. Keating was awarded a huge contract that he was unable to complete. He sought Roark's help. Roark agreed to do the project since the market for his creations was very small. Only enlightened consumers appreciated his genius. The book ends with Roark blowing up the project that he designed after Keating was forced to alter Roark's design to satisfy his client. Roark had only agreed to design the building for Keating under the condition that it not be changed. He felt that the building belonged to him, and his genius, and not to the clients who paid the bill. If one thinks carefully about this, it is certainly a rejection of some basic tenets of capitalism. Those who paid for the building are the real owners and not the architect. Morover, capitalism based upon the notion that consumers are the best judge of their own needs is violated. Only enlightened consumers recognized and purchased the products of a genius. Since Roark's motivation for doing creative work was his intrinsic reward for doing the work, it also raises questions about a view of capitalism in which profit is the only motivation.

Austerity in Britain Compared with Austerity in US

link here to article

This article provides data on the early returns from the conservative governments plan in Britain to cut back on government spending during an economic downturn. Retail sales in March fell 3.5% which is the largest monthly decline in 15 years. Moreover, real household income is forecasted to fall 2% for the year. That will produce the worse consecutive decline in annual income in Britain since the 1930's. The loss of 300,000 government jobs will further exacerbate recovery in Britain.

The Conservative plan in Britain is based on a belief in the "confidence fairy". The assumption is that investors will believe that the government is on the path to fiscal sanity and reward the government with low interest rates. Interest rates in Britain compare favorably with those of Germany, which has the strongest economy in Europe. Its hard to imagine that the "confidence fairy' will do much better than that, although further deterioration in Britain's debt situation might cause investors to raise interest rates.

Comparing the austerity plan in Britain with the Ryan plan in the US leads to some interesting observations. The current government in Britain is the most conservative in Europe, yet it is to the left of the proposals in the Ryan plan and perhaps even to the left of the Obama plan. That is because the focus of the British plan depends on 75% of deficit reductions coming from spending cuts. The top marginal tax rate of 50% has not been reduced and the national health service structure has not been changed. The Ryan plan cuts spending by $5.8 trillion but this is offset by tax cuts, mostly for the rich, of $4.2 trillion. Moreover, the Ryan plan cuts government spending on healthcare by shifting the burden of rising costs to recipients. Neither party in the US is proposing any real increases in taxes. The Obama plan lets the tax cuts for the super rich expire under current law. The GOP, of course, has little interest in the current law and they regard the expiration as a tax increase.

Its also interesting to compare interest rates in the US with those in Europe. Investors have been willing to purchase US Treasury's with interest rates well below those in Britain and the rest of Europe. Its hard to see how the "confidence fairy" can do much better for the US. The US could grow its way out of its budget mess by taking the opportunity provided by low interest rates to invest in the economy. That would allow the US to focus on longer term plans to reduce the costs of providing healthcare.

I doubt that the GOP will discouraged by the results from Britain. It may be exactly what they want as the 2012 election approaches. If they win the election they will lose some of their interest in deficit reduction as they have in the past. The largest US budget deficits since WW II occurred under Reagan and Bush. They both cut taxes and increased spending. Obama's deficits are primarily due to the fall in tax revenue because of a weak economy. Total government spending in the US had not increased under Obama. Increases in federal spending have barely compensated for losses in state and local spending.

Obama's Response to Ryan Plan Wins Round One

Ryan's roadmap was initially received by many pundits as a serious plan for cutting deficits and the national debt. His plan did indeed cut deficits and it included many changes to entitlement programs that are the fastest growing segment of government spending. Now that everyone has had a chance to analyze the Ryan plan it looks like a real loser for the GOP. First of all the plan contained many assumptions that did not pass the laugh test. For example, Ryan used data from the conservative Heritage Foundation that crunched the numbers to prove that cutting taxes for the rich was good for the economy. They forecasted unemployment dropping to 2.8% as a result of the tax cuts. They have since retracted that claim, but the damage had been done. Real budget analysts began to look closely at the plan and its weaknesses became more apparent.

Democrats should be pleased that the GOP decided to go with the Ryan roadmap. Not simply because it exposed its weaknesses as a plan that adds up, but because the plan does layout the GOP view of the world. The plan cuts taxes for the superrich dramatically and it pays for the tax cuts by cutting government spending on entitlements and non-defense discretionary spending that provides real benefits for those in need. Nothing could be clearer. The GOP plan is a roadmap for the path to plutocracy. Obama, and the Democrats now have the opportunity to ask the public what they want. Plutocracy or a democratic state that serves the interests of the entire population.

Western Population Declining as Percent of World Population

In 1950 the west was 20% of the world population. Its share of the world population has been steadily declining. Its share of population will have been cut in half by mid century. This will have obvious effects on economic growth and political clout.

Thursday, April 14, 2011

Institute for New Economic Thinking Holds Second Annual Meeting

link here to article

John Cassidy reports (via Manan Shukla) in the INET's second meeting held at Bretton Woods in New Hampshire. He provides us with comment made by George Soros, who is funding INET, along with those of other big names, including Larry Summers, Gordon Brown and I. Turner who made the keynote address at the first meeting.

