Thursday, June 30, 2011

What if Greece is a Kleptocracy?

link here to article

This article paints a bleak picture of the problems of Greece in particular and of the Eurozone more generally. If we assume that Greece is a kleptocracy, or a failed state, there is no real chance for saving Greece and its creditors. The successful vote by the Greek Parliament to accept the austerity measures, imposed upon the government, will only buy time. The majority of the Greek citizens understand that they are being asked to pay the price for kleptocracy. Many of the well educated plan to leave the country in order to find acceptable employment, and the government will have its hands full trying to restore order among those who remain.

In addition to the political unrest, there is little reason to expect that the economic growth assumptions that have been used to show that Greece will be able to produce the tax revenue needed to pay down its debt, are possible with the cuts in government spending. What will replace the cuts in government spending in an economy with high unemployment? Moreover, if the kleptocrats refuse to pay taxes and the government is unable to force compliance, where will the needed tax revenue come from?

Obama Sounding Like He is Republican Lite

link here to article

The GOP is playing chicken with Obama on the debt ceiling and there is a good reason for doing so. Obama sucks at the chicken game. His advisers show him polls which indicate that the GOP has convinced the public that government spending and budget deficits must be cut, and he has decided that he can't run against public opinion. Besides, the GOP won't let him do anything about stimulating the economy anyway. Running the economy is less of a priority for either party than the 2012 election. Contractionary austerity appears to be politically correct at the moment. The administration must believe that it cannot shape public opinion as well as the GOP.

Which Version Of Obama Should the Dwarfs Attack?

link here to article

Foreign Policy has an interesting take on the first debate among the GOP 7 dwarfs. They are confused about which version of Obama that they want to run against. Unlike most debates, they did not debate each other, they all attacked different versions of Obama. Two of the dwarfs were hawks who told us that Obama was not tough enough to lead the most powerful nation in the universe. Most of the other dwarfs told us that the US should not be engaged in nation building as we are in the mid-east. They sound like Bush in his first campaign when he was against nation building, which has a venerable tradition in the GOP. Of course Bush turned into a hawk after 9/11 gave him the excuse to invade Iraq, so there are two versions of Bush on foreign policy. The 7 dwarfs can't decide which version of Obama/Bush to attack. He can't be too weak on defense and too strong on defense simultaneously. One of them even reversed his position from attacking Obama as being weak on defense, to attacking him on his efforts at nation building. His polls probably told him that the tea party crowd wanted to cut the defense budget along with the rest of government. His behavior should not be surprising since he is now against the healthcare reform he engineered in Massachusetts, since it is too similar to Obamacare that the tea partier's hate.

If the dwarfs remain too confused over which version of Obama to attack, they can always move to the next game to play. That is, which of the dwarfs is most like Ronald Reagan. This is a safe bet, but some in the GOP are comparing themselves to Margaret Thatcher instead of Ronald Reagan, which is so 2008. Maybe they like showing some solidarity with the conservative government in the UK which is intent upon restoring Thatcherism after years of nation building by Tony Blair.

Wednesday, June 29, 2011

We Needed FDR, We Got Clinton II

link here to article

David Frum is a conservative who understands that Obama is not the socialist devil that exists in the imagination of Republicans. He argues that Obama inherited a bad economic situation that called for strong leadership. He has not provided the kind of leadership that the situation demanded.

Brad DeLong, comments on Frum's description of Obama, and is forced to agree with him. He believes that Obama is being perceived as a weak leader and that this will cost him the 2012 election. Unfortunately, one of the GOP 7 dwarfs will assume the presidency and provide strong leadership in the wrong direction. The race to the bottom will continue unless the crazies in the GOP nominate one of their unelectable crazies.

Henry Kissinger Puts China in The Global Leadership Role

link here to article

Henry Kissinger argues that it is time for China and the far-east to assume a role in global leadership. England passed the torch to the US after WW II because the US was the global creditor. Now China has assumed the role of the global creditor and it will be the largest economy in the world by 2050.

While the North Atlantic alliance that has led the world in the 20th century and beyond, it is showing signs of old age. Europe has prospered by forming the eurozone but there is no European leadership on how to deal with cross border issues. Politically, Europe is a loosely connected group of sovereign states that must respond to domestic politics. The US is demonstrating that it cannot even manage its internal politics, let alone provide global leadership. Congress operates like a pack of snarling dogs, and the national media would rather broadcast the fight, while a poorly informed public cheers for the nastiest, media created, celebrity. The real issue will be about the transition from the North Atlantic to Asia. England passed the torch, and America did a good job before it succumbed to success. Its not clear that America will pass the torch as gracefully, and participate in shared global leadership.

Tuesday, June 28, 2011

What is Washington?

link here to article

The Senate GOP Minority Leader, Mitch McConnell recently stated, in the context of the deficit ceiling, that it was "Time for Washington to take a hit and not the taxpayer" This article explains why it is an abuse of language, with the intent to mislead, to define Washington in that way. For example, Washington writes checks on most of the tax dollars that it receives that goes right back to taxpayers in the form social security checks, healthcare expenses, and payments to the military and defense contractors. In other words, Washington is not some entity that gobbles up taxpayer money for itself. McConnell, of course, understands this, but his purpose is to reify Washington, which has negative connotations for many Americans, (with the help of the GOP politicians who receive government checks and healthcare benefits)and to connect Washington to policies which are proposed by an alien administration. Apparently, GOP politicians who work so hard to get elected to government, and to live in Washington, are immune from any connection to the city that gobbles up taxpayer dollars.

Kansas City Fed President Takes on Too Big To Fail Banks

link here to article

The President of the Kansas City Federal Reserve Bank gave a speech (via Mark Thoma) in which he criticized the banking reforms in the wake of the financial crisis. It appears that the primary purpose of banking reform was to preserve a system in which some banks are too big to fail. The banking system has become less competitive and even more concentrated. He views the current structure as a risk to capitalism itself. He recommends that Glass-Steagall, which separated retail banks from many activities engaged in by investment banks, be restored. He also counters the arguments that US banking would be less internationally competitive under Glass-Steagall.

He recognizes that the shadow banking system, which contributed heavily to the financial crisis also needs to be regulated. The major problem was that the shadow banks borrowed heavily short term from wholesale bankers such as money market funds, using risk long term assets as collateral. When the risk of those assets was exposed, there was a run on the shadow banks and they lost their source of liquidity. He proposes some changes to the shadow banking system that would reduce the risk of bank runs.

Born to Lose and Poor Air Quality

link here to article

This article summarizes recent research on the quality of air and factors of well being such as infant mortality, underweight births, attention deficit disorder etc. The groups most strongly affected by poor air quality are low income groups who are not free to choose neighborhoods with better air quality, and who are not well informed enough to understand the risks associated with poor air quality.

Economists typically view this as a pricing problem. If air polluters had to pay higher prices to internalize the costs that they pass on to others, there would be less air pollution and healthier children. This author suggests that if their own children were subjected to the risk of poor air quality they might behave differently. They are free to choose neighborhoods with better air quality while the less lucky are "born to lose".

SEC Rule Changes and Shale Gas Stock Evaluations

link here to article

One of the last moves of the SEC, under the Bush administration, was to change the rules used by natural gas companies to measure their shale gas reserves. There could be only one reason why the industry pressured the SEC to change the rules. The rule change increased their reserve estimates, and lowered their cost of exploration and recovery. This had the desired effect of increasing industry stock prices. Some analysts view this as another Enron moment. This is another example of the problems that were created when executive compensation was tightly coupled to stock market valuations. Managing the stock price became the name of the game. Unfortunately, this has led to a lot of creative accounting and pressure on the SEC to relax accounting standards. By the way, the SEC rule change is another example of describing an industry favorable law or regulation as "modernization". In this case, the modernization was achieved by allowing the use of mathematical models to estimate gas reserves. We hope that these models more accurately describe reality than the models that were used to estimate the default of sub prime mortgage securities.

Fidelitiy's Outlook on Renewable Energy and Environmental Investments

link here to article

Fidelity has a select fund that invests in renewable energy and environmental companies. Its always informative to get the perspectives of those who invest in a sector for a living.

