Monday, May 30, 2011

Learned Helplessness and Unemployment Policy

Policy makers everywhere have given up on the unemployment problem. The shift is to making structural changes that will reduce sovereign debt burdens. Our unemployment problem is connected to household debt burdens not sovereign debt.

The Politics of Medicine Becoming More Liberal

link here to article

Medical doctors change their politics when they become hospital employees. As more women enter the profession and doctors work for hospitals that provide malpractice insurance they become less conservative and less oriented toward the attitudes typical of small business people.

Sunday, May 29, 2011

The Role of Wall Street Speculation on Oil Prices

link here to article

This article (via Manan Shukla) contains links to communications from Saudi officials about the role of speculation on high oil prices. They were concerned that high oil prices would dampen demand. The US, for example consumed more ethanol than Saudi oil in one period.

Until recently, 70% of oil future contractors were held by heavy users of oil products, such as airlines, as a hedge against price increases. Today contracts held by Wall Street speculators have risen by a factor of five. Speculators, who will never take delivery of oil, now hold 70% of oil future contracts. The high degree of speculation in the oil market means that the normal operation of supply and demand on prices has been distorted. Speculation will produce wider swings in prices than changes in supply and demand.

As one might imagine, the oil futures market is dominated by a few Wall Street banks and the futures are traded on unregulated exchanges. This means high profits for Wall Street banks and unpredictable oil prices. The Wall Street Casino business is a model of innovation. It never produces anything of value but it uses a large percent of the world's savings to wager on price swings in almost any commodity.

The Super Rich Fund More Than Political Campaigns

link here to article

This article documents the influence of the super rich on how economic ideas are discussed in higher education. The Koch family has been particularly active in promoting its causes by sponsoring academic research on government regulation and climate change that is favorable to its financial interests. The Mercatus Center at George Mason University is a classic example of a Koch funded economics research organization that produces economic "studies" that consistently blame government regulation for most of our economic problems and argue for the privatization of government entitlements such as social security. The Mercatus web site provides a list of its Board of Directors. It reads like a Who's Who of far right political activists. It is not dissimilar from the Boards of other right wing "think tanks" e.g., The Heritage Foundation, The American Enterprise Institute, The Cato Institute, The Hoover Institute etc. etc. A visit to the websites of these organizations is like going to the center of the right wing universe.

One of the problems with growing income and wealth inequality is the potential for the corruption of democracy and higher education. The super rich cannot spend all of their wealth on consumer goods. They can use it to purchase power. The weak financial situation of many higher education institutions opens up the market for those who want to use universities to promote their particular causes. A college in Utah was given a large grant from the Koch Foundation on the condition that Ayn Rand's novels are required reading.

Saturday, May 28, 2011

Shadow Banking on the Rise

link here to article

This article (via Manan Shukla) is on the rebirth of the Shadow Banking System. It consists of non-banks, which are not regulated, that do not depend on deposits as a source of liquidity. It is about the same size as the depository banking system and it is a source of competition for the Wall Street banks who are regulated and who are less able to take risk than they were before the crisis.

The failure of a single hedge fund (Long Term Capital)required a large bailout, orchestrated by the Fed but paid for by the big banks, because the enormous leverage that it employed was a systemic risk to the financial system. If they escape regulation as they grow larger, they will set the stage for our next crisis.

Citi Bank CDS's Cheaper Than Goldman's

Citi was the poster boy of the bad bank during the crisis. Goldman looked like the strongest bank at the time. This graph shows that the CDS market perceives greater risk of a Goldman default than a default by Citi. Goldman's reputation, which was once worth a fortune, has been shattered by revelations about its sale of securities, that it knew to be at risk, to its customers. It has also been revealed that Goldman borrowed $30 billion from the Fed discount window during the crisis. At the time Goldman claimed that it was fully hedged and did not need a bailout. Customers have also filed lawsuits against Goldman and the government has information which many believe to be evidence of fraud.

Friday, May 27, 2011

The GOP Plan to Restore Jobs Is To Do What Bush Did

link here to article

The GOP just announced its plan to create jobs. It starts out by blaming the recession, which started after 8 years of Bush policies and a financial crisis that occurred during the Bush presidency, on the Democrats. They do not even mention the financial crisis in their document. It has been erased from memory. Orwell is alive and well. The GOP operates like Soviet historical revisionists under communism. They have rewritten the history of the Great Recession.

Their plan for fixing the economy and restoring jobs is their generic plan for fixing every problem. See if you can guess whats in it. You are correct. We should cut taxes, get rid of government regulations and reduce government spending. Our economic problems, and unemployment, are the result of the burdens placed upon business by government. John McCain ran for the presidency on that platform and got clobbered. The GOP has no new ideas to sell to the public, and it has no new ideas on how to deal with recessions. We should just let the free market work its magic, and the magic that contributed to the recession will get us out of recession.

Thursday, May 26, 2011

GDP Growth Not HIgh Enough In 2011 to Reduce Unemployment

link here to article

Mark Thoma links us to an article that provides more bad news for the economy. GDP is a measure of spending but the BEA also uses a more reliable measure of growth based on income (GDP I). That measure came in at 1.2% compared to 1.8% for Q1. Okun's law tells us the GDP growth has to exceed 3% before unemployment is reduced.

There are other ways to increase employment without focusing on GDP growth. It may be time to look at alternatives to growth as the solution to employment problems. That makes sense particularly when sustainability is a global issue.

Ryan's Medicare Plan Would Increase Spending on Healthcare by 40%

link here to article

Peter Orzag is the former head of the Office of Budget and Management. He believes that Republicans like the Ryan plan for reforming Medicare. They view the reason for not supporting the plan as political. That is, it might cost some to lose elections. The GOP is right to worry about the politics but Orzag tells them that the Ryan plan would raise healthcare spending by 40% rather than reducing it. Consumer based healthcare reform can't cut costs because 85% of the costs are incurred by 25% of the beneficiaries with problems that would be covered by insurance. If 75% of the pool cut their spending, because they are forced to pay a greater share of the cost, it would do little to reduce spending.

The Ryan plan would reduce government spending on healthcare a lot but it would increase overall spending on healthcare by 40% because Medicare has lower administration costs than private insurers and it has greater bargaining power with providers than private insurers.

We should put the Ryan plan to rest. The GOP will drop it because they value winning elections more than anything else, and studies by the CBO show consumer directed healthcare does not lower spending and that Medicare is more efficient than private insurers.

GDP Growth Rate for Q2 Is Being Cut by Forecasters

link here to article

Macro Advisers, a major economic forecasting company, cut its estimate of Q2 GDP growth to well below trend. It follows JP Morgan and Goldman Sachs which have also cut their Q2 GDP growth numbers. The fundamentals are not good for growth.

Can America Become the New Phoenix?

link here to article

In mythology, Phoenix rose from the ashes to lead to a new direction. This article(via Manan Shukla) makes the point that a new direction is needed in economic thinking in order to solve our global economic problems. We have learned that our financial system is subject to recurrent crises that were not predicted by economic theory. Moreover, the dominant free market ideology led to the deregulation of the financial markets that contributed to the latest crisis. We also know that global warming is changing global weather patterns and causing recurrent cycles of bad weather events to be more extreme. The cost benefit analysis used by economists stress the cost of lost economic growth that might result from efforts to reduce greenhouse gases. We have also learned that unemployment and increasing income inequality are endemic to our system and that economic growth does not fix either problem. We need new ways of thinking in economics to deal with our major problems and the US, which is still the world's dominant economic force must assume a position of leadership in setting the new directions. The key question is whether America will become the Phoenix that is needed or whether it will continue in its role as the center of free market ideology that describes an economy that has never existed.

Adair Turner, an aristocrat who makes policy for England's central bank, made the keynote address at the recent Bretton Woods Conference which should challenge the profession and inform our politicians. He stated that employment stability, financial stability, climate stability and inequality were our most important problems and that they could be solved without a focus on economic growth. Banks should be required to hold enough capital to forestall problems even if it resulted in less lending and economic growth. Furthermore, countries should pay whatever is necessary to improve energy efficiency, and to transition from fossil fuels, even if it stunts economic growth by 1% of GDP as many models predict.

