Sunday, July 31, 2011

Why Voters Turn Off When Democrats Speak

link here to article

This article describes the growing frustration of the electorate. They believe that the system is rigged against them and they don't trust government to change that dynamic. Many have described themselves as conservatives for that reason. If government is part of the problem they don't expect that democrats, who they associate with government, will fix it. Republicans, who they perceive as anti-government, have won their support by default.

Not Only Do Zombie Ideas Live But Some Zombies Are Alive and Prospering

link here to article

Alan Greenspan tells us that higher capital requirements for banks would lead to the stagnant use of resources. This article explains the fallacy. It does not explain why Greenspan is advancing the idea. His major clients are Wall Street bankers whose compensation is based on return on equity. The higher the equity they have to hold, the lower their potential compensation. Of course this also means less risk that needs to be supported by the taxpayer. Banker compensation is dependent upon the subsidization of risk by the taxpayer. Its an insurance policy with no premium demanded.

The Moral Consequences of Economic Growth

link here to article

This interview was published in the spring of 2009. It raises a number of questions and provides some answers that are food for thought.

Some good things happen with the right kind of economic growth. Social mobility is an important consideration. When people feel that they are not limited by accidents of birth, and that they can participate in economic growth, they are happier and more supportive of opportunity for others. They are also more tolerant of diversity. They support racial integration, immigration, gay rights, gender equality etc. etc. They are also more generous to those who have been less lucky. Democracy is also strengthened and nurtured in less developed countries as well as in mature democracies.

The bad news is that economic stagnation produces a retreat from the good things that happen in periods of good economic growth. Support for economic mobility wanes. People are less supportive of diversity. They are less generous toward the poor and the democratic process atrophies. If we look at what is happening in the world today as a result of slower and less equal economic growth, we see a retreat from things that would otherwise be valued.

Rising incomes don't necessarily make us happier. Per capita GDP is much higher than it was 30 years ago but people are not necessarily happier. Well being comes from the feeling that things are getting better for us and for others. We are happier when we are optimistic about the future.

There are also issues around economic growth and the environment. As countries become richer they have more concern for clean air and clean water. Many of the strongest supporters of environmental quality are individuals who feel well off.

Resource depletion is an issue but that is what the market is supposed to be good at fixing. Oil prices will rise as it becomes scarce and the search for new sources of energy will be stimulated as the consumption of oil declines.

Climate change is the most pressing issue that we face and we do not have a governance structure in place to deal with it. There are solutions but each nation has to be willing to give up some of its sovereignty, along with the recognition that we share a common atmosphere. This is easier to do in some countries than in other countries. Rich countries have to be willing to provide leadership since they have more to give up. Poor countries have the opportunity to grow without the burden of legacy costs, and they may point the way toward new forms of growth.

Although this interview was given in the context of the Great Recession, it is important to remember that we had economic stagnation prior to the recession. Rising inequality was obscured by the substitution of debt for income. It is not surprising that the retreat from the good moral consequences of economic growth was started well before the recession. Unlike climate change, however, it can be solved by political actions in the nation state. Whether the retreat continues, and leads to a climate like that in the 1930's, depends upon our political and moral response to stagnation. It is easy to get discouraged about the future, but we can determine the future if we are willing to invest in it.

Saturday, July 30, 2011

Greek Bailout is Actually a Bank Bailout

link here to article

This article suggests that the European plan for dealing with the Greek crisis is primarily a plan for rescuing European banks that are at risk for the Greek sovereign debt. The banks will have to write down a share of the debt that is much smaller than their actual losses, which are reflected in the current market value of the bonds that they hold. Moreover, the remaining debt, held by the banks, is being guaranteed by the taxpayer. Its a big win for the banks, and a big loss for the taxpayer, since future losses are almost certain.

The Costs of Political Paralysis

link here to article

Brad DeLong suggests that he can't talk about political economy until we know what will happen in the war over the debt ceiling. Instead, he outlines some of what has been lost. He lists several things that we should have been doing that were not done, and he laments that the world has been left without a competent super power, as the US continues its descent into political oblivion.

The SEC Has Requested More Information From Shale Gas Producers On Forecasts

link here to article

We posted an earlier article that questioned the data used by energy companies to project the productivity of shale gas wells. The article also suggested that the SEC was not diligent in evaluating financial statement by energy companies that made forecasts of future profits that researchers believed to be overly optimistic.

This article explains why the SEC is asking energy companies to provide more information on the assumptions behind their optimistic forecasts.

What Are Corporations Doing With Their Retained US Earnings?

link here to article

This article suggests that US corporations exist primarily to boost the value of their stock price. This pleases Wall Street and it makes executive stock options more valuable. They are using their surplus capital to buy back their own stock instead of investing in new technologies. For every dollar they invest in R&D they spend 1.5 dollars on stock buy backs. They also lobby for greater government investment in R&D while they do whatever they can to avoid US taxes.

We should not expect anything else from our large multinational corporations. They are only doing what their compensation system tells them to do. The majority of their income comes from stock options. Investing in the future has become investing in short term stock price appreciation.

Advocates of free market capitalism are typically opposed to government led industrial policy. They claim that private industry should allocate resources to their best use. Our large corporations want government to make the risky investments in R&D, which dictate the future of the economy. Their actions suggest that government is better prepared to allocate resources to their best use than they are. Warren Buffet, one of America's most successful investors, does not award his stockholders with dividends or stock buy backs. He argues that he will only do that when he believes that others can make better investments with his surplus capital than he can. We need more executive like Warren Buffet running our corporations.

Friday, July 29, 2011

Some Data on Income Inequality in the US and Implications

link here to article

By now everyone is familiar with the notion that inequality is increasing both globally and within the US. This article describes the pattern in the US. The implication of rapid income growth in the top percentiles is that income does not grow as fast, or at all, in the lower levels.