Comments on the Financial Crisis Commission Report

link here to article

I recently reviewed the conclusions reached by the Financial Crisis Commission in a graduate class that I teach. I felt that the Commission did an excellent job of documenting its findings and stating the most important conclusions from their research. This article (via Manan Shukla) agrees with my assessment of the Commissions findings and it has a link to the full report for any who are interested. The Commission did not make recommendations, since it was not one of their charges. This article discusses aspects of the reform bill that may be helpful in the future.

Lots of Data on Changes in the Tax System Since Reagan

link here to article

There is a lot of information in this article (via Manan Shukla) that everyone should be aware of. The basic idea is not to soak the rich as some of the stupid comments suggest. The real issue is to get them to pay their fair share of taxes.

Comparing the Ryan Roadmap and the Obama Plan

link here to article

The NYT did a good comparison of the major differences between the GOP vision of the future and Obama's vision. The differences a very clear and the the values that shape each plan are clear. You decide what kind of country that you want to live in.

Wednesday, April 13, 2011

The South Shall Rise Again

A recent poll shows that 25% of Americans prefer the confederacy and 38% of southerners feel the same way. That is just about the size of the Tea Party and the poor white part of the GOP base. Its no wonder GOP leaders are forced to say stupid things in order to keep that part of their base happy while they cut taxes for rich yankees.

Commodity Price Increases DON'T Cause Core Inflation to Rise

link here to article

Krugman posts a graph of commodity prices and core inflation published by the Chicago Fed. The graph shows wide swings in commodity prices that don't correlate with core inflation. Show that to your inflation hawks screaming about the Fed.

Facts and Lies about Budgets

link here to article

The GOP plan for cutting deficits is right out of the GOP playbook. Cut taxes for the super rich and pay for the tax cuts by borrowing. I said borrowing because the spending cuts, or the revenue increases that are claimed to come from tax cuts, never happen as planned. In any case, the current GOP plan pays for the tax cuts to the super rich by cutting spending on programs that conservatives don't like because they don't need them, or because they make part of the GOP base happy because they don't like public radio, planned parenthood etc. This editorial makes the issue very simple. The spending cuts are there in order to cut taxes. The plan cuts projected deficits by shifting a substantial part of the projected increases in healthcare costs to the beneficiaries. It does nothing to reduce the growth in healthcare prices.

Tuesday, April 12, 2011

How to Avoid the Ben & Jerry Problem When Selling the Corporation

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A lot of companies like Ben & Jerry measured themselves using the triple bottom line. When they sold the company, they were forced to take a high offer from a large corporation instead of taking a smaller offer from a company that shared their values, Moreover, there are lots of companies that claim to be socially responsible, but provide no information to prove the claim. Now there is a way to solve both problems: become a B corporation. All B corporations must provide proof to support their claims and they are able to sell their companies to the best buyer regardless of price. This article is about B corporations and how they are certified to support their claims that they serve all stakeholders instead of just current shareholders.

Merry Christmas Wall Street from Uncle Sam

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This article (via Manan Shukla) is based on information that the Fed was forced to provide by the banking reform law. It describes some of the most egregious abuses of the TALF program which was designed to enable investors to purchase illiquid assets held by financial institutions. I remember discussing this program with a colleague who managed a derivatives group for a large bank. He could not believe it. The hedge funds, and other groups who purchased the assets, were in line to get any gains from the purchase. The Fed loaned them the money to make the purchases and agreed to absorb most of any loses that were absorbed. He was almost ready to start up a hedge fund to get into that business. Of course, in order to evade taxes on the gains he would have located his fund in the Cayman Islands as many of the investors in this article did.

Rolling Stone published this article, and it does tend to sensationalize issues, but I have not seen any mention of these abuses elsewhere in the media.

You may recall that Goldman and Morgan Stanley told everyone that they did not need government help because they had hedged their bets on mortgage backed securities. They borrowed tens of billions of dollars from the Fed which indicates that they would have failed without the bailout.

Voodoo Economics, Fiscal Policy Voodoo and QE Voodoo

This article briefly mentions that voodoo economics of the Reagan era as if it is history. Unfortunately zombie's do not die. It is being revived in the Ryan plan which implies that tax cuts to the wealthy will lead to an economic boom. The conservative Heritage Foundation was glad to provide the "research" behind the Ryan claims. After all, it is funded by the super rich to provide research to benefit the super rich.

The major portion of this article was devoted to an explanation of quantitative easing and a rationale for explaining why pumping more money into banks won't cause them to lend more freely because of their solvency concerns, and why heavily indebted households won't take advantage of the increased money supply to borrow and spend.

Fiscal policy is usually invoked to deal with the limitations of monetary policy. Government will borrow and spend to compensate for the reluctance of business and households to borrow and spend. Our recent experience with fiscal policy shows that it cannot work as long as it is left up to Congress to implement.