Monday, June 27, 2011

How Big Will the Green Economy Be?

link here to article

Lots of people would like to have a greener economy, and almost everyone is looking for new sources of job growth. There is very little information, however, about the sizing of the green economy and its potential for job growth. The Brookings Institute will host a webcast on this topic on July 13th. Everyone is invited to the webcast. This link provides the necessary information for those who would like to attend. I would assume that the Brookings website will also summarize the discussions for those who are unable to attend the webcast.

China's Version of its Economic Policy

link here to article

The Financial Times gives us China's Premier's report on its economic policies. It contains lots of information about its current economy and the direction in which it is headed. American's may take note of the fact that its trade surplus now only accounts for 3% of its GDP. China's focus is on expanding domestic consumption.

Some may be interested in exploring the details of this report. What strikes me about the report is not the details as much as the report itself. China's government has some broad goals and directions for its economy. Included among them is more reliance on markets and building an infrastructure intended to increase well being, while keeping an eye on ecological issues, and solutions, that would otherwise limit its ability to reduce poverty. I cannot even begin to imagine anything like this coming from our government officials who spend most of their time planning the next election campaign. I can imagine, however, adverse reactions to China's plan. Some would say that it is industrial planning, and therefore, it must be bad. We let our banks allocate capital to their most productive uses and that is a better system. We can see how that has worked recently. We had the dot com boom in which any IPO was a good IPO since it was good for bank revenues and good for venture capitalists. Then we moved to over-investment in real estate because it seemed to be good for the banking industry, at great cost to the rest of the economy. It appears that bankers are more focused on the best ways of making quick money than they are on the best allocation of capital.

Real Personal Consumption Expenditures Down in May

This graph (click to enlarge), via Calculated Risk, shows that real PCE growth has tailed off. After rising from the trough, real growth in April fell from March and May growth fell from April. GDP is 65-70% personal consumption.

Language and Thought

link here to article

Governments and marketing organizations are adept at manipulating language to affect the way in which we think about certain topics. This article informs us about how language can be abused in a particular way. Pornography commonly portrays women saying no to the sexual advances of men when they really don't mean no. One of the consequences is that women who say no are silenced. The word no does not mean what it is supposed to mean to men who have been schooled by pornography.

There are lots of reasons for not believing what politicians tell us but propaganda can be used to silence politicians in a way similar to that of silencing women. For example, soon after Obama was elected to the presidency a campaign was underway to deligitimatize him. Issues were raised about his citizenship, his religion, and his Americanism. They effectively silenced the president's speech for many Americans. He no longer spoke for the majority of Americans even after winning the election by a large majority.

Politicians can also appropriate the meaning of certain words. For example, the invasion of Iraq was called Iraqi Freedom. Given the value that has been attached to the word freedom in the US, those who opposed the invasion were guilty of opposing freedom. They were effectively silenced.

There is lots of debate today about whether or not to cut taxes. There are good points that can be made for and against tax cuts. However, when a proposed tax bill is given the name "tax relief", more people will respond favorably to the bill. Similarly, the bill that deregulated the banking industry in the US was called the Banking "Modernization" Act. Who could be against modernization? The use of language in this way is typical of many bills proposed and passed by government. For example, those who oppose the estate tax claim that they oppose the death tax.

At another level, Fox News claims that is fair and balanced. Even its viewers understand that it has a point of view that is hardly balanced. That is why they watch it. On the other hand, Fox has effectively silenced other sources of news since it positioned itself against the "main stream media" which is not fair and balanced. In a sense the media can't be trusted so why bother to view other sources of information since they are all biased.

Most people are unaware of how language can be used to effect their thinking. In fact, many would argue that they are too smart to be fooled by propaganda. There is a reason, however, why government and marketing organizations spend lots of money on experts who help them to choose the words they use wisely.

Questions on Shale Gas Economics and Safety

link here to article

The Energy Information Agency (EIA) was established to provide government with independent information about energy sources. Given recent safety issues in other fossil fuel industries such as BP's and the Massey Coal disaster, as well as concerns about nuclear safety, many look to natural gas as a safer alternative. The energy industry is particularly interested in exploiting shale gas reserves.

This report raises concerns about the independence of the EIA from the energy industry. Internal emails suggest that employees within the EIA are less positive about the data that they provide than one would hope. Some experts question the technical competence of the agency and its reliance on consultants who have relationships with the energy industry. Much of the data that the EIA relies upon comes from industry public relations sources which is compiled by the consultants and presented to the EIA. Many questions are raised about the economics and safety of extracting natural gas from shale resources. Given that government and the energy industry are bullish on shale gas, the EIA is in a familiar pickle.

Sunday, June 26, 2011

SEC is Toothless Tiger According to Harvard Legal Team

link here to article

The SEC was created after the Great Depression. It's mission was to restore confidence in our financial markets. Its record after the latest financial scandal is reviewed in an article published by Harvard Law School. The SEC's performance is on par with the performance of the banking executives who were responsible for the financial crisis. Despite widespread evidence of fraud, the SEC has not brought criminal charges against any of the corporations or their executives. There is no reason to believe that actions taken by the SEC will deter future abuses of trust. The civil fines that the SEC has preferred to use are minor relative to the harm, and they are viewed as just another cost of doing business.

There are many reasons why the SEC has not acted in way that would deter future abuses and restore confidence in the financial markets. In the first place, it is underfunded and undermanned. It has been given new duties as a result of banking reform but Congress has not granted its request for additional funding. Apparently, deficit reduction is a higher priority than criminal justice. There is also a revolving door between the SEC and the Wall Street law firms that defend the bankers. The better lawyers at the SEC often move to higher paying jobs on Wall Street, and the Wall Street lawyers are more valuable after they take a "tour of duty" at the SEC. Economists call this regulatory capture. Its even possible that we are seeing an example of "state capture". The Justice Department has been AWOL. It prefers to give the appearance of action by starting up an organization with a powerful title, but whose actions speak louder than its words.

The Harvard Law School article is welcome, however. Thus far, details about the failures of the SEC to act in way that might deter future abuses have appeared in articles written by journalists without the prestige of legal scholars at Harvard Law School. The banks may not be too big to change if pressure comes from our elite institutions.

Saturday, June 25, 2011

Robert Lucas Presents His Views on the Great Depression and Great Recession

link here to article

Robert Lucas won a Nobel prize for his work in developing rational expectations theory. He is one of the economists from the University of Chicago who have opposed the use of fiscal policy to deal with the US recession. In general, Chicago economists have been leading proponents of a very limited role for government in the economy. I have linked to a recent presentation that he gave at the University of Washington, in which he compared the Great Depression with the Great Recession. He points out the similarities and differences between these large departures from the long term growth trend and concludes that both lasted too long for similar reasons.

He agrees with the conclusion of Milton Friedman, that the Fed contributed to the Great Depression by failing to increase the money supply, and he adds a few other reasons. The Smoot-Hawkley bill reduced international trade; government supported the growth of unions, and FDR demonized business. In other words, government was responsible for the extended duration.

The recovery from the Great Recession has also been extended because government has been doing too much. High income earners anticipate higher taxes (this leads them to save up to pay the taxes). Government has increased its role in the market for healthcare, and banks are threatened by increased government regulation. He argues that the US is following the lead of the European welfare states, and it is choosing to reduce the rate of per capita GDP growth to that of the low growth welfare states.

If one starts out with the premise that a market economy, with a very limited role for government, is the best of all possible worlds, it is not surprising that Lucas found that government was the problem in the two large deviations from the long term GDP growth trend. FDR and Obama advocated policies that destroyed business confidence, and that was primarily responsible for the slow recoveries from recession. We certainly don't want to move in the direction that Europe has taken by increasing the role of government in the economy. He is so certain of his conclusions that he is not aware of the faster recovery that has taken place in Germany, Sweden and other European countries with stronger social support systems. He also seems unaware that business investment as a percent of GDP has been relatively high in relation to the the level of unemployment in the US. Moreover, he does not even mention the decline in household net worth, and the deleveraging that has resulted from the bursting of the housing bubble. Who needs to examine evidence that run counter to a firmly held conclusion that was reached without evidence?