Unfortunately, economics is still engaged in a debate between those who argue that free markets can fix all of our problems, and that government intervention only makes things worse, and those who argue that government is essential to deal with market failures. Rational expectation theory, which is the outgrowth of free market ideology, still dominates macroeconomic modeling despite its failure to predict market failures. This is not surprising since one its assumptions is that markets don't fail unless an external event disrupts their normal operation. Financial markets are not accounted for in the theory. They are external to the economy.

The article describes some of the new efforts to improve economic forecasting and to incorporate irrational behavior into economic thinking. The financial crisis should make the case for a collective funeral for the old ideas that do not describe reality and which contribute to the market failures that have always been characteristic of the way in which markets really work.

Wednesday, May 25, 2011

GOP Self Destruction Continues

link here to article

Of all of the flotsam currently running for the 2012 GOP presidential nomination, the Democrats fear Mitt Romney the most. He looks the part of a president and he is much smarter than the other candidates appear to be. He won the Governorship in Massachusetts which is very liberal state and he has lots of money behind him. One of the major Tea Party groups just announced that its primary goal was to keep Romney from being nominated. Maybe they should get Paul Ryan to run to insure that they lose in 2012. He has demonstrated the lack of competence and commitment to false claims that would qualify him for nomination.

Why Home Prices Continue to Fall

link here to article

Government efforts to support the sinking US housing market have failed. This editorial suggests that the problem lies in the lap of mortgage servicers who earn more money collecting fees for servicing impaired mortgages than they would from modifying them. Some proposals for fixing the system are proposed. Unless the sinking ship is rescued our economic recovery will continue to sputter. April home sales in Massachusetts were down 28% from last year. The problem is even worse in states that were harder hit by the housing bubble and the mortgage scam.

A New Third Rail of Politics In US

Social Security has always been viewed as the third rail of US politics. The public likes it and it votes against any plan to change it. George Bush failed in his attempt to privatize it and turn it over to Wall Street. The GOP effort to privatize Medicare and cut benefits to future beneficiary's, under the guise of deficit reduction, is meeting with a similar fate. A special election was held in a GOP stronghold suburb of Buffalo, NY yesterday to replace the GOP House Representative from that district. (He resigned after being caught sending half naked pictures of himself over the Internet to women who he was trying to attract.)

The Democratic candidate ran her campaign by attacking the Ryan plan, which the GOP House voted for, which cut future Medicare benefits, and turned it over to private insurers who would be paid with vouchers that lost value, relative to cost, over time.
The GOP candidate attempted to defend the plan initially, but she gave up and tried to run on her commitment to deficit reduction. The Republican district decided to vote for the Democrat. Goodbye Ryan plan, and welcome to the new third rail of US politics. The Democrats are going to have fun putting GOP politicians who voted for the Ryan plan on the third rail for electrocution.

Tuesday, May 24, 2011

What Kind of Society do We Want?

Paul Ryan spoke on behalf of a segment of the super rich. He certainly did not speak for Warren Buffet or Bill Gates who believe that our tax system should be more progressive. Moreover, his rationale for cutting taxes is specious. Cutting taxes for the Koch brothers will not stimulate their productive activity. Nor will Warren Buffet or Bill Gates work less hard with higher taxes.

Our president makes the right kind of speeches about sharing the benefits of our economy more broadly. Is he willing to run for the presidency on that platform?

Bank Holdings of Eurozone Sovereign Debt.

Sometimes a picture is worth 1,000 words. This picture shows European bank holdings of sovereign debt. Their holdings of Italian debt dwarf that of the other at-risk states. The recent downgrade of Italian debt should be a concern in the eurozone.

Note that Ireland is not a problem. The Irish banks made all of the bad loans.

Why The Rats are Leaving the Sinking Ryan Ship

link here to article

Politico reported on how the GOP has retreated from the Ryan plan because of the backlash that it has encountered from its own base that especially likes Medicare just the way it is. Krugman thinks that Ryan may become a martyr among the Washington punditry. They viewed his plan as a bold attempt to solve our long term fiscal problems.

What I liked about the Ryan plan was that it laid out the value system of the GOP for everyone to observe. In that sense it was a bold plan because politicians rarely take such risks. Krugman describes the Ryan plan very well. He called it right wing wish list on steroids: sharp tax cuts for corporations and the wealthy, savage cuts in aid for the poor and a gratuitous privatization of Medicare. To make matters worse, it is also technically incompetent. It does not reduce the national debt. The public has rejected the Ryan plan, but he may have been influenced by the love affair of the punditry, and by encouragement from those on the far right who blessed his plan. After all, how does an obscure representative from Wisconsin get to appear on all of the Sunday talking head shows and get his picture on the cover of all of the national weekly magazines? Incompetence sells as long as it of the right kind. I also think that is an example of GOP hubris. Many in the GOP have been drinking too much tea. They have come to believe that the time is right to commit to the far right agenda and they have over-reached. The real America is not in South Carolina or other third world states.

The Sky Is Not Falling

link here to article

Paul Krugman is a dangerous economist. He is intent upon using arithmetic to destroy goblins like the "confidence fairy" and the "bond vigilantes" . In this article he uses a bit of arithmetic to show that our short term debt problem does not lead to a long term national debt disaster as long as the economy grows at the nominal trend rate of 4%. Of course things could change, the bond vigilantes may take actions that cause the cost of government debt service to rise. He argues, however, that they are also capable of doing the arithmetic that he just did. There really are no vigilantes, there are a lot of investors who prefer to use arithmetic when making decisions. Hopefully, they will follow his line of reasoning as well.

We have to keep asking ourselves why we have become so affected by goblins. There are lots of folks who invent the goblins because they want to run goblin-centric election campaigns, and there are others who would like to erode the public safety nets that are provided by government. They hate taxes, and they believe that safety nets distort market signals when the safety nets support ordinary Americans who face uncertainty. They are only supposed to be used to rescue bankers who take excessive risks with other people's money.

Construction Bust Greater Than Boom

This graph (via Brad DeLong) shows the trend in new residential construction and it depicts the extent of the boom above trend and the bust below trend. The fall in construction below trend is much greater than the overbuilding during the boom. The implication is that demand for new housing will begin to outstrip supply. The problem is that nominal income is not sufficient to satisfy latent demand. Its also the case that the continuing decline in prices, due to distressed sales, is not a strong signal to developers to expand supply.

Monday, May 23, 2011

Loony Tunes on Tax Policy on the GOP Campaign Trail

link here to article

This article on the chatter from GOP primary hopefuls on tax policy (via Manan Shukla)is par for the course. George Bush ran his primary supporting the flat tax because it was being pushed by his opponent (Forbes) and getting a good response from the GOP base. The concept of fiat currency and advocacy for a return to the gold standard are old chestnuts among the GOP fringe. The GOP primary campaign is designed to attract the loonies who outnumber its wealthy supporters who pay little attention to this nonsense.

I would like to remind my readers that the US tax system is essentially a flat tax system already. We have a progressive income tax system, that has become less progressive, which combined with the regressive payroll tax and regressive state and local taxes results in a relatively flat tax system. One of the reasons for all of this campaign lunacy is that we don't teach our citizens the basics about tax policy and government budgets. That should be required in every high school.

Contest Over New IMF Head as Proxy for Banker Centricity in IMF

link here to article

The IMF has brought the major emerging market countries into it's leadership. They are now demanding an open process in appointing the new leader of the IMF. Europe has usually picked the leadership but many view the leading candidates as "bank-centric" That is, they will resist requiring that banks bear some the cost for bailing out countries who may default on their debt. Greece is a classic example of the problem that the IMF faces. Major banks in Europe made the loans to Greece that are at risk. The ECB and the IMF have imposed austerity on Greece which will make it impossible for it to generate the revenues needed to pay down its debt. The alternative is to have the banks take a haircut on their bad loans and give Greece some breathing room to service its debt.

This article does not raise the topic of credit default swaps, but they are in the background. Speculators have been using CDS's to bet on Greek default. If Greece restructures its debt that will be an event that enables the speculators to cash in their chips.

Excelent Summary of Wall Street's Role in Financial Crisis

link here to article

This is the best summary of the way that the pipeline worked in the mortgage securities market to crash the global financial system. The system worked like the market for illicit drugs. The loan originators were the pushers on the street whose behavior was overlooked by the "cops on the beat". The Wall Street banks packaged the toxic waste provided by the pushers and sold it to their "junkies" (otherwise known as valued clients) who were starving for higher octane product. The credit agencies were paid accomplices who certified that the high octane junk was indeed high quality. The entire pipeline was corrupt, but it was enabled and led by a handful of the top Wall Street banks who encouraged and enabled the pushers, and then lied about the quality of the product they sold to their junkies. To make matters worse the banks took out insurance on the junk that they sold so that got paid off when its junkies were sent to visit Betty Ford's for rehab.