The article does not discuss one of Keynes's less often cited solutions to recession. He argued that income inequality was one of the problems that lead to recession. The super rich can't spend all of their income so they invest in ways that do not expand the economy. Today they invest in private equity which purchases a weak business and extracts value out of it before putting it on the market for someone else to fix (Chrysler is a good example). They also invest their money with other schemes that extract value by making bets on currencies and other securities. This is a sum zero game in which some investors make better bets than those who made poor bets and lose their money.

This gets us back to the basic problem of income inequality. Low growth in middle class income as we have experienced for the last 30 years has led to a situation in which growth can only be sustained by the assumption of household debt. If we focused on changing this dynamic we would not need Voodoo economics in each of its forms.

If You're Rich You Must be Smart

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The title of this post is Robert Reich's explanation for why government puts so many Wall Streeters in key positions. Its probably more complicated than that. For example, lawyers who defend clients against actions brought by the SEC often spend some time in the SEC. The same thing happens in the IRS. Those who have both perspectives are more valuable. Wall Streeters are a good fit in the Treasury and former Treasury staff are sought by Wall Street. The nature of the game is influence peddling.

Great Articles on Brad DeLong's Blog Today

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Macro Advisors forecast for Q1 2011 GDP growth cut to 1.5% on annual basis. Probably due to forced cuts in federal spending.

The UK has gone to where conservatives would like to take the US. Expansionary austerity has led to a big drop in retail sales. The confidence fairy, which is supposed to boost spending because of austerity plans, is not working as planned.

Larry Summers bets his reputation on the failure of the austerity plan in the UK.

Larry Summers interviewed by Matin Wolf of the Financial Times explains why macro economics based upon micro economic assumptions has not worked out well.

The are two great short quotes from Adam Smith's Wealth of Nations. Conservatives love to quote the part that provides the micro basis for "Economic Man". If any of them have ever read the entire book, they have neglected Smith's writing about the bad side of human nature, and laws which amplified the bad side and have contributed to inequality and economic inefficiencies, including slavery.

Several Excellent Posts on Krugman Blog

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Krugman reported on a proposal that would give Americans a choice to take Veteran Administration care as one of their choices for healthcare. He knows that it is politically impossible today but he relishes the idea of conservatives opposing socialized medicine as a free choice (they really love free choice). If American's chose a lower cost plan (VA is lower cost healthcare) that provided the quality of VA care it would be a blow to the conservative mantra that government can't be as good or as efficient as private enterprise.

The Post has reported that Obama will propose the Simpson plan as his alternative to the Ryan plan. Krugman explains why that is a bad idea from his perspective.

The Post also explained in an editorial on the Ryan plan that it would extend to Bush tax cuts to the wealthy. That is true, but it also cuts taxes for the wealthy even further. The additional tax cuts add up to $2.9 trillion. The basis idea of the Ryan plan is to cut taxes for the wealthy that are paid for by cutting government spending on programs that benefit less wealthy Americans. His plan also revives the voodoo economics from the Reagan era. Cutting taxes for the wealthy is supposed to create a boom in the economy. Unemployment drops to historic lows in the Ryan plan. Most economists laugh at this assumption.

There is also a post that explains why the move to the Euro as a common currency in Europe led to some of the problems that we see in Greece, Portugal, Spain etc. The southern economies had been paying a premium to borrow money in their own currencies before the Euro. Interest rates dropped for them to the level of German interest rates after moving to the Euro. This encouraged more borrowing which led to the problems they have today.

There is another post that explains why economics would have been more able to deal with our financial crisis and recession if it had used the economics of a previous generation that was more interested in understanding how things really worked than it was in building elegant mathematical models of the economy based on assumptions of rational maximizing individual behavior rolled up into the macro economy. The assumptions simplified the math but it stripped economics of many ideas that have large impacts on the economy.

Can Natural Gas Replace Coal?

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This study suggested that while natural gas emits less CO2 than coal or oil when burned it may have a bigger greenhouse gas footprint than coal during its life cycle. Methane released in the drilling process along with gas leakage from piping it to markets, is a bigger problem than we realized. Moreover, production would have to be ramped up 4X to replace coal in electricity production by 2035 as planned. It is doubtful if that goal can be reached.

Monday, April 11, 2011

Krugman Chimes in on White House Deal with GOP

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Krugman understands that Obama is limited by GOP control of the House but he hits Obama hard for announcing the deal as an achievement. Why he would claim victory by announcing the largest budget cuts in history is rather silly. The GOP forced the cuts on him and they are the ones who will benefit from the deal with most of their base (Some Tea Partiers wanted bigger cuts).

The cuts in the budget will damage the anemic recovery that is underway and it will cancel out the positive impact that he got in the last deal with the GOP in which he traded extension of the Bush tax cuts for middle class tax cuts which have some impact on the economy.

This is just another example of Obama trying to stay above the fray instead of trying to use his position as President to sell the public on his reasons for keeping the short term focus on jobs and dealing with budget deficits after the economy recovers.