Five Reasons for Sweden's Fast Recovery from Recession

link here to article

Sweden has recovered much faster from the recession than other countries. Its economy is growing at 5%, which is twice the rate of US growth. This article discusses five differences between Swedish policy, and that of most other states, that may be related to its faster recovery. Of course, US policy makers do not believe that there is anything that they could learn from the Nordic states, which have not embraced neo-liberal economic ideology, but it is worth looking at Sweden just to understand more about the options that are available to countries that do not allow ideology to limit their options. Perhaps the most important reason was that Sweden was running a budget surplus when the recession began. This enabled its social welfare system to put a floor on the decline in consumption without creating huge budget deficits. This contrasts sharply with the US response to the budget surpluses left by the Clinton administration (which, of course, must have resulted from policies from the Reagan administration). The Bush administration saw this as an opportunity to cut taxes, and to increase government spending, in order to get rid of the nasty budget surplus.

Friday, June 24, 2011

Business Spending is Actually Good Relative to Unemployment

The GOP talking point on the slow recovery is that Obama's policies have led to a fall in business confidence so they are not investing. This graph shows that business spending in relation to the unemployment rate is pretty good. They can't blame the slow recovery on weak business investment. Capital spending is less of a problem than job creation.

Has Greed Become Good?

link here to article

This is a review of a book that chronicles the crises in the financial system since the 1970's. It tells a story about the key players that have turned Wall Street banks away from their primary function of allocating savings to their most productive uses, into a system that maximizes executive compensation by taking excessive risks with the assurance that government will backstop loses. Our recent financial crisis is simply the latest greed inspired crisis that required government compliance and government rescue operations. In that sense, it reminds the reader that financial crises have been built into the system. We should not expect that efforts to reform the financial system will prevent the next crisis.

One of the problems with the book is that it places greed at the center of the crises. This is a problem in couple of ways. Greed is a human weakness, and good systems of governance and accountability should recognize human weaknesses and establish systems to counteract them. The focus should not be on greed but on weaknesses in corporate governance and accountability, as well as the compliance of government officials who establish, and enforce, the rules by which the game is played. Nevertheless, it is also probable that changes occur in our culture. Perhaps the response to greed in our culture is more favorable than it has been in the past. We should try to understand how cultural attitudes may have changed such that financial success has become a goal, independent of the manner in which it has been achieved.

Thursday, June 23, 2011

The Origin of Rational Choice Theory as Propaganda

link here to article

Ideas matter. This article explains how, and why, ideas regulate one's life and the formation of common communities. Individualism is part of America's vocabulary and its ideology. We accept the fundamental idea that individuals seek to maximize their preferences, and a society in which individuals are to free make choices which enable them to maximize their preferences is more desirable than those that do not. This concept was further developed by the Rand Corporation in 1951. Algorithms were developed by which rational choices can be made and the result was rational choice theory. During the cold war, rational choice theory was used to prove that a society based upon individualism, and rational choice, was superior to collectivist societies. It quickly became part of the government propaganda apparatus in the battle of ideas that characterized the cold war.

It was picked up in economics as well. Freedom to choose became part of the ideology of economics, and Milton Friedman postulated an essential connection between free market economics and democracy. It was developed further into rational expectations theory by Robert Lucas. He was awarded a Nobel prize for his work, and rational expectations theory, despite the flaws exposed by the financial crisis, is still the dominant theory in macroeconomics. It contains the philosophical assumption underlying Rand's use of rational choice theory as a propaganda tool, but it also enables the use of algorithms and mathematics which are part of its appeal in establishing economics as a science on par with the physical sciences. Individuals preferences, and social welfare, are maximized when governments do not interfere in markets.

One of the problems with rational choice theory is that one's chances of maximizing preferences increase with wealth and power. Individuals and organizations that have access to power win and those who do not are the losers. There is nothing ethically neutral about rational choice theory. Powerful corporations, which ironically operate as command and control systems, are better able to maximize preferences when they can achieve market power which limits the choice of their competitors.

The author leaves us with the thought that individual freedom is of value only when it is guided by a community with a shared value system.

US Debt Problem Goes Away If Congress Makes No Change to Current Law

This graph shows that the US long term debt problem would disappear if government did nothing new. The CBO projection of the extended baseline assumes current law. Under current law the Bush tax cuts go away and payments from Medicare to doctors remain as they are. The line showing unsustainable debt includes the Bush tax cuts and the payments to doctors increases. That is the most politically realistic line and that is the problem.

Wednesday, June 22, 2011

US Housing Inventory Moving Upwards

This graph shows the new home sales have not been high enough to reduce housing inventory which is on the rise. The housing inventory will have to be burned off before new home sales can stimulate growth.

US Debt Deleveraging Will Last Until 2020

This graph from Nomura Securities, based on Federal Reserve flow of funds data, tells a nasty story. Debt deleveraging will not put the US back onto its trend until 2020.

American Exceptionlism on Display

link here to article

The US has again moved into the number one position as a result of its exceptionalism. The IMF just released data which shows that unemployment in the US, as a result of the Great Recession, which was produced by American Exceptionalism and the unleashing of banking industry innovation, has vaulted it over that of all other nations. If the US keeps this up it may overtake others who are competing for the Banana Republic Trophy.

How is Austerity Working in the UK?

link here to article

The early returns on austerity in the UK are not good. Government borrowing is up versus year ago, and government welfare payments are also higher. That is precisely what we should expect when consumer demand is low and government spending does not replace it. The confidence fairy has not made its appearance yet in the UK. Perhaps it will make its appearance in December along with Santa Claus.

Oh Canada, We Sing Thy Praise

link here to article

This article contains several interesting graphs which show the differences between US and Canadian household balance sheets and how they were impacted by the Great Recession. The innovations in US banking, triggered by deregulation which enabled innovation, by getting government out of their way, did not have the predicted result. Canada, which avoided deregulation and banking innovation, looks a whole lot better than the US. They have a better healthcare system, and a more solid banking system, but the Bruins won the Stanley Cup.

On a more serious note. Per capita home equity in the US is back to where it was in 1978!! Our balance sheet recession will impact the US economy for some time. Canada's primary concern will probably be slower growth in their export market to the US.

Architecture Billiings Move Downward

link here to article

Architecture billings are a leading indicator of commercial real estate and public real estate construction. The index has turned downward after a brief bounce. This means that the economy will not get much help from commercial real estate development going forward.

The Bond Vigilantes Are Not Interested in Government Spending Cuts

link here to article

Bill Gross, who heads up the world's largest bond fund has a message for Washington politicians who are on the warpath to cut budget deficits. He tells them all of the right things but it won't make much of a difference. The GOP's strategy for the 2012 election cycle is to run on a platform that pits them against their traditional rivals, the "tax and spend" democrats. They understand that kind of campaign and they have invested heavily in it. They will continue to run on that platform. The democrats seem to fear that attack, and they appear to be on the defensive. The administration has been struggling to show that it is equally concerned about deficit reduction. Neither party seems to believe that the public has more pressing concerns.

It is ironic that Bill Gross has to tell Washington that restoring economic growth is more important than cutting deficits to please the bond market. Our deficits are affected more by slow growth, and uncertainty about future growth, than they are by "excessive government spending". That is what worries the bond market.

Derivatives and the Eurozone Crisis

link here to article

There are many questions about the impact of the financial crisis in Greece. It may impact banks, who are on the hook for the debt, and it may impact the finances of governments and their internal politics in many ways. These issues are pretty well understood. Since credit default swaps, and other derivatives are unregulated, nobody knows how that will play out if there is a default. Governments have been unable to pass laws that regulate derivative trading, despite the lessons from the financial crisis.