Our slow recovery from the Great Recession may be partially caused by rising income inequality. The large middle class has less to spend and the top percentiles save a good share of their gains in income. This reduces GDP and our large multinational corporations shift their focus to countries with a rising middle class. The upper echelons of these corporations do not care where the revenue or profit growth comes from. They cut costs by off shoring to lower wage countries and watch their profits and stock prices increase as their price to earnings ratios increase. There is no recession for most of them and for many in the professional class.

A Comparison of Problems in Europe With Those in the US

link here to article

Simon Johnson compares the problems in the US and Europe in this article. Europe has the biggest problems. In a sense, they are suffering from something like our sub-prime housing bubble problem. Many countries were able to borrow, primarily from other European banks, at AAA interest rates without the means to service the debt. Their moral hazard was the expectation that they would be bailed out by the economically stronger countries if they got in trouble. Well they got in trouble. Now Europe must find a way to save the Euro, which benefits the entire euro zone, without an effective fiscal governance structure. Their other problem is that one of their largest export markets, the US, is not growing very fast. This will make it harder for Europe to grow its way out of difficulty.

The US has its problems as well. Fortunately, its real fiscal problem occurs around 2021. Unfortunately, its governance problems preclude directing attention to its real long-term fiscal situation. Washington is primarily concerned with its short term budget deficits. It is being forced by politics to take steps that will reduce economic growth and exacerbate its deficit problems by cutting government spending while the rest of the economy is also cutting spending.

Thursday, July 28, 2011

China's Response to US Fiscal Nonsense

link here to article

This article describes China's reaction to US Fiscal policy as it looks in disbelieve at the political dysfunction in Washington. They no longer trust the US to protect the value of the dollar. Consequently, they will slow down purchases of US assets. This means that they will also shift their economic strategy from reliance on exports. They believe that this is necessary not only because of the risk to the dollar but also because they see economic growth slowing down in the US, Europe and Japan.

In order to develop a more consumer driven economy, China will develop the service sector of its economy and it will invest in urban development and a stronger social welfare system.

The US will face serious problems selling treasuries to fund its debt as China backs away from its export focused strategy which required the purchase of treasuries to maintain the peg of its currency with the dollar. It will have to increase domestic savings and face the risk of higher interest rates.

Is The S&P Behaving Like Murdoch?

link here to article

This article reports that S&P is disclosing its rationale for rating US treasuries to bond investors. If they are doing this it is against the Dodd/Frank law. The real problem, however, is that they intend to downgrade US debt unless it gets its debt to GDP ratio to a specific level by a specific time. That would require US debt to fall by $4 trillion over that period, and GDP must grow at 3% in order for that to happen. It is unlikely that GDP can grow at 3% while government is cutting spending by the required amount. The problem in the US is not debt. The problem is that US business has stopped investing in the US economy. Business investment has grown slower that GDP which implies that business is divesting in the US economy.

This article compares S&P to Murdoch on the grounds that both have been able to influence government behavior by using their particular powers.

Voodoo Economics Is Spreading To The UK

link here to article

When George W. Bush ran against Ronald Reagan for the GOP presidential nomination, he coined the voodoo economics phrase. It described his view of the Reagan plan to cut taxes in order to GROW federal tax revenue. Reagan won the nomination and the election despite his belief in Voodoo.

This of one of the zombie ideas that will not die. One of the problems with zombies is that they are the living dead and cannot be killed. The GOP still believes in voodoo economics in the US. They keep saying that cutting taxes will raise government revenue and its base lifts its tea cups in response. Since tea is even more popular in the UK than it is in America, voodoo economics has crossed the ocean. Politicians in the UK are making the same claim made by Reagan. They argue that cutting the VAT will stimulate the economy and increase tax revenue by more than the loss from the cut in taxes. This article in the Financial Times is intended to kill the zombie idea but we should remember that zombies cannot be killed.

New Home Construction Is Weak and Won't Recovery Until 2014 If Things Go Well

link here to article

A study by the San Francisco Fed shows that new home construction is at the lowest level in decades. It concludes that construction will not return to its normal rate until 2014. If their assumption about the foreclosure rate is too optimistic, the return to normality will take much longer. Government should be doing something about limiting foreclosures if it wants the economy to recover sooner.

New home construction is more important to the economy than most people recognize. With the exception of the boom under Clinton, new home construction led the economy out of all of our previous recessions. The recessions were triggered by increases in the Fed interest rates which curtailed new home construction because the market is interest rate sensitive. The Fed lowered interest rates to end the recessions by stimulating new home construction.

Why Global Warming Requires Global Policies

link here to article

The European Union has implemented a carbon trading scheme that was part of its commitment to the Kyota Agreement that the US failed to support. It will affect US airlines that fly into European airports. They are less efficient than European airlines and will be more affected by the carbon trading requirement. The Obama administration, although nominally committed to a cleaner environment, is objecting to the carbon trading plan. It argues that Europe has no jurisdiction over US airlines flying across the ocean. China is working out a deal with Europe.

The carbon footprint from air travel is especially damaging because the emissions occur high in the atmosphere. This issue shows how important it is for global agreements on environmental protection. We share a common atmosphere and we inhale the same air. The US was a laggard under Bush and the current political scene in the US does not auger well for US leadership on the environment.

Concerns Over Euro Support Dollar Rise

Despite problems in the US with the debt ceiling crisis, the US dollar is rising in value. Investors are more concerned about the future of the Euro than the dollar. Problems in Italy are the current concern. The economy is not growing and its government is looking like the US Congress.

The Swiss franc, on the other hand, is doing better than the dollar or the Euro. It is up 17% for the year against the dollar.

We Have to Prevent Government From Destroying The Economy by Protecting the Environment

link here to article

The GOP environmental wrecking machine is at it again. They are doing the bidding of their financial backers in the energy industries by cutting funding of the EPA by 17% and by restricting the scope of various government agencies. They claim that government regulations of the environment are responsible for our slow recovery.

Its easy to understand the behavior of the energy companies. They care only about increasing the value of executive stock options. On the other hand, its hard to understand why the poor slobs in the tea party want to endanger public parks, like Yellowstone, which they tend to use.