No Good News on Housing in US

Around two million homes are either in foreclosure or for sale by bank owners of foreclosed homes. Moreover, there are many more potential foreclosures in the pipeline. It will take several years to work off this back load. In the meanwhile, prices will continue to fall and create more problems for banks. It is estimated that banks will be hit with $40 billion of writedowns. Its no wonder that they are holding on to record amounts of reserves and that the Fed continues to help by keeping mortgage rates low.

Trouble in Eurozone Accelerates

Greece's debt is now rated below junk. Default is likely and investors are holding back. No good news from Ireland and Portugal. Spain's effort to deal with 20% unemployment has backfired and it's socialist government lost local elections by wide margin. Its not likely that conservative austerity will work better than socialist austerity to lower unemployment.

To make matters worse, the stronger economies, Germany and France, are slowing down and that may limit their ability to bailout the southern tier of the eurozone. The euro has weakened in response to the latest news.

Sunday, May 22, 2011

Tax Policy, Fiscal Policy and National Debt

link here to article

This article is about tax policy as well as the impact of tax cuts versus government spending on economic stimulus. If our tax policy was similar to that under Eisenhower we would not have a long term debt problem. Moreover, the CBO estimated that government spending had a bigger impact on employment than tax cuts because some to the tax cuts would be saved and some would be used to purchase imports.

When Should The Dollar be Strong or Weak?

link here to article

Christina Romer was on the Obama economics team where she was involved in developing its fiscal policy. In this article she discusses how the value of the dollar is determined on the foreign exchange market, and how its value is influenced by monetary policy and by fiscal policy. One of her points is that whether the dollar is strong or weak relative to other currencies depends on the state of the economy. Many in Congress understand that our trade deficit with China would be better if China allowed market forces to determine the relative value of the currencies. On the other hand, the same members of Congress prefer a strong dollar as a matter of national pride. We can't have it both ways. Government has to decide where it wants the dollar to be in terms of its current economic situation.

Saturday, May 21, 2011

Labor Productivity Up; Wages for Labor Down

link here to article

This is a link to a study that attempts to determine why the historical link between labor productivity and wages has been broken. The explanation requires an understanding of a wide range of changes in society. Some of these changes are explored in depth. Perhaps the most profound changes have occurred in corporate America. The shift from managerial capitalism to financial capitalism has had dramatic influences on corporate behavior and upon the distribution of income.

Some recommendations for change are proposed but it will be an uphill battle.

The Government Mistakenly Moves Defense Funds to Education

link here to article

The Onion is a national treasure. This article is priceless.

How to Reduce 2016 US Debt by 50%

Bush tax cuts and two "wars" account account for half of budget debt projected for 2016 according to Congressional Budget Office data.

Economic Problems in Spain Reach Boiling Point

link here to article

Mass protests in Spain over unemployment. Socialist government has adopted austerity plan to cut deficit but unemployment remains the highest in Europe. Fiscal policy is not possible with current deficit problems and monetary policy is in the hands of the ECB which has tightened credit. If Spain joins Greece, Portugal and Ireland in need of bailout it could threaten the euro-zone. The Spanish economy is much larger than that of the other at-risk countries in the euro-zone, so the cost of a bailout would be prohibitive.

Why Fears of US Deficits are Sometimes Overblown

link here to article

An unorthodox view of the need to reduce deficits. For most people this view will defy their common sense. Most people do not understand the relationship between trade deficits and foreign purchases of US treasuries. They get the dollars by running surpluses with us and they use the dollars to buy treasuries. His point on rational markets is also difficult for people who believe that markets are rationale. Sometimes they are, much of the time they are not. If the bond markets are rationale today, the low interest rates they are paying for treasuries is irrational if they expect inflation. Of course, if the markets are irrational, it is impossible to develop a policy to please the market makers. I would have liked to have watched his presentation in order to view the reactions of congressmen who don't really understand finance or the way markets really work.

Friday, May 20, 2011

Why Educated Republicans Can't be Honest

link here to article

Brad DeLong claims that when he talks to his GOP friends about the basic elements of the Affordable Care Act they seem to like each of the major elements. On the other hand, they are unable to state that they like the Obama plan. He can't seem to find an explanation. Perhaps it makes sense in an historical context. When the GOP loses the presidency they have resorted to a tactic of delegitimizing the democratic president. They did this successfully in the Clinton administration by turning both Clinton's into demons (with a little help from Bill at the end). This has been their approach with Obama as well. This has worked especially well in the South where many are unable to deal with the reality of a black president. This is especially true when the black man does not fit their stereotype, and is much smarter and better educated than they are. In the South racism underlies much of the criticism of the Affordable Care Act. Extending Medicaid benefits to a larger number of low income citizens translates into providing "undeserved" benefits to minorities. The problem that Brad's GOP friends have is that the GOP is no longer the party of North Eastern patriarchs. The party has become dependent upon the votes of southern whites and rural Americans even when most of its campaign contributions come from the educated part of its base.

Labor Market Structure and Unemployment Problems in Recession

link here to article

This is a rather long, but informative study, of the ways in which labor market structure moderate or exacerbate unemployment rates in recession. Much of the discussion is about the differences between Denmark and Germany, but there are lessons for the US from this analysis. Denmark has excellent programs for retraining employees who have lost their jobs. This works very well during periods of full-employment but it works less well during a recession when there is a demand shock. In a demand shock recession there are fewer jobs to be retrained for.

Germany was the only OECD country to maintain full employment during the recession. It has two programs which encourage firms to cut down on hours worked instead of laying off employees. The government replaces some of lost income from shorter hours and workers can bank hours by working overtime or by working during vacations. They can use their banked hours during periods of low demand for hours. This kept employment levels from falling and kept wage income from falling and reducing aggregate demand further.

The US has the most "flexible" labor market structure among its peers. There are very few structural impediments to firing workers during a downturn. High costs for employer sponsored healthcare in the US also provides an incentive to fire workers, or to use part time labor during a demand shock. The Obama administration favors the use of programs, like those of Denmark, to retrain workers to meet the requirements of open jobs that employers are unable to fill with the available workforce. This does not work well in a demand shock recession when the fit between labor force skills and job requirements is less of an issue. The US spent more on stimulus relative to GDP than other countries but it suffered higher employment loss during the downturn than most OECD countries. Labor market structure made the difference.

The "War on Capitalism" is Working

link here to article

When the government bailed out GM and Chrysler, right wing critics called it a "war on capitalism". They believed that capitalism required government to let ailing firms fail. The bailout may have violated one of the maxims of doctrinaire capitalism but it has enabled GM and Chrysler to survive and retain jobs. GM, in particular is on its way to overtake Toyota as the number one auto manufacturer. The government rescue of the auto manufacturers has kept our industrial heartland alive and now manufacturing is one of the bright spots in our economic recovery.

Right wing critics also complained about the actions taken by the Fed which caused the dollar to depreciate relative to foreign currencies. A less expensive dollar has made US manufactured products less expensive and this has led to higher exports. Again doctrinaire capitalism would have been the wrong medicine for the economy.

Some US manufacturing companies and some foreign manufacturers are now looking at the US as good place to locate their plants. Shipping costs have risen and the disaster in Japan has made companies more concerned about over extended supply chains.

We should continue our war on a version of capitalism that never has been more than a dream in the minds of fundamentalists who prefer an imaginary world to the real world.

Thursday, May 19, 2011

Monetary Policy in Balance Sheet Recession

Nomura's Richard Koo is experienced with balance sheet recessions over the lost decade in Japan. He produced this graph which shows the effect of the Fed's QE 2 policy. The monetary base has expanded rapidly as bank reserves have increased by selling treasuries to the Fed in exchange for reserves. The money supply, however, has not increased because the banks have not created money by using their reserves to make more loans. The Fed has kept long term interest rates lower but the major impact has been on the appreciation of stock prices as investors sought higher yields.