FDA Gets Tough on Cigarette Manufacturers

link here to article

The FDA is using powers given to in by a recent law to require cigarette manufacturers to place anti-smoking graphics on cigarette packages which should deter some people from smoking. It will be interesting to see how this plays out. Cigarette manufacturers, who know that smoking causes cancer, seem to care less about the damage that their product does to its customers than they do about the loss of revenue. They will argue that the government is interfering with their "free speech". Some economists may even take their side and argue that government interference in the market is not needed because consumers act rationally when they make their cost-benefit decisions. The government does not know more than consumers and this is just another example of a movement towards the "nanny state".

The Fed is Ready to Throw in the Towel

link here to article

The Fed appears to be backing away from further attempts to use monetary policy to stimulate the economy. They have reinforced what many economists believe about the use of monetary policy in a balance sheet recession. In the first place, the inflation predicted by some economists did not happen. Its hard to get inflation when there is high unemployment. In the second place, the Fed may have kept us out of a deflationary spiral, but low interest rates only kept the housing market from getting much worse. Unlike previous recessions, in which low interest rates stimulated the housing market, and led us out of recession, the hangover from the bubble burst is still impacted the housing market. We should be worried about what happens next in the housing market when the Fed stops purchasing mortgage securities and mortgage rates rise.

We also learned that business investment is not primarily driven by interest rates. High levels of household debt, and deleveraging, along with high unemployment, has kept consumer demand from rising. Business investment depends upon expectations of consumer demand growth.

What happens next is dependent upon fiscal policy which is in the hands of politicians who are more focused on developing talking points for the 2012 election than they are on dealing with high unemployment. That will have to wait until after the election and it could get worse.

Tuesday, June 21, 2011

Krugman's Speech at Cambridge in Honor of 75th Anniversary of Keynes's General Theory

link here to article

Paul Krugman delivered this speech at Cambridge to honor the anniversary of the publication of Keynes's "General Theory" It is very timely because Keynes had several insights about economics that were derived from his efforts to understand the Great Depression. Unfortunately, his insights violated many of the assumptions held by economists, and by those in government. They were also opposed by free market fundamentalists who viewed any intervention by government into the economy as a movement towards socialism. Ironically, Keynes viewed his work as moderately conservative. He believed that government could moderate some of the problems inherent in capitalism, such as periods of high unemployment. He believed that a better functioning capitalism was superior to the alternatives that were being debated.

The Great Recession has revived many of the debates within economics and government that were common during the Great Depression. This has contributed to many of the problems that governments have had in dealing with a situation that is assumed away by classical economics. Classical theory assumes that the economy would return to full employment, which is its normal point of equilibrium, without government intervention. In fact, government intervention will only makes things worse by taking actions that prevent the forces of supply and demand from working their magic.

Krugman believes that macroeconomics can benefit from the insights that he finds in Keynes, and he refers to those who fail to understand those insights as contributors to what he calls the "dark ages of macroeconomics". In this speech he attempts to show how the insights that he finds in Keynes, and which are poorly understood by his critics, are particularly useful in addressing the needs of an economy in which monetary policy is up against the "liquidity trap" described by Keynes. He recognizes that the resistance to Keynes is deep, and that little can be done in our current political climate. He believes, however, that in the long run, bad ideas eventually give way to better ideas. The dark ages did not last forever.

Krugman's speech is not for everyone. He does a better job of presenting the salient ideas he finds in the General Theory than many others who have attempted to do so. Unfortunately, these ideas are not easily grasped. Those who are interested in understanding the current debates about how to deal with our economic issues, and who are willing to take the time and effort to read his speech carefully, will be rewarded.

Monday, June 20, 2011

In Insider's View of the Eurozone Crisis

link here to article

This article by the former German Financial Minister Joschka Fischer, provides a deeper understanding of the financial issues in Europe than anything that I have read so far. In Fischer's view there must be a difficult and lengthy process of moving towards a United States Of Europe. He does not think that the current organization of Europe is sufficient to deal with the issues that have been made apparent by the Greek crisis. A common currency cannot work without a common economic government. The US has a crisis in its member states that it has been able to deal with because in addition to a common currency the US has an economic governing body.

The primary beneficiaries of the eurozone are Germany and France. The common currency allows Germany to run its export economy, which comes 70% from Europe and 50% from eurozone member states. Without the common currency surplus states would see their currency appreciate relative to that of the states to which they export and exports would decline. France has an agricultural economy that also benefits from its exports within the eurozone. Germany and France have the most to lose if the eurozone folds, but it is not easy for them to work together because they have unique approaches to monetary policy.

Fischer views the current approach to Greece as an effort to bail out the banking system once again. Without intervention many of the banks would be insolvent because of the risky loans that were made. Instead of punishing Greece for not living up to its treaty obligations, the banks should bear the burden of responsibility. He also believes that pushing weak states like Greece out of the union would also be a security disaster for Europe.

In summary, the eurozone faces a choice of going backwards or forward towards greater integration. He does not believe that going backwards will work but he understands the obstacles that make going forward very difficult.

Krugman Asks: "What Recovery"?

link here to article

There has been lots of discussion around whether there will be a double dip recession and whether the US will experience a lost decade. Krugman uses the employment to population data to answer the question. The ratio dropped rapidly during the downturn and it has stopped falling. On the other hand, it has not begun to climb back up to where it was before the crisis hit. He believes that we stopped flirting with a lost decade 3 years ago. We are now in the middle of it.

Two Views on Probability of Double Dip Recession

link here to article

Brad DeLong reads Shiller's article in the WSJ on the housing market and why Shiller is worried about a double dip recession, despite the fact that forecasters disagree with his him. DeLong is worried too, but for a different reason. He believes that the historical correlations, that are built into the macroeconomic forecasting models do not reflect current reality, and that the models are probably wrong.

Farmers Take Real Estate Developers to the Cleaners

link here to article

The housing bubble tempted real estate developers to make offers for land purchases to farmers at the price that they could not refuse. Now several farmers are buying the land back for a fraction of the price that they sold it for. Perhaps they will wait for the next bubble to occur, and for new developers to appear on the scene that they can resell their land to at newly inflated prices. This scenario says a lot about efficient markets theory, and about rational expectations theory, that were at the root of the housing bubble, and the financial crisis.

Is Shifting from Manufacturing to Services Good for Wage Growth?

link here to article

Jobs in US manufacturing have fallen substantially while jobs in the services industry have been growing. Some argue that this is a good thing. The US is losing manufacturing jobs because of high productivity. The problem, however, is that productivity in the services sector is not as high as it is in manufacturing. Consequently, those who move from manufacturing to services jobs have seen their wages reduced by 3-11%.

Rodrik also shows that hundreds of thousands of US manufacturing jobs have been offshored to China. This has contributed to the sectoral shift from the higher productivity and higher paying manufacturing jobs in the US to the lower productivity and lower paying service jobs in the US. This is reflected by lower growth in US wages.

Dani Rodrik on the Greek Debt Problem

link here to article

Dani Rodrik offers his opinion on the Greek crisis. He offers Argentina as an example of a state that defaulted on its debt but has recovered by depreciating its currency and building up its export business. Greece does not have this option, however, because it is in the eurozone. The imposition of austerity on the Greek state will not work either because it will only shrink growth and reduce tax revenues further. The longer that we wait for a solution, however, the worse the situation will get. Rodrik suggests that delaying the needed actions is not the best way to deal with the problems.

The Greek Tragedy is Moving to Act Three

link here to article

The battle over how to resolve the crisis in Greece continues. On the one hand, it raises the question of who will pay for the eventual Greek default. Will it be the creditors or will taxpayers in the well off eurozone countries have to absorb the losses in order to keep the banks solvent? In Greece, which is essentially a failed state, it has become an issue of national sovereignty. The conditions imposed on the Greek state, in order to receive financial support, effectively turns over control of the state to its rescuers. This has triggered political unrest and there are also concerns about a run on the Greek banks. Ireland, Portugal and other states are watching this closely and their strategies will reflect what they learn from the Greek experience.

It is easy for most of us to see this as a Greek problem or as a eurozone problem. If things go poorly with Greece and the eurozone it will affect everyone. The US is invested heavily in the banks that hold Greek debt and it is uncertain how US investors will be affected by over $40 billion of credit default swaps that have been traded. Moreover, any slowdown in the eurozone will impact the emerging markets that been producing much of the growth in the global economy and who have been financing much of the debt in the rest of the world.