Wednesday, July 27, 2011

Which Cult is Destroying America?

link here to article

I'll bet that you didn't make the right guess. This article is about another cult. It is the cult that reports the news and makes believe that both sides are equally at fault. This cult believes the there is some middle position that must be correct. We have a centrist president, who is conceding on almost every point in the debate with the cult that has taken over the GOP House, and the media are reporting that there must be some place in the middle that is better than the positions held by either side.

We had a name for those who took positions that were obviously wrong. We placed them in the "flat earth society". The assumption, of course, was that it was pointless to listen to them any further. We did not believe that there was some middle ground between a flat earth and a round earth. Today we have 97% of the climate scientists in the world pointing to evidence that supports global warming. Yet many in the media believe that they have to give equal time to the 3% who believe otherwise. There are even some in the media who argue that the 3% are correct and about half of the population believes them instead of the majority of the scientific community. The flat earth society is much larger than I would have imagined.

Flat Economic Growth in UK Shows Impact of Austerity Plan

link here to article

This article (via Brad DeLong) points to the failure of the Tory plan to boost the economy by implementing an austerity plan. There has been almost no economic growth over the last 9 months. The confidence fairy is still on holiday.

Will The Administration and Congress Let The EPA Do It's Job?

link here to article

Scientists have learned that we would be healthier if the government standard for ozone in the air were set at a lower level. The EPA wants to enforce the standard recommended by the scientists. The usual suspects are arguing that the new standards will be expensive and that it will result in fewer jobs. Curiously, the only time that that we hear politicians talk about jobs is when they object to new environmental standards. They seem to prefer talking about the 2016 federal budget so that they can cut entitlements. In any case, this is another opportunity for the administration to show whether its commitment to public health is as strong as its commitment to winning the next election.

Tuesday, July 26, 2011

Fiscal Policy, Growth and Budget Deficits

This graph shows how federal budgets are affected by three things: tax policy; spending and the state of the economy. We had budget surpluses in the Clinton administration. They were the result of modest tax increases, cuts in defense spending and a booming economy which also increased revenue. The Bush administration deficits were the result of huge tax cuts, increased defense spending and poor economy. The Obama deficits reflect the continuation of the Bush tax cuts and the loss of revenue from a very weak economy. The increase in federal spending is also a consequence of higher transfer payments that occur in recession and the continuation of the military buildup in the mid-east that started under Bush.

The discussions that we see in Washington today about deficits concerns many economists. In the first place, its not good to balance the federal budget in the short term during a period of high unemployment. This will exacerbate the downturn and lead to declining tax receipts and higher short term deficits. Furthermore, eliminating the Bush tax cuts which solve 50% of budget shortfall and cutting back on expenditures in the mid-east, which do little to grow the economy, could also make a big dent in the deficits. In the longer term, the high cost of government funded healthcare is the major problem that we face. Social security is less of a problem. Of course, the economy must also grow at the projected rate so that tax revenues are not reduced. I don't see any proposals that will encourage economic growth, and there is strong resistance against significant cuts in defense. We have midgets in Washington when we need giants.

The US Debt Can Easily Be Serviced Today

This graph from the St.Louis Fed shows the cost of servicing the US debt as a percent of GDP. The ability to service the debt is more important than the size of the debt relative to GDP. The Treasury can refinance its debt at very low interest rates today. There is little reason to believe that the government faces bankruptcy. On the other hand, this does not mean that low interest rates will always prevail and it does make sense to address the longer term imbalance that we face in our fiscal policy if we do not bring spending and income closer together. Fear mongering in the GOP today is mostly about the 2012 election campaign which is based upon fear of debt that it has raised among the public.

What Would Linclon Say About Extortion?

link here to article

Krugman posted comments by Reagan when he was faced with a debt ceiling battle with Congress. Now we get another Republican that was faced with a similar request for ransom. I didn't realize that extortion was so common in our political system. It goes all the way back to Lincoln who found that many could not abide the election of a Republican. Some of our problems today are similar to Lincoln's. Many cannot abide the election of black president. Some southerners would rather secede from the Union than be governed by a black president. They also drink a lot of tea while proclaiming that they are not racist.

If we look at the tea partiers in the US they share many of the concerns that we are seeing in Europe. There is a small, but committed, political force in many European countries that prefer nationalism to political union. Many would like to secede from the European Union. Like the Norwegian assassin, they rebel against multiculturalism and they fear the incursion of Islam which they associate with a detested liberalism. Fortunately, this is a small segment of the polity in Europe. Unfortunately, this group is being funded and organized in the US in order to achieve the objectives of those in the far right of the GOP which it was unable to accomplish without populist support. They may well be creating a monster that they will be unable to control. The western political system is starting to look more like Europe in the 1930's. Only this time the country at risk is the most powerful nation in the history of the planet.

The Bond Market is More Worried About Economic Growth Than Deficits

link here to article

Pimco is the largest bond fund in America. It's CEO assesses the unemployment problem in the US that is being ignored by Washington as our politicians position themselves for the 2012 election cycle. Ironically, both parties are focused on the budget deficit under the pretense that it is necessary to build confidence in the bond market. If Pimco is any example, the bond market is more concerned about the structural problems in the economy that have produced the unemployment. It is also concerned about our dysfunctional political system. The economic problems that need to be addressed are serious, and it looks as though they are invisible to the folks that we elected to run the government. They are doing what they do best, that is electioneering, while "Rome" burns.

One of the points that is made in the article is worth repeating. The financial crisis precipitated the Great Recession, but the recovery has been weak because our economic problems were masked by the unsustainable boom in debt induced spending. We have restored the financial system but growth and employment will not return until we fix the structural problems that have been ignored. I wish, however, that he would have addressed the more important structural problems in the economy. A better education system would be nice but jobs are not leaving the US in order to source more skilled workers overseas.