The Nuclear Option in Politics

link here to article

This article illustrates the dangerous game of chicken that is being played in Washington. The GOP cannot make good on its threat to shut down government without creating economic havoc. The administration cannot make the required budget cuts without destroying any chance of economic recovery. Nobody wins in this game and everyone stands to lose. What is the purpose of the game? Are you shocked to learn that it is all about the GOP strategy to base the 2012 election on its attack on government spending.

A Graph That Tells a Story About Tax Myths

This graph via Ezra Klein shows two things: Raising taxes in the Clinton administration led to more growth in GDP and employment than the Bush tax cuts produced. Raising taxes does not necessarily reduce growth and cutting taxes not necessarily produce growth.

20 Facts About Real Estate in US

link here to article

The data from Zillow paints a pretty dire picture. If our economic recovery hinges on the recovery of the housing market, we are in for an extended recovery.

Will New Leadership in the IMF Affect Ireland and Greece?

link here to article

This article suggests the IMF may have been more accommodating to Ireland, and perhaps to Greece under its leader who has resigned in disgrace. The IMF is likely to continue with its bank-centric policies of the past under new leadership. The medicine prescribed is fiscal austerity. Since Ireland and Greece are in the euro zone they cannot use monetary policy to depreciate its currency to expand exports. Imposed austerity precludes the use of fiscal policy to stimulate internal demand and economic growth. They are sovereign governments without access to the economic tools that enable most states to cope with economic distress.

Do Republicans Really Care About Deficits?

link here to article

The GOP has built a following among tea lovers by advocating cuts in government spending in order to reduce budget deficits. We all know, however, that they had less concern about deficits when Saint Reagan and George Bush were running up huge deficits. This article provides a glimpse back to 2003 when a leading GOP politician explained why he had changed his mind about the evil of deficits. More generally, anyone who believes that a GOP administration would suddenly become fiscally responsible does not remember the huge budget deficits that characterized the Reagan and Bush administrations. The only way to pay for tax cuts without cutting spending is by borrowing. That was the policy is both administrations.

Is Outsourcing of Public Services Cost Effective?

link here to article

Many states are outsourcing the operation of state prisons to private contractors. This article reports the research that was done in Arizona to determine whether it saved the state money. It turns out that the assumption that private contractors operate more efficiently than public prisons is not supported by the data. This is a familiar story in other programs that outsource public services to private contractors. For example, the data on Charter Schools do not support the claim that they provide a better education or that they operate more efficiently. Moreover, Charter Schools and the private contractors that run state prisons, cherry pick the clients that they serve. The state prison contractors do not accept prisoners that are more costly to serve because of poor health or other reasons. Most Charter Schools are able to select the students that they enroll. The public schools do not have the option of refusing to enroll students who may be more costly to serve, or those who are more likely to be successful.

Wednesday, May 18, 2011

The Use of Research to Compare Drug Treatments is Socialism.

link here to article

The GOP would not support comparative research that was proposed in the healthcare reform bill. They argued that it was socialized medicine and that Medicare should be prohibited from using this tool to cut the costs of Medicare which are the most important contributor to our long term budget concerns. I guess consumers and doctors should not have to put up with research which shows that two drugs provide similar results, and that one of the drugs costs many times more than the other. This article shows that Medicare has paid out millions more than it would have paid if it were able to use comparative research. Apparently, the GOP favors higher spending on Medicare. Research and the use of data to make important decisions is socialism, like everything else that is proposed by their political opponents.

The Arithmetic of Government Spending Cuts

link here to article

Economists like to use calculus whenever possible to assure themselves that they are really scientists. This article shows that simple arithmetic can help us to understand the important debates that are going on everywhere about the means by which deficits can be reduced. The most common mistake is to assume that cutting $100 in spending will reduce budget deficits by $100. The mistake is to ignore the affect that a cut in government spending has on tax revenue. When government cuts spending GDP falls, and tax revenues decline with it. The argument in this article is very similar to one that Keynes used with the example of the Banana Paradox. He used this very simple problem to show that increases in the savings rate will cause GDP and employment to fall unless the additional savings are used to fund an equal amount of investment.

Ironically, the same people who advocate spending cuts to decrease deficits are also fond of cutting taxes. In this case they argue that tax cuts will increase government revenue by stimulating the economy. There is no empirical evidence to support the claim that tax cuts stimulate the economy enough to compensate for lost revenue.

Put Down Our Pitchforks

link here to article

This article and the next post (both via Manan Shukla) are about the financial crisis and attempt to explain why the behavior of the bankers was not criminal. This article offers praise for the article below which excused the behavior of bankers by claiming that stupidity and risk taking was at the root of the problem. One wonders how they earn such large incomes if they are simply stupid and irresponsible risk takers. Most of them would not like those descriptions on their resumes. They certainly aren't stupid, and they knew what they were doing when they used leverage to boost profits, as well as what they did to make detection less likely.

Why Nobody Has Been Criminally Prosecuted for Financial Crisis

This article describes many of the behaviors that contributed to the financial crisis. The author claims that risk taking and stupidity are not crimes. He also points out that prosecutors must prove criminal intent to get fraud convictions. Perhaps the article was written prior to the government audit of the major bank's behavior in filing fraudulent claims to the FHA for mortgages that they foreclosed on, and which the FHA had insured. Its hard to imagine that our Masters of the Universe on Wall Street are stupid or simply risk takers. There is substantial evidence that management was aware of, and even encouraged, the problems that permeated the loan origination organizations, and that underwriting standards were knowingly violated. Its also clear from internal emails that Wall Street banks sold securities to their customers without disclosing adverse information which they were aware of. If we can't get fraud convictions on the available evidence we should reexamine the fraud laws that have been recently changed to make criminal intent almost impossible to prove.

Who Benefits from the GOP Cut Taxes and Borrow Strategy?

The Bush tax cuts, primarily for the super rich, contributed to our budget deficits that required us to borrow in order to fund government. This strategy was used in the Reagan administration as well. Their tax cuts were not paid for by cutting government spending. We ran large budget deficits that were financed by debt. Much of the debt was financed by American's who own 40% of the debt. The super rich were able to earn interest on the treasuries instead of paying taxes to fund government. This is not understood by most Americans. The super rich would much rather finance the government and earn interest than by paying taxes. The GOP has been more than willing to oblige them.

Tuesday, May 17, 2011

A Good Primer on The Science of Climate Change

link here to article

This report from Columbia University provides all of the information that is necessary to understand the forces that threaten our planet. Our parents did know how they were damaging the planet but we do. It is our responsibility to our children and our grandchildren to leave them with a habitable environment. We also have an obligation to the Souther Hemisphere which will suffer the brunt of the initial damages to our environment. The economic consequences of climate change are enormous but we have a moral obligation that transcends the economic cost.

This article gave me a much better understanding of the science and some of the ways that we might deal with the problems. We receive energy from the sun and we emit that energy out of our atmosphere when we are in balance. We cannot restore balance without reducing our consumption of fossil fuels but we can also make changes in agriculture and use reforestation to help the process as we make the transition from fossil fuels.

Does Your Religion Affect Your Income?

link here to article

This article suggests that it does. Income varies significantly by one's religious affiliation. Protestants, especially Baptist's and Pentecostal's, earn less than Catholics, who earn less than Jews. Education, of course is highly correlated with income. This helps to explain the findings about religion since education varied by religion as well. Religious groups which are highly educated make the most money.

The Tax Foundation Pulled This Post From Its Website

link here to article

Many were surprised that the conservative Tax Foundation posted a critique of the WSJ Editorial on US income distribution. They had reason to be surprised, the CEO of The Tax Foundation has removed the post from its website. I had posted the critique before but I thought that it would be a good idea to post it again since it is now rare and more valuable. It also shows a strong connection between the management of the foundation and the WSJ. I wonder if the research team that posted the critique has resigned.

In case you don't recall the prior post, the WSJ provided a classic example of lying with statistics. It published a graph that made income distribution in the US look like a bell curve and concluded that the middle class received the majority of the income. They did this by using different sized segments across the horizontal axis. The research team arranged a graph with appropriate percentages and showed that the top 5% receive much more income than any other group. The amount of income going to every group increased with income. If you missed this the first time, take a look at the graphs and make up your own mind about the WSJ Editorial.