Corporate Governance and Carrefour's Future

link here to article

This story is about the world's second largest retailer. This is a tough business. Fashions come and go and retailers have to adapt quickly to fickle consumers. But the real story is one of corporate governance in the new world of investor capitalism.

Blue Capital is an investment group founded by a US property tycoon and Europe's richest man Bernard Arnault. It owns 15% of Carrefour's common stock and it has placed 3 of its people and the Carrefour board. This gave them the power to hire the new CEO who had earned a reputation at food producer Nestle as someone who could turn a business around. Blue Capital invested in Carrefour because it believed that the value of its properties were not reflected in its stock price, and that the new CEO Olofsson was the person who could make 1+1=3.

Olofsson came to the job with no retail experience so he hired someone with retail experience, but with no experience in France, to spruce up operations. He also had to start the process of making 1+1+3 by selling off some of Carrefour's properties. This got him into a battle with its operating managers who did not want to give up operating control, and he eventually had to dispose of the manager he hired to run the French operations, who had difficulty adapting to the French culture.

Olofsson also had problems at the top of the pyramid. Blue Capital was not pleased with the stock performance, but neither were other investors who opposed Blue Capital's plan to sell off Carrefour properties. This put Olofsson in the difficult position of dealing with unrest among his operating managers and the conflicting opinions of the major investors in Carrefour.

My take from this story, as it has been told, is that it is a mistake to hire a CEO to run a retail operation because the person had established a reputation in food production as a tough guy who could turn organizations around. That seldom works. It also raises questions about the role of investors in running corporations. Blue Capital was looking for a way to boost the stock price and it believed that it could bring in a CEO who could implement its view on how to make 1+1=3. For Blue Capital running a complex corporation is only a numbers game. The right CEO can make the numbers come out right. On the other hand, there are other investors who have a different view on how to make the numbers come out right. Running a complex business is a tough job. It is even tougher when investors believe that they know more about how a business should be run than the management. This is the new world of investor capitalism. Unlocking perceived value and managing the stock price is the name of the game.

The Globalization Shell Game

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This article describes how globalization works for many companies. Set up operations in low tax countries to avoid taxes. Then petition your friends in congress to let you bring the profits home, at a reduced tax rate, to "stimulate investment and create jobs". Then you use the profits to distribute dividends to shareholders and you buy back your stock to award options to executives and increase the share price. Of course you lied about creating jobs. Instead you "right size" your labor force to boost profits and, of course, the value of your stock options. And, by the way, you come back a few years later and play the same game. Congress. of course, understands the game and no questions are asked about what you did the last time the game was played.

Sunday, June 19, 2011

When Greed is Good, Democracy is Bad

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It is well known that income inequality is a global problem. This feature article in the Washington Post describes the role that changes in executive compensation has played in the US. The attitudes of top executives have changed along with the attitudes of many Americans who have adapted to a win/lose version of the economy. More specifically, corporate boards comprised primarily of fellow executives, are more than willing to oblige the CEO's who appointed them to the boards on which they serve.

It may be surprising to many that the US culture was not always so supportive of increasing the share of company profits that are awarded to the top executives. It may also surprise some that the pattern of income distribution in the US compares more with that of developing countries than it does to that of other advanced economies. Rising income inequality is also anathema to the democratic process in the US much like it is in developing countries. The concentration of wealth contributes to the concentration of political power.

The Marriage Between Conservative "Think Tanks" and Talk Radio

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The Economist describes the ways in which conservative "think tanks", like The Heritage Foundation, use conservative talk radio shows to recruit donors. Heritage pays Rush Limbaugh $2 million to place Heritage talking points on his radio show. They pay Hannity $1.3 million for the same opportunity. This is a win-win for Heritage and the talk radio shows. Heritage recruits large numbers of small conservative donors. The talk radio shows get the payola from Heritage, and they also get the professional script writers from Heritage to spruce up their conservative messaging. Heritage, and the other "think tanks" are also blessed by the IRS as a non-profit "educational" institutes without a political agenda. Contributions are tax deductible.

Saturday, June 18, 2011

link here to article

This article compares the politics during the passage of the Glass-Steagall law, which separated retail banking from investment banking and created the FDIC, in response to the role of Wall Street in triggering the Great Depression. The GOP called the FDIC "socialism" but the bill was easily passed by congress.

The banking system operated successfully under Glass-Steagall for 70 years but it was repealed under a democratic administration with ample support from the GOP. The repeal of Glass-Steagall, along with other bills that limited government regulation of banking, enabled the over-leveraging and risk taking that contributed to the financial crisis. The political response to the financial crisis has done little this time to prevent the next financial crisis. The banking lobby's have been much more effective in delaying or weakening efforts to make meaningful reform in the system.

Friday, June 17, 2011

For Whom the Oil Flows in Iraq

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The major benefactors from the US led war in Iraq turns out to be the oil service companies, such as Haliburton, and 3 other major service providers based in Texas. According to a spokesperson from a Russian company that won a bid for access to a large oil field, the intent of the US was to bring more oil to the market in order to keep oil prices from rising. The US used to be able to do that on its own when it was a major source of oil. It could open and shut the oil valve to adjust prices. It looks like Iraq is targeted to play that role as it ramps up production substantially.

UK Government Accepts Plan to Separate Retail and Investment Banking

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This article (via Manan Shukla) reports on the conservative government acceptance of the recommendation from a study committee on the financial crisis to separate retail banking from investment banking. It would be similar to restoring the bill that was repealed in the US, prior to the financial crisis, that contributed to the global crisis. This is significant given the centrality of the banking industry to the UK economy. London competes with Wall Street for global banking leadership.

There is speculation on whether this will open the door for other countries to follow the British lead. One of the differences between the UK and the US is that there are no limits on campaign spending in the US. Wall Street has been a major source of campaign funding for both political parties. Obama's campaign was heavily funded by Wall Street. He spent more on his campaign than any campaign in US history. There is a battle now between the GOP and the Democrats for contributions from Wall Street for the 2012 elections. Repealing Glass Steagal would not be high on either parties list. Democracy in the US will always be for sale as long as politicians are dependent upon huge campaign contributions to win elections. The UK sets limits on how much can be spent on political campaigns. That is inconsistent with the prevailing value system in the US. We believe that the market should determine the price for purchasing support from out elected officials, and there should be no price ceiling.

Thursday, June 16, 2011

Convergence in a Global Economy

link here to article

Michael Spence delivered a talk on the problems of global growth and sustainability at the Carnegie Council. He had some very interesting views on how global GDP will increase by a factor of 3 and how it is forcing countries to respond to the problem of convergence. Most of the growth will occur in developing countries and it will raise 70% of the world's population above the poverty level. He had some very interesting comments on how China has grown its economy along with the recognition that growth must be sustainable in order to continue. There is a link to China's latest 5 year plan that is worth reading.

Growth in the developing world will create problems for many developed nations. For example most of the growth in the US economy has been in non-tradable services such as healthcare and education. The US will have to make the right kind of investments in order to participate in the high value added tradable sectors. Germany, may provide a model for the US to follow (if the US is able to learn from what other countries have done).

Wednesday, June 15, 2011

Do We Have Structural or Cyclical Unemployment?

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One of the debates about our unemployment problem is whether the housing crisis has made our labor force less flexible. If that is the case, then we have a structural problem that cannot be resolved via fiscal policy. This article reviews data from a study that shows that the large number of households with negative equity, and therefore, less flexible about selling their home in order to move to where employment opportunities exist, is not a problem. There has been little change in interstate movement to take new jobs. Most of the opportunity is within counties and not limited by the inability of households to sell their homes.

Fed Chairman Warns About Sustainable Fiscal Policy

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Bernanke's speech yesterday makes the case for political agreement on a sustainable fiscal policy. He argues that whatever we do, it should avoid harm to our fragile recovery. In particular, using the debt ceiling as weapon in fiscal policy deliberations may harm the recovery in many ways. He acknowledges that the battle over fiscal policy reflects differences in social values and that decisions will not be easy. Our first objective, however, should be to avoid harm.