An Overview of Convergence Between Rich and Poor Countries

link here to article

Dani Rodrik examines the rapid pace of convergence that has taken place since the 1990's and explains the contributing factors. He then looks into the future and points out some of the question marks about its continuation. One thing is clear. The pace of convergence is already creating political problems in the nation states that have little control over globalization that is driven by multinational corporations. Its not clear how this will affect governance.

Monday, July 25, 2011

The Contribution of Internet Social Groups to the Spread of Hatred

link here to article

The Guardian published this article by a woman who belonged to the right wing political party in Norway, and was a Facebook friend of the assassin. She was very concerned that the Internet groups that she belonged to had a common message of hatred against the liberal government and against minorities. She does not argue that this caused the mass murders in Norway, but that the atmosphere of hatred was amplified by the ability to use the Internet to spread the hatred and create bonds between those who shared her cyberspace community. What she described is not very different from some of the Internet postings that create fear of immigrants, Muslims and other minorities, along with the hatred of liberal government in the US.

Analysis of The Greek Debt Plan

link here to article

This is a good analysis of the current rescue plan that was announced for dealing with the Greek debt crisis. It is somewhat technical but it is cogent and brief.

Who Holds The US Debt and What Are the Implications?

link here to data

This article contains a slide show that lists the holders of US debt. The largest single holder of the debt is the Social Security Trust Fund which holds 19% of the debt. That represents the $2.6 trillion in surplus payroll tax revenues collected which were used for other purposes. The Federal Reserve is the next largest holder at 11%. International investors, primarily central banks, hold about 31% of US debt. China and Japan hold 8% and 6% respectively which reflects their trade surpluses with the US.

The treasuries held by investors are assets to them and liabilities to the US Treasury.
Therefore, 69% of the US debt represents assets held by US investors and government agencies. In essence, the US held debt is a form a wealth and the interest payments are a source of US income. The debt held by foreign investors is another matter. The interest payments are a cost of servicing the debt that does not increase US income.

The total US debt is currently $14.3 trillion and the interest payments on that debt are a cost of government. The Treasury refinances the treasury notes when they come due and does not pay down the principle. This means that the cost of refinancing the debt is dependent upon variability in the interest rates demanded by investors.

Saturday, July 23, 2011

An Economic History Lesson for the Historically Challenged

link here to article

Conservatives like to portray Obama as a socialist. Liberals think of Nixon as a far right conservative. Bruce Bartlett, formerly of the Reagan administration, shows us that economic history is poorly understood. He provides a history lesson that reveals Obama and Clinton as economic conservatives, and shows that Richard Nixon was more of an economic liberal than either of them. The Democratic Party hasn't had a real liberal president since Lyndon Johnson, who gave us the "Great Society" on top of FDR's New Deal.

Bartlett's analysis is interesting. I think that we sometimes define Democrats as liberal based upon support for social values rather than on their economic values. Richard Nixon certainly ran for office proclaiming support for traditional conservative social values. That is what defined his "southern strategy" and characterized his campaign strategy. On the other hand, Nixon once proclaimed "that we are all Keynesian's now". Lyndon Johnson understood the difference between economic and social values. After passing the civil rights law, he lamented that democrats would never again carry a southern state. He was almost right. The previously "solid south" which voted democratic since the civil war, became the republican solid south. That happened despite the popularity of the Great Society programs in the general population, including the south.

Why Social Security Tax Receipts No Longer Match Payouts

link here to article

Robert Reich, a former Social Security trustee, explains why the 1983 fix to Social Security no longer works. It is due to the rising share of income going to those whose wages exceed the payroll tax cap. Raising the payroll tax cap to reflect the shift in wages is all that is needed to keep Social Security tax receipts in line with payouts.

Reich is correct in his analysis but one of the problems is that government has been borrowing the Social Security tax surpluses that it has collected since 1983, and it owes the SS Trust Fund trillions of dollars. Paying off that debt adds to US deficits rather than reducing them as it has done in the past. In a sense there is no SS Trust Fund. It consists of Treasury Bills and interest on the Treasuries that have been spent on other government programs.

Fundamentalism and Global Warming Denial

link here to article

This article explains how several of the extreme weather events that we have recently experienced are connected to the science of global warming. Most of you already know this stuff but its important to understand the resistance. For example, Florida had a an unusually cool winter this year and it was used as evidence by right wing commentators like Rush Limbaugh to deny global warming. One of my relatives, who happens to belong to the Florida tea party, declared on Facebook that "I told you that Al Gore was crazy". They of course made the common mistake of using a single weather event to deny global warming. On the other hand, the extreme heat that has broken records in many parts of the country is regarded as an exception, it is not viewed as evidence for global warming. There is no way to convince a large segment of the population that global warming is real by using evidence. Many of the deniers are similar to those who want to eliminate evolutionary theory from school textbooks despite the overwhelming evidence for evolutionary theory in biological science.

Not too long ago groups like the tea party would have been ignored as ignorant extremists. Today they have been organized into a powerful political force that can determine election results in most of the southern and rural states. They attend church on a regular basis by listening to Rush Limbaugh and others on talk radio and they can hardly wait to watch Fox News in the evening to have the days events explained to them according to the gospel of right wing extremism. Even well educated and very smart politicians like Mitt Romney are forced to deny global warming in order to win the GOP nomination for the presidency. The inmates are running the asylum, and it is very dangerous for the US and the rest of the world.

Friday, July 22, 2011

The Best Explanation of The Jobless Recovery Today and For Future

link here to article

This article summarizes a report published in the current issue of Foreign Affairs. It was primarily about job growth in the US but some of the findings of the study will apply to Europe as well. The results are sobering and should be read by everyone who wants to understand why job growth has lagged growth in GDP.

GDP was broken into two segments: One is for tradable goods such as manufactured products and the other is for non-tradables such as medical and legal services. The US economy created 27.3 million jobs between 1990 and 2008. Only 620,000, or 2.3% were created in the tradable sector!!! The non-tradable sector accounted for almost 98% of the jobs that were created. Since most of these jobs are not as high paying as jobs in the tradable sector, it also helps to explain rising income inequality.