Bernanke Warns about Using Debt Ceiling as Bargaining Chip

link here to article

The US Treasury warned Congress about the negative implications of keeping the debt ceiling where it is. The Treasury is part of the administration so it may not have as much weight as a warning from the independent Fed.

Are You Happy or Flourishing?

link here to article

There has been a lot of interest in measuring happiness or well-being. Some of the attempts are better at measuring the mood that you happen to be in at the time of responding to the survey. This article describes an effort to measure "flourishing" which is the title of a new book by an advocate of positive psychology. He has found five factors which contribute to a high flourishing score. They tend to be at the high end of the Maslow Hierarchy which many are familiar with. In a way he identifies some of the elements that Maslow only alluded to, but his work is not based on Maslow's hierarchy.

Monday, May 16, 2011

Fewer US Manufacturing Jobs May Go to China

link here to article

It is becoming less cost effective for US companies to outsource manufacturing to China. This does not mean that business that has been outsourced will come back to the US because China has developed the infrastructure, that work that has been lost in the US. It does mean that some work that might have gone to China may remain in the US because the cost difference has been reduced, and because there are more concerns about supply chain problems since the Japanese disaster.

US Manufacturing Growth Weaker Than Reported

link here to article

This article provides data showing the real growth in US manufacturing is still weak. It has changed little from its trough in the recession. Imports, however, risen close to their peak prior to the recession.

Why Deficit Reduction Requires Tax Increases

link here to article

A former member of the Reagan administration explains why the current GOP stance that spending cuts are the only way to address budget deficits will have to surrender to reality.

Can Mexico Become the New China?

Ten years ago China was 3.5 times more price competitive than Mexico. Today they are almost equal. This article explains why China's price competitiveness is shrinking, and why many companies are looking elsewhere for low labor costs to lower their cost of production. A shortage of skilled labor in China is driving up labor costs and China may begin to focus on expanding internal consumption to compensate from a shrinking trade surplus.

The Ryan Medicare Plan is So Last Month

link here to article

Last month the GOP House voted in Paul Ryan's plan to radicalize the entitlement system and government spending and tax policy under the cover of deficit concern. The GOP soon found out that there were fewer members of the Tea Party than they had come to believe. The Ryan plan was exposed for what it is and the GOP began to walk away from it as it heard more from its constituents who are less enamored with the Tea Party's version of what our founding father's intended when they cobbled together the constitution despite widely different visions of America's future among the contributors. Newt Gingrich delivered the death blow to the Ryan plan in one of his first moves after announcing his candidacy. He declared that it was too radical, just as the Obama healthcare plan was too radical. He found the perfect way to walk away from Ryan's plan. What could be a better excuse than likening it to left wing social engineering. The Newt has put a stake in the ground against social engineering which is highly unpopular in the GOP base.

The Opportunity Cost of Doing Good

Link here to article

This article is about the capture of government regulators by those who they are supposed to regulate. It has become so common place today that it does not get much attention. What isn't well known is why it has become more common. Not too long ago, the gap in pay between top regulators and corporate executives was small. As executive pay skyrocketed the gap widened. Top regulators who do not succumb to lobbying efforts may foreclose offers to take executive positions in the companies that they regulate. Therefore, the opportunity cost of doing their job effectively has risen along with the pay gap.

Hostage Taking by the House GOP

link here to article

Krugman calls it what it is. The GOP has taken a hostage and they are using it to extort concessions from the White House. They did this last year on tax policy and the White House caved. That whetted their appetite for more. Now they are using their authority to keep the debt ceiling below where it needs to be to enable the government to spend against its budget which has already been approved. The only question remaining is how the White House responds to the hostage takers. In essence, the GOP House is preventing the elected administration and the elected Senate from operating. We didn't elect the Tea Party to run the country but it can prevent the country from functioning as it has normally functioned in the past.

Friday, May 13, 2011

Wall Street Journal Editorial Page is a Lie Machine Again

link here to article

The Wall Street Journal published an editorial that made one valid point and then manipulated statistics to lie about another point. The valid point was that we could not solve our deficit problems by focusing only on taxing the rich. The lie was that most of the income in the US went to the middle class. The Tax Institute properly analyzed the distribution of income by percentile and published a graph that showed what the WSJ should have published. It shows that the top 5% receive the lion's share of income.

Off to Bainbridge Graduate Institute for the Week End

Posts will be slow until after the weekend. Blogger was down yesterday but they have fixed it today.

Banks are OK Households and Housing Are Not OK

link here to article

Bank's back to normal according to St. Louis Fed study. We should stop worrying about the banks and fix unemployment. The big problem is household debt and the housing market. That will take time without help.

Wednesday, May 11, 2011

Doing God's Work

link here to article

This article (via Manan Shukla) describes some of the details of a report filed by a Senate committee charged with investigating the role of the Wall Street banks in the financial crisis. It is doubtful whether the Justice Department will pursue criminal prosecution, because its almost impossible to prove criminal intent without reading someone's mind, but if I were one of Goldman Sachs's customers who were sold mortgage securities that were known to be toxic, and which Goldman had shorted, I would look for another God, or perhaps come after them myself. According this report they even screwed Morgan Stanley for almost $1 billion on a deal that they sold to them and refused to close out while it was still falling in value because they had a short position on it. In total, according to this description of the Senate report, Goldman had a net short position in the mortgage market of $13 billion while they were pawning the stuff of to their valued customers.

Rolling Stone reports things that other news organizations do not, and it uses language and descriptions which tend to sensationalize their reporting, but if even half of this stuff is true it is one of the most heinous crimes every committed by a US corporation.

Why Spending Must Rise

link here to article

This article simplifies the issues. The US government is essentially an insurance company for the elderly with an Army. Federal spending is more than 50% on transfer payments to the elderly, which are mandatory under current law. More than half of discretionary spending is on defense. Non discretionary spending, which the House has been poking at is small potatoes but it provides red meat for its base that hates certain programs.

Payments to the elderly, under current law, must rise because of the inflating cost of healthcare and because of the shrinking ratio of younger workers to the elderly. Since we are unlikely to stop healthcare price inflation, or make big cuts in the military, we only have three choices: increase spending or cut benefits to the elderly unless we are willing to raise taxes

Many deficit hawks in congress and elsewhere do not really care about deficits. They are more concerned about tax policy and running campaigns. Most would like to cut taxes, for example Paul Ryan, but few are willing to tell the elderly that benefits must be cut. The House passed Ryan's plan that cut benefits surreptitiously but the GOP is walking away from the Ryan plan because the shell game has been exposed. Federal spending is likely to keep rising. We can pay for benefits with taxes or we can continue to run deficits.

Banks Offer $5 billion Settlement for Damages

link here to article

The 50 state attorney generals asked the banks for $20 billion. They claim that they have done nothing wrong but are willing to pay $5 billion for having done nothing wrong. The AG's will most likely declare victory and accept something close to the offer.

What Geithner Negotiated For on Trip to China

Link here to article

This article clams that our Treasury Secretary has not left the bed in which he slept when he was President the NY Fed and reported to his Board, which was populated by Wall Street bankers. He asked China to open up its market to our financial services industry so that they could sell insurance, underwrite bond issues and sell mutual funds. The implication of the article, is that in return he did not put pressure on China to appreciate its currency against the dollar. A lower valued dollar would enable us to sell more tradable manufactured products to China. It would also make the imports of US products manufactured in China more expensive and encourage them to be made in the US. If this article is correct it spells out our industrial policy. We are willing to give up manufacturing in order to achieve global dominance in financial services. That is, we will be more of a Wall Street economy and less of a Main Street economy. In return, China will continue to fund US deficits which are partly the result of our trade deficit with China.

This is the Political Economy of our Founding

link here to article

Our founding was a test bed of political economy. There was little agreement between powerful founders, and between the various regions. Almost all of the disagreements were about economic issues and the level of democracy and income equality to which our country should aspire. Economics has been expunged from the history that most Americans are taught , and it plays little role in the way economics is taught because it pretends to be a "positive" science. We pay a price for ignorance. It is far costlier than the cost of providing education. What we see in the Tea Party today is an attempt to educate populists on a particular view of political economy as the intent of our founding fathers who had difficulty agreeing on that direction for the country. They believe the movement to be leaderless but it is being molded to serve the interests of those who not share their economic interests.