Home Remodeling Permits are Up Over Last Year

Residential Investment (RI)is a leading indicator of economic growth. There are 3 parts to RI: new residential construction, multi-family construction and remodeling. This graph (via Calculated Risk) shows that permits for remodeling are up compared with the previous year. Even though new residential construction remains weak, there is hope that multi-family construction and remodeling will stimulate RI and, therefore, GDP.

The Battle over Warren Continues

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There is little doubt that Elizabeth Warren would be a strong advocate for consumers. That is why she is being opposed by those in Congress who receive support from the banking industry. There is also speculation that the US Secretary of the Treasury opposes her selection. He was the head of the NY Fed prior to, and during the financial crisis, and many believe that his interests are aligned with Wall Street. This article takes the position that the banks would be insolvent if they had to write off all of their bad debt, and that the Fed and Treasury are doing what they can to enable the banks to earn their way out insolvency. Part of this strategy is to allow the banks to earn fees in ways that a Consumer Protection Agency under Warren might prohibit. Therefore, she is opposed by friends of Wall Street in the Treasury.

This puts Obama in a pickle. He must decide whether to invest political capital in a battle over Warren's appointment, or to appoint someone who would be easier to get approved, and perhaps be a less effective head of the agency.

Tuesday, June 14, 2011

Italian Election Results Bad for Current Government

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The results in Italy's local elections were a blow for the policies of the current government. Voters opposed the use of nuclear energy, privatization of the water supply and a law that would make Italy's scandal prone leader immune from prosecution.

The result in Italy reflects a general malaise in several euro zone countries suffering from economic problems. The socialist party in Spain lost key local elections as well. Voters were not pleased with the use of conservative austerity measures to deal with high unemployment. Greece, Ireland and Portugal are also experiencing a loss of confidence in government attempts to deal their economic problems.

How The US Became a Low Tax Country

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This article shows how changes in the US tax structure have reduced federal tax revenues to the lowest percent of GDP since 1950. There are 10 slides that tell the story. The GOP has had a simple campaign strategy since Reagan that has worked wonders for them. Setting aside all of the value issues that defines them as the defenders of "family values" and of the "real America", their economic policy has been a politicians delight. Everyone likes tax cuts so give a little bit to most Americans and give most of the cuts to those who pay for political campaigns. Everyone also likes to receive benefits from government so they don't pay for the tax cuts with spending cuts. They borrow instead, because as Dick Cheney told George W. Bush "Deficits don't matter. Reagan proved it". Of course, when Democrats hold office, they switch back to their strategy of running against "tax and spend Democrats" and screaming about the budget deficits (produced by their tax cuts).

They have had remarkable success with a strategy so simple that even intellectually challenged candidates can run on it. Their strategy has also changed the Democratic party. It used to be the party that represented American's who worked in factories and who belonged to unions. The demise of manufacturing in the US, along with the decline in union membership, has caused the Democratic party to seek campaign contributions from some of the same groups that have historically purchased GOP candidates. The result is that both parties are paid for by corporate interest groups, but they both have to convince the electorate that they really love small businesses and the traditional American family. The media help out by focusing on the horse race between the two parties and the minor differences that separate them.

David Brooks, a normally conservative pundit, wrote an article in today's NYT's in which he said that he would cover the 2012 election, but he would do so under protest. He accused the GOP of running a campaign with a focus on cutting budget deficits while they propose to cut taxes by trillions of dollars. He also argued that the Democrats have not done much to address the real structural problems in the US economy. He does not see any purpose in covering a campaign that looks like all of the other campaigns he has covered in which both resort to their traditional song books.

In any case, the slides on US tax policy tell a story. Show them to your friends from both parties and ask them what should be done about it.

Monday, June 13, 2011

American Healthcare as the Evil Monster in the UK

link here to article

We live in a curious world. GOP politicians use the Canadian and French healthcare systems as the evil monsters that we must avoid at all costs. They argue that we need to privatize Medicare or make our system more consumer directed (which means a system of price rationing). In the UK conservative politicians are forced to declare that they do not plan to turn their system of socialized medicine into the American system of healthcare which is the evil monster to UK citizens. The electorate in the UK seems to understand what is in their best interest. The majority of Americans have a poor understanding of what is in their best interest. They live in a world populated by evil monsters that conservatives have implanted into their imagination. Their world is also dominated by a media culture that maintains their ignorance of how things work in the rest of the world, or outside of their experience. They are immersed in the consumption of everyday reality which deadens the imagination.

Greek Debt Downgraded to Speculative

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S&P downgraded Greek debt to its lowest rating above default. Greece has substantial financing needs as debt matures this year through 2014. It appears that some kind of restructuring will be required or help from the ECB and the IMF will have to be substantiated. The big issue will be how the world reacts to a Greek default. It may have a profound impact on Portugal, Ireland and other countries that are in trouble.

Larry Summers on Preventing a Lost US Decade

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Larry Summers, now back at Harvard and out of the Obama administration has second thoughts on the need for stimulus. The GOP claims that we have a supply side problem that can be fixed by using the GOP panacea of tax cuts. Summers believes that we have a problem of inadequate demand. We could stimulate demand by taking advantage of low interest rates for government debt and investing in infrastructure to create jobs. We are half way through a lost decade. The GOP does not have a viable solution and the Obama administration is moving toward supply side remedies as well. Where was Summers when we needed him?

Recession Affects Groups Differently

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John Kenneth Galbraith had some words of wisdom on the differential impact of recession. The NYT's reprinted his 1993 comments which still have a ring of truth. I would just add that the climate today is different from that in 1993. Politics are more polarized, and the bank bailout created an extremely negative public reaction and a public backlash against government intervention in the economy. The cost of the bailout, and the loss of tax revenue from a deep recession, resulted in extremely high budget deficits that played into the hands of the reincarnated deficit hawks in the GOP.

Refinancing Home Mortgages Pattern Has Changed

This graph (click to enlarge)from Calculated Risk illustrates the new dynamic in mortgage refinancing at Freddie Mac. Fewer mortgages are being refinanced with cash back and more mortgages are being refinanced with cash being added to reduce the principle. This is partially because applicants need to satisfy new guidelines in order to refinance at lower interest rates. Applicants whose homes are worth less than their existing mortgages are paying down the principle.

This is a form of deleveraging. Households are no longer able to refinance and take cash out in order to boost consumption. Furthermore, those who are increasing their equity in order to refinance will have less to spend on consumption.

Sunday, June 12, 2011

Medicare Costs Lower Than Private Insurer Cost per Beneficiary

This graph (via Krugman) shows that real healthcare cost per beneficiary have increased dramatically since 1969. Medicare costs have grown substantially but private insurer costs have grown even faster. This does not support those who want to end Medicare and replace it with private insurers.

Investment Banks are the Same Everywhere

link here to article

This article is primarily a profile of the CEO of Germany's, and Europe's largest and most powerful bank. There are several points that are worth mentioning, however. The banks oppose restructuring the debt of peripheral countries in the euro zone because it would force them to write down their loses. Instead they favor the imposition of austerity measures that are preventing these countries from recovering from recession.

The major banks are also arguing against the imposition of larger capital requirements. They claim, over the objection of many economists, that higher capital requirements would reduce their ability to make loans to Main Street businesses. This ignores the fact that 85% of Deutsche Bank's profits come from its investment bank, located in London, which is heavily engaged in trading operations.

What struck me most about the article was the photo of the CEO in front of his shareholders promising them a 25% return on equity. Banks can only achieve that kind of return on equity by using leverage to boost returns. That, of course, is the kind of risk that led to our financial crisis. It is a risk, however, that would be backed by governments which recognize that they are "too big to fail". In other words, the asymmetric incentive system that envelopes our current version of corporate capitalism, has not changed. CEO's have an incentive to increase stock prices which provides them with the bulk of their compensation. They have to take risks with other people's money do accomplish this, but shareholders applaud their actions. This is what happens when corporate goals are singularly directed toward the objective of increasing short term shareholder value. The idea that other stakeholders such as employees, customers, suppliers, longer term shareholders, and the broader community have a stake in our corporations was blown away in the 1980's.