It is instructive to look at Apple Computer's iPad as an example of a tradable good. The parts and assembly were off shored to low wage countries. About 42% of the iPad price was retained as gross profit by Apple in the US. The gross profit paid for marketing, engineering and administration in the US and thus added to GDP. The addition to GDP required a relatively small number of new employees. Therefore, the success of the iPad improved GDP without creating many new jobs.

Countries like China, India and Brazil have been providing the low value added manufacturing but they want to move up the value added chain. There will be more competition for the high valued added jobs in the tradable sector over time.

The non tradable sector which produced 98% of the jobs in this period consists of government and healthcare services which accounted for 40% of the new jobs. Retail and construction followed government and healthcare in providing the most jobs. Much of this growth, however, depended debt and the housing bubble.

Everyone is looking for government to fix the job growth problem but what is being proposed by politicians. They want to reduce spending by government and healthcare which has produced 40% of the job growth over the last 18 years. Little can be done about construction jobs until the housing market recovers and that will not be soon.

Unfortunately, in addition to reducing job growth in the two areas that have produced most of our new jobs, the other proposals that are coming from government are wide of the mark. Helping to fund new high tech start ups will contribute to GDP but it won't create many new jobs. Google, Facebook and other high tech companies employ a very small number of people. Training more Americans for technical careers won't help much either. The number of workers required to perform this work is small relative to the employment gap. In general, we will have to find ways to grow jobs in the tradable sector. That means investing in new areas that will grow and create opportunities for a wider range of employment opportunities.

Why Not Use a Carbon Tax to Cut Deficits?

link here to article

The Economist raises the rhetorical question of why a carbon tax is not included in the mix of options being discussed in the US. Brad DeLong knows why the GOP does not want to use the carbon tax to reduce the budget deficit. After all, they use the deficit problem as a way to cut government spending in order to pay for tax cuts. The question is why it has not been put on the table by the democrats. I guess the answer is that they won't propose anything that the GOP will not support.

Old Age Dependency Ratios Across Geographic Sectors

This graph tells an important story. The largest economies in the world have the highest dependency ratios. The implication is that they will have lower growth rates and government provided age related benefits will be more costly per worker and not easily covered by higher economic growth rates.

Wage Growth and Profit Growth as Percent of US GDP

This graph shows the trends of wage growth and profits in relation to GDP. In recent years wages as a percent of GDP has declined. This is probably due to the rising costs of healthcare benefits as well as to slower growth in money income. Corporate profits in the last couple of years have risen to a high level as percent of GDP. Profits have grown faster than GDP. It would appear that the recent growth in profits is related to the decline in wages in that period. Corporations have been able to grow revenue with fewer workers.

Overall compensation which includes benefits, as well as non-cash income from stock options, has been more stable as a percent of GDP.

Thursday, July 21, 2011

Another Zombie Idea is Revived

link here to article

This article (via Manan Shukla) has a common theme. Where is the outrage?

Politicians are getting line to provide a tax holiday for US multinationals under the guise that it would stimulate the economy. We did this before and it did not work. It was attacked when it was proposed earlier but it is another zombie idea that won't die. I guess we need to put together the zombie ideas that have not worked and distribute them.

Do Young People Choose to be Unemployed?

link here to article

This is another good post today from Mark Thoma. It has a good relationship to the post below on establishing countervailing power in the US. The University of Chicago's economic department has a lot of bright people who serve a common purpose. Their common purpose is to reinforce the micro economic ideas of 19th century England that have been used to show that government cannot effectively moderate the business cycle. They have specifically directed their attack against the ideas of Keynes who argued that full employment depended upon adequate demand, and that government could take actions to stimulate demand and attain full employment during a recession.

Casey Mulligan is one of the many prominent Chicago economists who have attempted to make the case against Keynes and government intervention in the economy. He recently wrote that young people are unemployed because they choose not to work. This is one of the common themes among conservative economists. They use many arguments to place the blame on labor and not on the availability of jobs. Mulligans data in support of his argument is presented and attacked in this article. There are numerous Casey Mulligans in economic departments, and in conservative think tanks for good reason. They make the case for the groups that provide the funding and determine what articles get published in the right journals on the path to tenure. One of the goals of progressives should be to put all of the conservative myths together, along with the evidence against them, in order to provide the antidote to the poison that they distribute. We seem to be in the position of putting out the multiple doses of poison that pollute the environment instead of attacking the source of the poison. It all comes from the same well of laissez faire economic dogma.

Need for Countervailing Power in US

link here to article

This article does a good job of describing the differences between Europe and the US. Labor unions in most European countries provide a voice and countervailing power in politics. Consequently, there is less income inequality and a greater share of tax revenue is directed towards social programs that increase well-being in Europe than there is in the US. Europe looks more like the US did before the revival of conservatism and the arrival of the post-industrial society. Its not perfect, but the average person has more security and social support than the average person in the US.

Its not likely that the labor movement will be revived in the US. In the absence of countervailing power we can expect that living standards for the average American will continue to decline and what remains of the social support programs will continue to erode. Government will continue to become less democratic as well. The high cost of running for political office in the US makes political candidates dependent upon those with the means to fund the campaigns. So whats to be done?

There are several recommendations in this article for organizing the various progressive elements that are splintered today in the US. There are lots of progressives but they are fragmented. The problem is to bring them together. Labor organizations may be part of the solution but they have been so weakened that they cannot provide sufficient leadership. The Green Party in some European countries has become an important force for progressive ideas that go beyond environmentalism. They understand that environmentalism cannot stand alone against the anti democratic forces that they have to contend with. We need something like the Green Party in the US.

In addition to organization there are several other suggestions in this article on tactics. Conservatives has shown how public opinion and the political debate can be shifted in their favor. It can be done by progressives in the US.