More on The Price Paid for The War on Terror

link here to article

An earlier post provided an estimate of the financial cost of our response to 9/11. It did not mention the costs to innocent civilians in the Mid-East who we callously refer to as "collateral damage". It also did not discuss the ongoing costs that we will incur as opportunity cost or the cost to our troops who gave their lives and to some who will never recover from their experience. War is hell, but it is also an opportunity for leaders, and for many of us to do chest bumps. We would be better off if we confined our chest bumps to athletics.

10 Year Old Kills Neo-Nazi Father

The 10 year old boy shot and killed his father while he was sleeping on the couch. No reason was given for the shooting but the boy was taught to love guns by his father who was one of the leaders of the NSM in California.. The article is mostly about the father who was shot and his ivies on the nation. In addition to racism, he was a rapid secessionist and against illegal Mexicans entering the US.

Aside from the movements connection with Nazism and weapons, he shared views that are similar to those held by other populists in the Tea Party. He was against the Wall Street bailouts and his views on Mexicans, blacks and the confederacy are not uncommon in the Tea Party. He ran for a local election in Riverside, California and got 28% of the vote. That is about the percent of the population who support extremist positions held by the the Tea Party.

Populism in its many forms, is an expression of powerlessness. The attachment to weapons is one way of dealing with powerlessness and so is the hatred for elites and members of groups who are also powerless. Many are concerned about the exploitation of populists by elite groups who hope to use them to advantage. They should remember what this guys 10 year old son did. Its a dangerous game.

Toyota Quarterly Profits Down Over 70%

link here to article

The disaster in Japan, along with an appreciating yen, had a dramatic impact on the #1 auto maker. It was unable to roll out the cars to fill orders because much of its production is in Japan. GM which is recovering from a near-death experience or VW may replace toyota as sales leader.

Tuesday, May 10, 2011

The $3 trillion Response to Bin Laden

link here to article

This article (via Manan Shukla) compares the cost of our "war on terror" with other wars that brought more benefits along with them. Bin Laden stated that he could bleed the US to bankruptcy by our reaction to his attacks. We are not bankrupt but $3trillion is not chicken feed. It seems like the technological benefit that we got was the predator drone missile.

This story reminds me off something a medical doctor once told me. He said that a large number of our illnesses are caused by the over reaction of our immune system. Arthritis is one of them but there are others as well.

28% of Home Mortgages Are Greater than Value of Home

link here to article

This article has a Table that shows the percent of homes that are underwater in selected metro areas as well as the percent decline in home prices since their peak.

Divide and Conquer

link here to article

One of the many myths that floats around the internet, and other unreliable sources, is that public employees have seen their wages and benefits rise while privately employed labor has done less well. The largest group of public employees happen to be school teachers but that is not the point. Private employees have been turned against school teachers and other public employees by the myth and by those who spread the myth for their own benefit.

This article contains data (not the myth) on public employee compensation. It shows that it had fallen substantially in the recession and that compensation growth compares with that of private employment compensation growth (data not provided). Both groups have seen their compensation growth fall in the downturn. Divide and conquer is working as it usually does. The same strategy is being used in discussions about entitlements. Many young people have been told that social security will not be there for them when they retire because it will be insolvent. Those who believe the myth will be less interested in protecting social security from those who don't like entitlements and the taxes that come with them. They are typically those who don't need social security to fund their retirement.

Unemployment Benefits Running Out For Millions Of Americans

link here to article

The good news is the number employed has risen by a million this year. The bad news is that millions of unemployed Americans will be losing their benefits. Many have been unemployed for over a year. They become less employable the longer that they are unemployed. That is obviously a real hardship for many of the unemployed. It is also bad for the economy.

US College Debt Burden Growing Fast

link here to article

The average 2011 college grad will have $18,000 of debt to repay. The average starting salary for 2011 grads will also be lower. It was $46,000 in 2009 but it has dropped to $36,800 in 2011. The debt burden is closer to $24,000 if loans by parents are included. Many grads will have to pay the parental loans back. The debt burden is 47% higher (corrected for inflation) than it was a decade ago. That is because tuition costs have been inflating at 5% while income growth for middle class families has been flat.

While this is not good news for 2011 grads, it is also bad news for the economy. It will delay the growth in new household formation and curtail spending on consumer durables. In the long run it raises the question of the affordability of higher education. Higher education may be less available to future generations if price inflation continues to grow faster than household income.

Monday, May 9, 2011

Blaming the Victim All Over Again

link here to article

Who is responsible for the bad things that our leader do? The answer from the leaders is that we are. We should not have let them do it to us. Its been a while since I've heard that excuse. We made Bush cut taxes for the rich and spend over $1 trillion on a war in Iraq so that we could have huge budget deficits etc. etc.

Sunday, May 8, 2011

How Should We Think About Obama's Fiscal Policy?

link here to article

Greg Mankiw is very smart guy. After all, he teaches at Harvard, he headed up Bush's economic team for a brief period and he has written a widely used economics textbook. Accordingly, he is much more sophisticated in his method of attack on democratic policy. Dean Baker reviews one his NYT's Op Ed s and answers the questions that he has raised. He also exposes Mankiw's use of the Socratic method, instead of blatant lies to attack the administration. Its all about asking the questions for which you can provide the "right" answer. That is how they do it at Harvard where the students are too smart for demagoguery.

By the way, Dean Baker wonders why Mankiw compared our weak recovery with the recovery during the Reagan administration. The recessions were totally different so there is no real comparison. Implicit in the question is that the Reagan tax cuts were the better way to deal with recession.

The Economist Provides an Analysis of Japan's Disaster

link here to article

The Economist (via Brad DeLong) has an article that reviews that Japanese disaster, and concludes that it was caused by several circumstances that are unlikely to happen simultaneously, and that nuclear disaster is preventable if proper safeguards are followed. This is an emotional issue for many people, but The Economist argues that the future of nuclear energy should not be based upon a response to what happened in Japan.

What Should Be Done to Stimulate the Economy?

link here to article

This article is in response to an article about what can be done in Washington to stimulate the economy. The major point is that we can borrow money on the cheap and we should spend the money on rebuilding our infrastructure which will provide a long term benefit to the economy. Therefore, we should not simply find ways to spend more money to provide short term stimulus without longer term benefit.

This is a good discussion in some ways because it recognizes the need for stimulus, and it is only about how to do it. Its the kind of debate, however, which is 40 weeks late. We should be spending the money on rebuilding infrastructure. Our current problem, however, is that little will be done in Washington on any fiscal stimulus prior to the 2012 elections. Our politicians are dong what they do best. They run perpetual campaigns. The only kind of stimulus plan that will get done in Washington must give both sides something that they can use in their campaigns.

The Bad Luck of the Irish

link here to article

I posted this article for two reasons. It has a short quote from Keynes's prescient book on "The Economic Consequences of the Peace" which he wrote after resigning from the committee that wrote the peace treaty at the end of WW 1. Keynes understood that the treaty would bankrupt Germany. He did not predict the rise of Naziism as the political response, but something like that was bound to happen. Ironically, one of the purposes of the treaty was to limit the ability of Germany to rearm itself and threaten France. The treaty enabled Hitler to rise to power, and to ignore the treaty as he rebuilt the German military with the help of US investment banks, that bought and sold the German bonds which partially financed the effort.

The second point is about the role of the US Secretary of the Treasury (along with the ECB) in rejecting the IMF plan that would have allowed Ireland to reduce its debt, held by primarily by major banks, by a 33% reduction in its gross obligations. The IMF, which was uncharacteristically generous in its proposal, lost the battle and Ireland is stuck with a repayment plan that it cannot afford without sinking its economy. The author of this article compares the Irish settlement with the treaty that sank the German economy. He gives most of the blame to the US Treasury Secretary, who he accuses of having a double standard. The name given to this standard is the Stockholm Syndrome. It stresses the importance of holding debtors accountable for contracts, while enabling bankers to be rescued by government whenever they make bad deals.

Washington Post Editorial on Economic Recovery

link here to article

This editorial has received quite a bit of attention in the media since the Post reflects political consensus within the DC Beltway. I decided to post it because the last sentence is all that anyone has the read. We are told that we need to be patient about the slow recovery while retaining a sense of urgency. This is the kind of wisdom that reflects an appropriate level of seriousness for a great newspaper while maintaining things exactly as they are.