How to Grow GDP by 5% Per Year

link here to article

Everyone has been looking for ways to perform two contradictory acts in order to restore economic growth and cut US budget deficits. This editorial summarizes the solution coming from the Gopher State and its former governor Tim Pawlenty.

Pawlenty claims that if we got rid of three taxes, that are primarily paid by the wealthiest Americans, the capital gains tax, the tax on stock dividends and the estate tax, our problems would be solved.

Someone with half a brain might ask how these tax cuts which would reduce federal tax revenues by over $4 trillion, would reduce budget deficits. Pawlenty then becomes Ronald Reagan and sprinkles us with voodoo economics. He claims that "they would unleash the creative energy of American's businesses, families and individuals". That is, American Exceptionalism would come to the rescue. The current administration has kept our creative energy bottled up, and he would unleash it by cutting taxes even further than George Bush (which led to huge budget deficits). The economy would grow faster than it has ever grown over an extended period (5%). Therefore, his plan would create jobs and INCREASE tax revenue by CUTTING taxes. That, of course, is the voodoo economics plan that turned Ronald Reagan into a conservative icon. It did not matter that US budget deficits under Reagan and Bush grew more than under any presidencies in US history.

Its understandable why voodoo economics would appeal to the those who would benefit from cutting taxes on wealth. What's extraordinary about America is that millions of Americans who have zero wealth find the appeal to American Exceptionalism to be irresistible. The Wall Street Journal and many in the media tell them that bedtime story on a regular basis. They realize that lies that are repeated regularly become the truth. Especially when they are big lies.

Saturday, June 11, 2011

Which Party is Killing the Confidence Fairy?

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Mark Thoma changes a few phrases in a WSJ editorial that blames Obama for the lack of confidence in the business community. Most of the confidence destruction is coming from the GOP.

Faith Based Economics and GOP Myth Creation

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Dean Baker destroys the faith based economics coming from the GOP. Cutting deficits will not improve the growth rate and cutting public employment cannot increase private employment without increasing wage rates.

Italian Per Capita GDP Now At 1999 Level

This graph shows the huge drop in Italian Per Capita GDP. The spike last quarter was due primarily to government spending. The Italian economy is huge relative to the peripheral country's in the euro zone who are looking to the ECB and the IMF for help. It would be a disaster if Italy joined that group.

The Wall Street Journal Editorial Page Create's GOP Talking Points

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If anyone wants to know what GOP politicians will be lying about next, all they have to do is read the Editorial Page on Murdoch's WSJ. This editorial provided the ammunition for GOP contenders to fire at the Obama administration which is responsible for the loss of business confidence, which in turn, is responsible for the slow recovery.

Who Believes in the American People?

The GOP Governor from Minnesota, who believes that he should by our next president, displays the style of deception that should endear him to many in the GOP base. He claims (via Krugman) that Obama does not believe in the American people because he does not believe the Governor can grow the American economy at 5%. He claims that Obama's "centralized" (read socialist) government has not grown the economy at 5% but that his "decentralized" plan can get the job done.

The Minnesota Governor believes in the American people and in it's ability to get the job done with his leadership. Perhaps he actually believes in the ability of the American people to believe the lies that flow from the far right. They believe almost any lie when it is couched in terms of American Exceptionalism.

For the segment of Americans who prefer facts rather than flattery, this graph shows GDP growth in the US by decade. With the exception of the rapid growth from the depths of the Great Depression, (its easier to grow fast from a low base), the US has never had a 5% growth rate. Moreover, the Reagan years in which Keynesian economics was used to stimulate the economy, (cut taxes and increase spending) did not achieve the magic 5% number either. The only other periods that stand out are the 60's with a high growth rate (led by drugs, sex and war protests), and the low growth rate in the last decade.

Implicit in the governor's analysis of the economy is the assumption that government structure is responsible for our extended downturn. This is consistent with the GOP talking point that attributes slow growth to negative business reaction to Obama's policies. They believe in the same "confidence fairy" that is supposed to restore growth when conservatives are restored to power. The confidence fairy is replacing Santa Claus as the giver of gifts to the true believers.

Friday, June 10, 2011

Banks are Complaining About New Mortgage Law

link here to article
This article in The Economist (via Manan Shukla) explains the new law that banks are resisting. If a mortgage is written with 20% down payment, and the payments do not exceed 28% of monthly income, the originator can package the loan in a security. If the mortgage does not pass that test, the bank must retain a 5% interest in the mortgage. This of course was intended to keep originators from passing on risky loans to the next person in the chain.

The banks complain only 3/5 of mortgages would pass that test and that it would hurt the real estate industry. This seems like a strange complaint. The banks can write any mortgage that the like at any interest rate. They just can't pass non-conforming mortgages up the chain without sharing the risk. If they don't want to share the risk, then the mortgage should not be made.

Investing in Capital Versus Investing in Labor

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This article provides a platform for a single small business person to explain why he is investing in capital rather than in labor. He makes several points that reflect his perspective on his business. Government has provided subsidies for investing in capital but there are no subsidies for investing in labor. Furthermore, the labor force lacks the skills needed in his business and he hates to go through the expensive process of hiring people on whom he has to spend $7,000 to provide government mandated safety training. He also must provide expensive health insurance. Consequently, he is investing in capital in order to remain price competitive.

His story is interesting but one wonders whether businesses can't find skilled workers to do the things that dumb machines can do less expensively. If a machine can do it better it must be a routine task that can be programmed. We don't need highly skilled worker for that. We need skilled labor to operate and maintain the machines. That would add jobs not replace them. He also has a mixed view of government. I get the sense that he likes government subsidies but he is against government mandated safety training. He is also worried about the rising cost of healthcare benefits but I get the sense that he would oppose universal healthcare provided by government. In other words, should the views of a single small business person be used to frame a discussion on why we are having a jobless recovery?

The US has been running a trade deficit since the 1980's. Much of that trade deficit is the result of off shoring by US multinational corporations to take advantage of lower labor costs in other parts of the world. My guess is that capital substitution for labor has been less of a problem than off shoring. Major contract manufacturing firms have been expanding their labor forces despite the use of advanced capital in the manufacturing process. Moreover, there is a shortage of labor in some countries and that is leading to growth in wages. Government incentives may be the cause of our labor surplus but it probably has more to do with policies that began in the 1980's. CEO compensation shifted from cash, which is taxed as ordinary income, to stock options. Government obliged by cutting the taxes on capital gains to 15%. These changes in the incentive system reduced management concern for the multiple stakeholders in a corporation to an almost exclusive interest in managing quarterly earnings and the stock price. It has also put Wall Street investors into an emerging role in the setting of corporate policy, and even in the selection of corporate CEO's. Wall Street and increasingly corporate managers, have no nationality. Moreover, many view themselves as the only stakeholders that matter.

What is the Risk to the Dollar?

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Critics of the Fed continue to worry about policies that they believe will erode the value of the dollar. They believe that the decline in the dollar will lead to inflation. The 10% decline in the value of the dollar has historically led to a 1% increase in inflation. The dollar has fallen by 5% and it has barely made a dent in inflation. Moreover, investors continue to purchase US treasuries at very low yields. This article makes the case that the biggest threat to the dollar is US fiscal policy. If investors believe that the inmates are running the madhouse, which is close to the truth, they might unload their dollar holdings. If that were to happen the Fed would be powerless to stop the retreat from the dollar. That is perhaps why Bernanke keeps reminding politicians that the Fed is reaching the limits of what it can do to restore the economy. He frequently states that Fed policy must be supported by fiscal policies which recognize short term needs as well as the longer term need for sustainable growth.

The US is Falling Behind in Green Market

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While our politicians argue about cultural issues that matter in elections, but have no importance outside of People Magazine, Fox News and the like, the rest of the world is thinking about the future (which is beyond the 2012 elections). This article explains why the US is leaving the emerging market for green technologies to the rest of the world. In short, the government must take actions to make the prices of green technologies competitive with energy from fossil fuels. In the US global warming deniers, paid for by energy companies, block any effort to encourage the move to green technology.