It is important to remember that competition in the world of ideas is a good thing. We need more competition rather than less, but it has to have a common goal of providing countervailing power against the anti democratic forces that are turning the US into a plutocracy. As Lord Acton said "Power corrupts, and absolute power corrupts absolutely". We can't continue to let freedom in the US be redefined as the freedom of corporations from democratically elected government that serves the public interest.

James Murdoch's Testimony Has Classic Quote

And I'm not saying that somebody should have told me. To my knowledge certain things were not known. And when new information came to light, with respect to my knowledge of these events, when the new information came to light, the company acted on it, and the company acted on it in a right and proper way as best the company could. But it's difficult to say that the company should have been told something if it's not known that a thing was a known fact to be told.

This quote (via Talkingpointsmemo) from James Murdoch's testimony is amazing. His legal team must have messed up his brain with conflicting advice on obfuscation.

Wednesday, July 20, 2011

Reagan Makes the Case For Raising the Debt Ceiling

link here to article

The US debt ceiling was raised 18 times under Ronald Reagan. The democrats played back some of Reagan's concerns about the disaster that might befall the nation if the ceiling were not raised. The article also points out that the national debt increased under Reagan by a factor of 4 from $1 trillion to $4 trillion, and that Reagan was forced to raise taxes in order to deal with the deficit.

Most people already know most of this Reagan history. Comments on the article from conservatives were interesting. They have placed their god on a pedestal and they invented all kinds of reasons why true believers should not pay any attention to a "leftist" reporter from the main stream media (Few progressives would claim Milbank as one of their own). Its almost as if the press repeated passages from the Bible that contradicted what they believed.

More Data on Claim That Hoover Increased Spending in Great Depression

link here to article

Some conservatives have argued that Herbert Hoover increased government spending in the Great Depression and that he has been wrongly accused of refraining from the use of fiscal policy to counter the depression. Brad DeLong provides a graph that shows that federal spending did increase in the last year of the Hoover administration but that it would have been flat if Congress had not overridden his veto of the veteran's bonus. He asks whether this supports the claim that Hoover increased federal spending.

Private Sector Spending is Growing Faster Than GDP

This graph shows that private sector GDP growth has been pretty good relative to the low base in the recession. It excludes government spending and net exports (which are negative) from GDP. Private sector spending has been much better than critics of the administration claim. Total GDP has been held down by lower growth in government spending and negative net exports.

This Firm Will Help You Set Up an Offshore Account and Avoid Taxes

link here to article

This is a link to an ad that popped up after I posted the article below on Panama as a tax haven. This firm will instruct you on how to set up an offshore account that might serve as a tax haven.

US Plans To Extend Free Trade Agreement to Tax Haven

link here to article

This article describes the banking system in Panama which is second only to Switzerland as a tax haven for wealthy corporations and individuals who want to evade taxes and protect their assets from legal claims that might occur. The US government is planning to extend a free trade agreement (FTA) to Panama, and this article explores the rationale. The president argues that the purpose of the FTA is to encourage US exports and increase jobs in the US. Panama is such a small economy that a FTA would have only a small impact on US exports. Apparently, the real motivation is the facilitate the free flow of capital across international borders. The major banks in the world have branches in Panama that benefit from the FTA.

The article provides links to law firms and banks that are prepared to set up offshore banking accounts and/or to enable the establishment of a corporation or trust in Panama. The easiest way to avoid taxes and provide protection for one's financial assets, would be to set up a corporation. You could put all of your financial assets into the corporation and there would be no taxes on the earnings. You would have complete control over the earnings and the assets of the corporation. Moreover, the assets that are held by the corporation would not be subject to any legal claims that might be directed towards you as an individual.

I think that we should publicize Panama so that everyone could avoid taxes just as the "smart money" does. Only the poor should have to pay taxes.

Inflation Fear and Rising Gold Prices

link here to article

The price of gold has risen rapidly along with inflation fears that have been widely publicized by commentators like Glenn Beck and the hedge fund guru John Paulson. The gold market is a relatively small market, and small changes in market sentiment can produce wide swings in the price of gold. In other words, investors should understand that the market can be manipulated in both directions. I suspect that John Paulson will benefit from swings in either direction.

Cameron and Murdoch Plead Ignorance

link here to article

The British Prime Minister and Rupert Murdoch defended themselves yesterday. Their defense was totally predictable. They both pleaded ignorance. This is just another example of failed leadership. If they were ignorant of what was going on, they are incompetent and should not be in a position of leadership. If they established a culture in which illegal activities were encouraged or overlooked, they must accept the blame for what happened.

Tuesday, July 19, 2011

Elizabeth Warren Is Too Good To Be Part Of The GOP- Light Party

The conventional wisdom is that Obama nominated a politician from Ohio to head the Consumer Protection agency proposed by Elizabeth Warren because the Senate would not confirm her. This article, (via Manan Shukla) tells a different story. Unfortunately, it is a story that fits into a pattern that is disturbing to many. This administration is not that much different from the despised Bush administration.

Keynes Does Not Assume that Governments Spend More Wisely Than Individuals

link here to article

One of the false arguments that are made against Keynesian theory is that it assumes that government can spend money more productively than individuals. The GOP minority leader made that argument but so has a prominent economist from Chicago. Krugman destroys that false argument very easily.

The GOP Is Not My Father's Party

link here to article

David Brooks disowns the version of conservatism that has turned his party in a laughing stock, which has become a threat to society.

The Murdoch Scandal Teaches Us About What We Have Become

link here

Roger Cohen uses the example of the News Corporation scandal to hold a mirror up to the society that enabled a criminal enterprise to feed garbage to its audience and hold governments hostage to its ability to shape public opinion. Rupert Murdoch is a product of Anglo Saxon social systems that have put everything up for sale on the market. Murdoch explained his success very simply. He told us that he gives the people what they want, just as any business does. In doing so he corrupts them as well as the governments that take advantage of his power to influence elections.