Saturday, May 7, 2011

Asymmetric Reward System

link here to article

Joe Nocera reports on a SEC settlement with a subsidiary of Deutsch Bank that originated loans to low income home buyers then sold the loans to the FHA that is stuck with them. The bank had to pay a hefty fine, which may or may not pay for the potential loses to the FHA, but no criminal charges were brought agains the bank executives. As long as the SEC does not pursue criminal charges against the executives who engage in that kind of activity it does little to deter the bad behavior. A good example is the former CEO of Countrywide, he was fined over $100 million for the bad loans that Countrywide made that has cost billions and brought grief and hardship to his clients. It only cost him $26 million of his own money because most CEO's have contracts that require their firms to pay for legal fees and fines incurred in the line of duty. The cost to Mozzila was a fraction of the hundreds of millions that he made operating Countrywide illegally. No criminal charges were brought against Mozilla or against executives of Washington Mutual who were doing similar things.

Ronald Reagan was once asked about some of his associates who were convicted of white collar crimes. He said that he knows what a criminal is and that his associates are not criminals. His message was clear. Crimes committed by those who wear expensive suits and live in nice homes are not really criminal. The SEC seems to be better at pursuing insider trading than they are at fraud. Perhaps the laws need to be changed to make it easier to get fraud convictions.

Friday, May 6, 2011

Speculation and Commodity Price Inflation

link here to article

This article in Foreign Policy describes the role that speculation in commodity future markets has on prices. fundamental factors play a substantial role in price inflation but speculators in future markets are driving up the prices of futures, and that impacts current prices. The article also reminds us of the limitations of the nation state in our global economy. The US government, for example, could not stop the banks providing and selling the indexes that are used by speculators. They could locate the business elsewhere in the world with ease.

Are the Days of Falling Prices and Abundant Resources Over?

link here to article

Jeremy Grantham is the CEO of GMO Capital which has $100 billion under management. He believes that we are at the beginning of paradigm in which resource scarcity combined with population growth will have profound effects on the economy and how we should live our lives. This is a long article with lots of data and graphs that he used to make his case. It contains a summary for those who do not have the time to read the entire article.

The IMF Learned Something from Financial Crisis

link here to article

Joe Stiglitz reports that the IMF which was once the bastion of neo-liberalism, has changed its tune. The financial crisis taught them that unfettered capital markets can create global imbalances and that capital controls may be an appropriate tool under some circumstances. They also see income inequality as an issue that requires attention. The financial crisis in the US was, in part, the result of an attempt to maintain household consumption with debt and an asset bubble to compensate for stagnant growth in middle class income.

Thursday, May 5, 2011

Commodity Price Inflation May Not Be Temporary

link here to article

We posted a previous article on population growth. This article is about declining productivity in food production. If population is growing, and incomes are increasing in emerging markets, there will be rising demand for commodities like food and energy. If productivity does not keep up with demand, then prices will continue to rise. This article reports on food production which has not kept pace with rising demand. Two reasons are discussed for declining food productivity. One is bad weather due to global warming; the other is the use of lower yielding arable land to expand production. Both may be impacting food production. The US is one of the largest producers and exporters of basic foods. It has been hard hit by rain and floods this year. It will not be a good year in the US mid-west.

Home Prices Fall and Start a Double Dip Decline

link here to article

Calculated Risk uses an additional housing price index along with the Schiller index to read the housing market. Prices are down 25% from the 2008 level which was spurred by federal tax credit program that lowered the real price. Distressed sales are around one third of sales. This will keep prices falling downward. The good news is that home prices are becoming more affordable. The bad news is that an enormous amount of household wealth has disappeared.

The GOP May Have Found Its New Star

link here to article

The Ryan plan has gotten the GOP in trouble because it cuts Medicare and Medicaid funding, and even some in its base can understand that this is not what they want. They were against the Affordable Care Act because the GOP told them that it would cut funding for Medicare. They did not expect the GOP to propose a plan to cut funding even further. So how would a rising GOP star deal with this problem? You guessed it. They lie and they always lie about everything.

Marc Rubio was on a Sunday talk show and he was asked about the Ryan plan and he showed that he has what it takes to move to the head of the GOP class. He said that the Ryan plan does not cut funding to Medicare. He then turned the question back to where he wanted it to go and raved about how "Obamacare" would cut funding for Medicare. A GOP star has been born. He is young, he is good looking, and he has learned how to lie like a trooper, and switch a question he does not like into one that he wants to answer. They love him in Florida because he does it so well. He did it so well that his TV host did not even call him on his answer. They appreciate a good lie when they hear it.

In case anyone forgot, the Ryan plan does cut funding for Medicare. In fact it ends Medicare. It is replaced by a voucher system which retirees can use to purchase insurance from private providers. The problem is that insurance premiums grow twice as fast as the values of the vouchers. The cost of healthcare inflation is passed on to seniors. Even Tea Partier's should understand that this is less than Medicare would have provided. Unless, of course, Marc Rubio and Fox News tell them otherwise.

How Can Our Planet Support 10 Billion Population

link here to article

The UN population forecast rose from 9 to 10 billion. Several analysts give their thoughts. Malthus predicted that this problem would occur but his call was too early. Its hard to imagine how the political and ideological straight jackets that we all wear will enable us to deal with this problem. It may end up as Malthus predicted, which is why economics is called the dismal science. Famine will solve the problem if we lack the intelligence to deal with it.

Wednesday, May 4, 2011

Portugal Aid Package Announced

link here to article

Portugal has been given a 76 billion euro aid package that reduces its need for immediate deficit reduction. The yield on its debt fell in response to the announcement.

Concerns about Global Economic Slowdown

link here to article

This article review signals from the US, Europe and Asia that do not signal a robust recovery.

The Pain in Spain

link here to article

This article explains why the UK which has a worse debt situation than Spain is able to borrow money at better terms. The reason is because the UK can borrow money in its own currency and Spain has to borrow in the euro. Actions taken by the ECB to raise interest rates will make it more difficult for Spain to recover from 21% unemployment.

This article produced many comments but those who suggested that speculation was partly the cause of falling prices for Spanish debt were the most insightful. Speculators are using CDS's to bet on default. Changes in the CDS spreads creates market anxiety which puts further pressure bond prices. Most economists do not consider the link between speculation and prices. European regulators understand this and they are taking actions against the use of naked CDS's which do not require ownership of the security being protected.

Stop Worrying About Unemployment, Worry Instead About the Dollar or Inflation

link here to article

We don't have inflation and the near term threat of inflation is remote. The dollar has fallen in value relative to the Euro so we should also worry about the dollar. Why worry about these non-threats? It may be because it stops us from worrying about unemployment.

This article compares the price of the dollar versus other currencies over time. It has fallen in value to the pre-crisis level. This is partly due to actions taken by he ECB to raise interest rates and encourage purchase of the Euro. The fall in the dollar recently is much lower than it was during the Bush administration when it received little attention. Moreover, a lower priced dollar does no harm to those who purchase in dollars but it does hurt speculators who borrowed in foreign currencies. It also makes US products less costly and it encourages exports which might improve of tread balance.

The Game of Politics and Extortion

link here to article

This article describes GOP bill proposals that would severely limit the Consumer Protection Agency that was created to protect consumers from abuses from banks like those that contributed to the financial crisis. The GOP understands that the Democratic Senate will not pass these laws so what is the purpose? According to this report, the purpose is to show bankers, and their lobbyists, that the GOP would take actions to defend bank profits which depend upon their ability to take advantage of consumers if it were to win the 2012 elections. They hope to extract campaign contributions from the bankers and to reduce the access of the Democrats to that source of contributions.

The actions of the GOP show how unconcerned it is about public reaction to their behavior. They believe that their base is misinformed by GOP friendly media and hat it can do whatever its wants without risk of public outcry. It also puts on full display how corrupt our political system has become. Government has the power to reward and punish business interests by passing laws which restrict or encourage rent seeking behavior. Politicians can extort campaign contributions from business by removing the threat of laws that restrict rent seeking or by passing laws which provide new opportunities for rent seeking. A political system that depends upon extortion in order to fund campaigns is not in the best interest of the country.

Monday, May 2, 2011

US Would be Better Off If Dollar Were Not Global Reserve Currency

link here to article

This article is a bit technical but it makes several very interesting points about how the advantages that the US derives from the status of the dollar as the global reserve currency is outweighed by the disadvantages. It also claims that it is not good for the Asian countries that have taken advantage of the dollar's reserve status to develop export based economies predicated on undervalued currencies. It would be better for the global economy if the US were to take the steps that would eventually unwind the dollar from its current position as the sole reserve currency.