Thursday, June 9, 2011

The View of US Healthcare from The Economist

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It takes the foreign press to teach us about rising healthcare costs. This article makes two important points. Insurance company marketing is an unnecessary expense and so is marketing by providers to consumers. It also points out that provider marketing is often directed to insurers who make the decisions about what procedures and treatments to fund. Our system is inefficient because it is based upon a half baked market model and it opposes any efforts to introduce real cost controls.

Are Taxes Really Higher in Europe Than in US?

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Bruce Bartlett is a recovering conservative. He spent most of his life supporting conservative tax policies and now he is exposing the conservative myths about tax policy. His OECD chart shows that more taxes are collected in Europe than by the US and that the US has a much lower tax structure (despite the conservative love affair with tax cuts). One can think of spending on healthcare as a tax since, like tax cuts, it reduces consumption of other consumer goods. He adds spending on healthcare to the US tax burden and we look a bit more like Europe. The only problem is that they have universal coverage and they have lower per capita spending on healthcare than we have in the US.

Most American's live in a fantasy world. They know little about anything that is really important and they know a lot about what's happening on their favorite TV shows. I guess conservatives and the conservative media like it that way.

More China Bashing from the WSJ

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The WSJ has found another reason to prove that China's economy can't be as good as the US economy and faux democracy in the US. Its hard to get a good read on China for many reasons but the WSJ found the problem that it wants to find. The article suggests that the fall in real estate values in China is like the collapse of the housing bubble in in the US. Housing prices have declined but China's bubble has been well short of the US bubble and China's banks are not holding trillions of dollars in toxic assets.

China may not be able to continue to grow its economy at 10% but the WSJ will keep finding reasons why China will fail because it wants China to fail.

Wall Street Journal Article Blame's Obama for Bad Economy

link here to article

Martin Feldstein is a senior economist who worked in the Reagan administration. This article reflects standard conservative dogma and puts the blame for our weak recovery on the Obama administration. He correctly argues that the stimulus should have been bigger but conservatives would have never voted for a bigger package. They also would not have voted for a stimulus without tax cuts. Feldstein argues that the focus should have been of increased government spending which has a higher multiplier than tax cuts. He is correct but his conservative friend in Congress would not have voted for a stimulus that was not tax cut heavy.

He also points out that wages have not grown and that consumer spending has been weak. He is correct but he fails to point out that real wages only grew 4% in the last decade. I believe that someone else was in the White House during most of that period. He then suggests that business investment has been weak because business does not like Obama policies. He should know that business responds to consumer demand more than it does to any government policies. Changing government policies to encourage business confidence is not the answer to weak business investment. Consumers need income in order to spend and they entered the recession with historically high debt to income ratios. Consumer demand won't change until wages grow and debt deleveraging slows down.

Feldstein then turns to longer term problems of deficit reduction. He wants to cut deficits while making the Bush tax cuts permanent. In other words, tax cuts that go primarily to the top 1% would be paid for by cutting social programs. Sadly, Feldstein and the WSJ care more about tax cuts for the wealthy than they do about deficit reduction.

This article could be used as a classic example of conservative economic propaganda that is sponsored by the WSJ and supported by a senior economist whose better days were in the 1980's.

Lobby's Don't Always Win

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The Dodd/Frank banking reform bill has been challenged by bank lobbyists, most of whom were formerly in the government, but they don't always win. The Senate defeated a bill that was primarily supported by the major credit card companies that would have delayed a bill, that was previously passed by a wide margin, that reduced bank fees on debit card transactions from 44 cents to 12 cents per transaction. That fee is consistent with fees in Europe where the same credit card companies operate.

The delay bill was supported by a majority in the Senate but it needed 60 votes to overcome a filibuster. The intensive lobbying managed to convince 9 Senators who had voted for the original bill to change their votes but that was not enough to delay the bill. The banking lobbyists were opposed by lobbyists who represented retailers who pay the debit card transaction fees to the banks. Perhaps the real conclusion to reach is that lobbyists have a hard time winning when one lobby is pitted against another lobby.

Tuesday, June 7, 2011

A View of The World Economy by 2025

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An economist from the World Bank believes that the BRICKS along with Malaysia will account for 50% of global output by 2025. That's not too far off.

Financial Times Editorial Board Against Austerity

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The Financial times believes that the risk of double dip recession is greater than the risk of inflation. They want to see more economic stimulus.

World's Top Brands

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This article lists the 100 top brands. Guess which brand has moved into #1.

Why Central Banks no Longer Target Money Supply

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The Fed and other central banks target short term interest rates and the interest rate on bank reserves to conduct monetary policy. That is one of the reasons why I no longer teach traditional monetary policy that was developed in the 1950's. The traditional method of measuring money supply no longer applies in a world of debit cards, credit cards, and Pay Pal. Moreover, velocity has become so variable that the old equations based upon M1 and Velocity make little sense.

Another important point made in this article is directed at those who claim that the Fed has been printing money and that will lead to inflation. That claim is baseless. Banks create money when they make loans. The Fed has taken actions to bolster bank reserves and in the "old days" banks would have made loans with their reserves because interest was not paid on reserves. Since 2008 the Fed can pay interest rates on reserves and they do. Therefore, banks are keeping reserves at the Fed as a safe investment instead of making loans and creating money. Moreover, the bank reserves have been used by the Fed to purchase longer term assets that is another tool that has been seldom used before. Most critics of the Fed who claim that it is printing money do not understand modern monetary policy.

How Does a Corporate Police State Operate?

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The British Columbia Supreme Court accuses Cisco, the Police and US prosecutors of an egregious breach of process in an attempt to extradite a whistle blower who Cisco wanted to intimidate. You can read the story but it is clear that Cisco was able to get the US police and US prosecutors to charge the whistle blower with 97 criminal charges in order to attempt the extradition from Canada. Cisco later dropped the charges which were without foundation. This article raises the question of whether this is a signal of how far the US has moved in the direction of Corporatism.

Do Canadians Flock to the US for Healthcare?

This graph shows the number of Canadians who come to the US for healthcare. It should dispel one of the several myths about the Canadian system and why the US system is better.

Sunday, June 5, 2011

The World Needs a New Technology Revolution to Feed Growing Population

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The demand for food has been growing faster than supply. Prices for food are expected to double by 2030. The food supply has been affected by climate change and by rapidly growing cities which consume arable land and ground water. Water shortages and flash floods, along with extreme heat in food growing regions has led to the development of new pests and diseases as well. Efforts are under weigh to develop new technologies to boost food production but governments have not lived up to their commitments to fund the research. The Gates Foundation has put billions into the research but more support is need from government. The Obama administration made a large commitment to the research but Congress has cut the commitment sharply.The short summary of this article is that the era of cheap food is over.

Saturday, June 4, 2011

A Tale of Two Economies

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This article from the Harvard Business Review describes the unfortunate trend in the US economy that is affecting the middle class. Large corporations learned to be lean during the recession. They cut large numbers of middle management positions and filled lower paying jobs with temporary workers. They have continued with this after the recession and they are experiencing record profits. We are likely to see a continuing erosion of job which support a middle class lifestyle. 60,000 of the over 200,000 jobs created in April came from a single company: McDonald's. Unless America finds a way to create middle class jobs we will move toward a two tier economy. A small number of executives and entrepreneurs at the top and a large number of workers, including many with college degrees at the bottom.

Friday, June 3, 2011

Even Bad Democracy is Better Than The Alternative

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It is easy to by cynical of our politicians. i am often guilty of that myself. It is discouraging to observe the capture of regulators and even government by special interests. Dani Rodrik tells us that lobbyists are pervasive everywhere that important decisions are made. That includes NGO's like the WTO and the IMF. He argues that economists who take an anti government position do not value the necessary role that government plays in developing the infrastructure that allows markets to work. He would rather give the democratic process and the nation states a bigger role in managing the global economy. Democracy, depute its flaws, is better than technocracy.