Have Conservatives Put Keynsian Fiscal Policy Out to Pasture?

link here to article

The use of fiscal policy in recessions has well know problems. In theory it makes sense for government to increase spending when consumers and business cut back on spending and unemployment is the consequence. The failure to use fiscal policy properly has its own problems. Its easier to increase government spending in a downturn if the government runs budget surpluses in good times. Trying to pass a stimulus bill after the expensive, and unpopular, bailout of the financial system was politically fraught with peril. It was also a mistake to believe that the government could ask for more stimulus if it underestimated the extent of the recession. The failure of the stimulus to work as predicted proved to its opponents that fiscal policy does not work. The failure to plan for the best uses of government spending during a downturn also created problems. Congress is not set up to figure out how to spend vast amounts of money quickly.

In addition to the well known problems in the use of fiscal policy, there were deeper issues that surfaced during, and after the debate, over its use. Many of the unresolved issues over the role of government in society colored the debate. It was a replay of the debates that occurred during the Great Depression of the 1930's. Conservative politicians and conservative economists had been working hard to overturn the New Deal and the economic ideas of Keynes for over half a century. They were not going to let a little thing like the Great Recession interfere with the progress that they had made. The greater issue at stake was that of the dominant ideology that shaped the way people think about the economy and its relationship with government. Neo-liberal ideology itself was being called into question.

The autopsy of the Great Recession and the ineffectual use of fiscal policy has produced its verdict. It will be difficult in the future to use fiscal policy as tool that is needed when monetary policy becomes less effective. But the bigger casualty may be the polarization of society and the lack of confidence in the ability of our political system to deal with practical issues that affect everyone.

Mutual Dependency Between the US and China

link here to article

How the US and China are joined at the hip. The US depends on China to fund its debt and China depends on the US to maintain the value of the $1.5 trillion it holds in its reserve account.

Monday, July 18, 2011

Progressive Proposals Are Ignored by the Media in the US

link here to article

Paul Ryan's Road Map, was promoted by the 87 freshmen reps in the House who were elected as Tea Party supporters. It passed in the GOP house and all but a handful of GOP senators voted for it. Of course it had no chance of passing in the Senate and Obama certainly would have vetoed it. In other words, it had no chance of becoming law but it was broadly covered by the media and Ryan has become a media darling.

This is a link to a budget reduction package that was proposed by 83 members of the progressive caucus in Congress. It fixes the deficit by cutting military spending and by making the tax system more progressive. Like the Ryan plan it has no chance of becoming law. Unlike the Ryan plan, however, few have ever heard of it because it has been ignored by the media. I posted the plan primarily to show how political debate in the US is framed by the media. Conservative plans receive lots of attention, and they are compared with compromises being offered by the administration, which agree to spending cuts on social programs that the GOP does not like, but which do little to cut military spending. The administration plan includes some tax increases but the deficit is reduced primarily by spending cuts.

The conclusion is that political debate in the US is between the far right of the GOP, and a center right administration. The media pays little attention to ideas that are left of center even though much of the public supports many of the ideas in the progressive plan for reducing deficits. This contrasts sharply with the political debate in the Pre-Reagan era. William Buckley, a prominent conservative, rightly complained at that time that the political debate in the US was between the far left and the center left. Conservative viewpoints received little attention in the media. Beginning with Reagan, conservatives have done a remarkable job of turning things around. They have made free market ideology the dominant ideology that shapes debate. The myth of free markets is assumed, and the debate is over how to deal with modest imperfections or market failures.

Herbert Hoover Speaks in 1932

link here to article

This is a link to a 1932 statement by Herbert Hoover on why he opposes a bill in the House, supported by the Democratic Party to award veterans a lump sum prepayment of benefits due to them. His reasoning is very similar to what one hears from the GOP today. Managing the deficit takes precedence over other things and this bill might even destroy the value of the dollar via inflation.

Will The Murdoch Scandal Impact News Corporation in The US?

link here to article

The Murdoch scandal in the UK is mushrooming. Several News Corporation executives have been forced to resign and the head of Scotland Yard has resigned. If the investigations implicate the News Corporation in bribing police officials, Murdoch may lose what remains of his political support in the UK. This article suggests that the News Corporation may face problems in the US as well. It will be interesting to see how this plays out in the US. The uproar in the UK over the illegal hacking, and bribing of the police, has been fierce. Certainly, the reputation of the News Corporation as a provider of reliable information has been destroyed, along with its ability to shape public opinion and perform its duties as a branch of the conservative government. My guess is the American Exceptionalism will play a role in the US. The Tea Party crowd could care less whether the News Corporation is a criminal enterprise. They will support any news organization that tells them what they want to hear. The conservative party in the UK has backed away from the Murdoch scandal. My guess is that the GOP will not do so in the US.

Can Wall Street Get the GOP House to Raise Debt Ceiling?

link here to article

Dean Baker argued that Wall Street would be damaged if the GOP House refused to raise the US debt ceiling. This article suggests that Wall Street has no influence over the 87 freshman reps in the House who wave the Tea Party flag. Consequently, it is foolish to believe that Wall Street can influence the House.

Perhaps the issue is whether the Tea Party has taken over the GOP, or whether it is just a splinter group within the GOP. The focus of the Tea Party on federal spending cuts, and tax cuts, is clearly consistent with the "starve the beast" tradition within the GOP well before the Tea Party came along. The role of the Tea Party is to get the vote out at the grass roots level. The GOP leadership, which can be influenced by large campaign contributors, has a tough balancing act on its hands.

Sunday, July 17, 2011

The Consumer Is Dead But Nothing Can Be Done About It

link here to article

This is another perspective on the slump in consumer spending which is behind the slow recovery. Spending on consumer durables has fallen steeply, new home sales are down, along with spending on the appliances and other things that go into them. Spending on services like insurance is also down. The reason is simple. A large swath of the population doesn't have the income to spend and their borrowing has been limited by the decline in home equity. When consumers don't spend, business is reluctant to spend as well. The economy is the sum of consumer spending, business spending, government spending and net exports. We have a Congress that also wants to cut government spending and net exports are negative so they don't help either. What is so hard to understand about this?