The problem for the US is that it has to choose between accepting high unemployment or debt because of the use of the dollar's status in Asia. The US has chosen debt. China and Japan overproduce which also results in high debt. China's strategy is to import foreign demand and to use its high savings rate to export capital. That strategy is like the colonial strategy of the past. The UK, for example, imported demand from its colonies and exported its savings to the colonies for investment.

Misplaced Criticism of Keynesian Theory

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The internet and talk radio are filled with criticisms of Keynesian theory by those who have never studied his writings. He is described as an advocate of government spending who is responsible for large public deficits. They are wrong on two counts. In the first place Keynes only supported government spending when an economy was in recession. He argued that governments should run surplus's in good times so that they had funds to support increased spending in bad times. Critics of Keynes should recall what Bush did with the budget surplus that he inherited from the Clinton administration. He cut taxes to get rid of the surplus.

The other problem with those who blame Keynesian theory for budget deficits is that recessions create budget deficits without any increase in discretionary government spending. This is because tax revenues decline in recessions and social safety net costs rise. Most of our current deficit is the result of falling tax revenues and safety net costs and not due to increases in government spending to stimulate economic growth. Many Keynesians argue that we failed to take sufficient actions to stimulate growth and that is why the recovery has been so weak.

Corporate Corruption Growth in Rich County's

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Jeff Sachs reports that corporate corruption , coupled with the lack of corporate accountability, is a growing problem in rich countries. He argues that the rich countries should not point to corruption in poor countries as the reason for their poor economic and social progress. He views it as a global problem that raises more serious in the rich countries.

The growth of large multinational corporations has increased their power relative to the nation states in which they are headquartered and the dependence of politicians on their campaign contributions makes the problem even more difficult to contain. The nation states have limited ability to implement reforms and they are unable to raise taxes, particularly on the wealthy.
Sachs argues for limiting the cost of election campaigns by the use of electronic communication, instead of expensive TV ads as one way to address the corruption and accountability problems that he cites.

China Economic Outlook Short and Medium Term

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This analysis of China's economic outlook finds a contradiction between its short-term and medium-term prospects. China's short-term problem is inflation but the analyst is concerned about the potential for deflation after 2013. The economy has been based on a relatively cheap currency and strong export led growth. Investment spending on public housing and infrastructure has been high as well. It increased from 45% to 50% of GDP when there was a 5% decline in net exports. This raises questions about the potential for over-investment in capacity that might fuel future deflation. The analyst bases some of his concerns on his observations on a recent trip to China. He observed under utilized transportation infrastructure and wondered how China could increase its train infrastructure without harming its investments in new airports. He also believes that investments in auto manufacture may be outpacing its rapid growth in auto sales.

The alternative for China is to grow household consumption at the expense of net exports. This would require structural changes that interfere with that alternative. The currency would be allowed to appreciate which would make imports cheaper and exports more expensive. It would also require growth in wages to support consumption. Consumption is less than 50% of GDP today. This would impact China's large savings rate which is the basis for low interest rates that support investment in China's State Operated Enterprises. They might suffer as well. The analyst believes that taxes should be increased on the SOE's or some should be privatized.

The author of this report was one of the few who predicted that the US financial system was headed for crisis. We will have to see whether his analysis of China's outlook holds up over time.

Sunday, May 1, 2011

The Doctrine of Laissez-Faire and Pretense of Libertarianism

" When economic power desires to be left alone it uses the philosophy of laissez faire to discourage political restraint upon economic freedom. When it wants to make use of the police power of the state to subdue rebellions and discontent in the ranks of its helots, it justifies the use of political coercion and the resulting suppression of liberties by insisting that peace is more precious than freedom and that its only desire is social peace. A rational analysis of social facts easily punctures this pretension."

The quote above is by the Christian theologian Reinhold Niebuhr. He exposes the myth of laissez-faire for what it is. It is invoked when economic interests find it useful to limit the power of the state, but enterprise could not exist in its current form without the power of the state to support its needs. For example, the enforcement of intellectual property rights is dependent upon the power of the state. Our economy could not exist in its present form without international enforcement of property rights. Patents, copyrights, trade marks etc. are necessary to encourage innovation, and they are the key to the profitability of many enterprises. It does not take a whole lot of thought to uncover examples of the critical role of the state in modern enterprise. In fact, without the support that Wall Street banks received from the state it would not exist. One of the principle roles of the Fed is to maintain the stability of the banking system as well as the dollar as the medium of exchange and a store of value. The myth of laissez-faire is so intrenched on Wall Street that most of the benefactors from state intervention in the market refuse to acknowledge the central role of the state in its survival and in its future growth.

The myth of laissez-faire is ordinarily used to benefit particular firms or industries when the state is motivated to provide public goods such as clean air and water, or worker safety. It is also used when enterprise desires to shift the tax burden from itself and its managers to others. The Reagan tax cuts and the Bush tax cuts, which primarily benefited the wealthy, were justified by the argument that everyone would benefit from the larger economic pie that would be created by encouraging enterprise to invest in the economy. Paul Ryan and others continue to make that unjustified argument today. The argument depends upon reinforcement of the ideology of laissez-faire.

Societies depend upon ideology to shape behavior and the ways in which people think about social arrangements. We would be better off today if we put the myth of laissez-faire to bed and focused our attention on how to best use the dynamics of enterprise and the powers of the state to provide for the common good. We do not need to replace capitalism with some other form of enterprise. We need to better manage the complex arrangements between the state and enterprise. This is better accomplished in the absence of myths that interfere with rational discussion. Logic and rational discussion depend upon the principle of non-contradiction. We seem to have forgotten that principle. The strongest proponents of laissez-faire have usually been the first to defend enterprise against the use of antitrust laws that were designed to promote free enterprise and limit the abuse of monopoly power. Teddy Roosevelt who broke up the trusts, was called a traitor to his class by the strongest advocates of laissez-faire. The German scientist Max Planck said that "science advances one funeral at a time". This may have been true in physics but it has not been true in economics. Its time that we had a funeral for a zombie idea that refuses to die.

Roasting "The Donald" To a Crispy Well Done

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President Obama used the occasion of a Washington media event to make Donald Trump's effort to use the conspiracy around his citizenship into comedic attack on the issue. He not only made Trump look like the fool that he is, but he turned to entire issue into a weapon to attack GOP pretenders to the throne, who exploited the issue, look as foolish as The Donald. He also showed that he is good natured and blessed with a good sense of humor.

A link to the video is in the article. Trump was in the audience, along with other pretenders such as Michelle Bachman and The Newt. You may enjoy watching them squirm.

Ryan Plan for Medicaid is Simply a Cost Shifting Plan

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There has been a lot of discussion about Ryan's plan to privatize Medicare by giving seniors vouchers that can be used to purchase insurance. Since the value of the vouchers does not rise as fast as insurance premiums have risen, it shifts the cost of price inflation to senior citizens. Ryan's plan for Medicaid is more of the same. It provides block grants to the states that do not increase at the rate of healthcare inflation. This shifts the burden to the states.

To make matters worse, Ryan would repeal the Affordable Care Act that includes mechanisms for reducing healthcare price inflation. Ryan's plan does nothing to reduce price inflation, it simply shifts the burden from the federal budget to beneficiaries or to the states. In other words, its a shell game wrapped in the cloak of deficit reduction and free market ideology. Moreover, his plan for Medicare, which has lower administration costs than private insurance companies, would substitute an inefficient system for a more efficient system and add to the cost of healthcare. Insurance companies would be the only winners in that game.

Town Census Measuring Happiness

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The mayor of Somerville, MA has added some questions to the town census that measure well-being. He hopes to get a better idea about what the town can do to alter the well-being of its citizens. Since well-being is the ultimate goal of an economy, and of government, and it don't cost anything extra to add the questions to the census, it makes sense to measure it.

My guess is that the effort has been influenced by location of Tufts University and the GDAE Institute which is associated with it. GDAE has been making the case for well-being as the ultimate objective economic activity for some time. It views the well-being of households and the community, along with the public and private sector as the core sectors of the economy and of economics for the 21st century.