After explaining the decline in our consumer economy, the article turns to the problem of finding a replacement for it. It is pointless, however, to talk about what what might replace consumer spending because we have a broken government. It is unlikely that we can repair the broken government, in my view, as long we have a population is that is fed a diet of nonsense from criminal enterprises such as the Fox Corporation, talk radio, and even our more progressive media which refrains from calling the virus infected GOP an obstacle to progress. The US House of Representatives is being led by a political party infected with the Tea Party virus. The virus was created and planted by a radical segment of our society that has the power to shape public opinion and elect public officials who view government as a public enemy.

Saturday, July 16, 2011

AAA Debt Expansion and Shift to Sovereign Debt

This graph shows the trend in the expansion of AAA debt. Initially it was primarily from the manufacturing of AAA debt by Wall Street and GSE's during the housing bubble. The latest surge in AAA debt is led by sovereign debt that is being issued to deal with budget deficits and the risk of default in the euro zone.

Auto Sales Differ In Countries With High or Low Household Debt

link here to article

Krugman presents a graph done by others who are trying to explain the slow US recovery. The graph shows that auto sales rebounded after the recession in low household debt countries but did not rebound in high household debt countries. The explanation for the slow recovery is explained by household debt deleveraging.

This explanation leads to the problem of government's role in fixing the household debt problem. The focus has been on fixing the problem of bank debt and Krugman plans to direct his attention to how we can fix the household debt overhang problem.

Its Food and Water Scarcity Stupid

link here to article

This article (via Mark Thoma) shows the problems of water and land scarcity that threaten political stability. The problem will be magnified by global warming but that is not discussed in this article. It is not necessary. Even without global warming, and changes to weather patterns, water and food supplies are essential resources that become scarcer as population increases faster than supply.

Keynes Versus Hayec

link here to article

There is a popular rap treatment of the Keynes versus Hayec debate that obscures the issues on what to do during a recession. Hayec turns the issue into one of central planning. He has no answer for the question on what to do in a recession. Keynes was not a central planner either. He realized that the economy could settle into a deep recession with high unemployment, and that the government could take actions to reduce the curse of unemployment, and maintain the market economy that was threatened by high unemployment.

Conservatives today still use the Hayec trick to their advantage. When democrats are in office they portray government actions to stimulate the economy as central planning or socialism. Government under a GOP administration operates much like governments under democrats but it was not called socialism when Bush added the drug benefit to Medicare, just prior to the 2004 election, and it was strongly supported by the GOP.

Paul Ryan Once Loved Keynes

link here to article

Richard Nixon once famously proclaimed that "We are all Keynesian's now." This article (via Mark Thoma) illustrates how Paul Ryan loved Keynes in 2001 when he argued that tax cuts were necessary to stimulate the economy that was in a mild recession. Keynes, of course, proposed something similar for economies that were in recession. Governments should run deficits during a recession to compensate for spending cuts by consumers and/or business. Paul Ryan embraced that idea warmly in 2001 when he was advocating for the Bush tax cuts. The GOP will embrace the devil in order to cut taxes for their campaign contributors. They love deficits when they result from tax cuts for the super rich.

Some you may recall the Bush road to the presidency. The US budget was in surplus during the campaign and he argued that we should give the money back to the taxpayers. He changed his tune after he won the election and he used the Keynesian argument that tax cuts were needed to stimulate the economy.

How the Democrats Lost the Populist Rage to the Tea Party

link here to article

Robert Reich was marginalized when he was in the Clinton administration and he lost the race for governor in Massachusetts. His politics, which is the politics of the traditional Democratic Party, may be too radical for the US. In this article, he makes the case for bringing the Democratic Party back to its roots, and he shows how the populist movement that has historically supported democrats has been turned in a virus called the Tea Party.

Is Stronger Leadership from Obama the Best Thing for the World?

link here to article

Given what we are seeing with the transformation of the GOP into the Tea Party, the worst thing that could happen to the world economy is to have the GOP assume the presidency in 2012. That raises the question of the best strategy for the White House. This article suggests that the administration should give the county what it needs now. That is, leadership that has been missing as the president continues to position himself as the responsible alternative to the crazies in the GOP. We would like to see more leadership from the president but what if his political advisers are correct?

The Wall Street Journal Turning into Fox News

link here to article

Now that the Murdoch media empire has been exposed for what it is in the UK, attention is shifting the corruption of the media elsewhere. I good place to start is with the Wall Street Journal. This article describes how it has corrupted since Murdoch purchased it. The Editorial Page has always had a conservative stance but the reporting was generally very good. The WSJ has be turned into Fox News. The editorials are worse than ever but the reporting has suffered as well.

How the German Press Views Politics in the US

link here to article

Der Spiegel provides a perspective on how the German press views the political holy war in the US over the debt ceiling. The consensus is that the GOP crazies are threatening the global economy by their refusal compromise. The US press tends to see the problem differently. Most of the papers attempt to portray both parties as equally to blame for the stalemate.

Thursday, July 14, 2011

Political Scientist Tries to Explain Rising Political Polarization

link here to article

This article explains rising political polarization in terms of income security. Voters who are insecure will favor the Democratic party because it is associated with income redistribution. More secure voters will favor the party that opposes income redistribution. The number of independent voters will decline as the degree of security or insecurity drives them to one of the two major parties.

I find this explanation rather weak. Many Democrats and Republicans have income security but they favor income redistribution because of the social values that they hold. Moreover, many insecure voters favor the GOP because of the values that it espouses. Forty percent of the GOP base consists of evangelical Christians. Many of whom are also in the Tea Party, and most of them do not have income security. They oppose redistribution because they don't want government benefits to go to minority groups that they do not identify with, and they have aligned themselves with the political party that pushes state's rights in opposition to liberal policies that they associate with Washington.

Changes in technology have also encouraged polarization in my view. The development of cable television has led to programming that targets viewers according to their value systems and political beliefs. This was less apparent when the news was broadcast by only 3 major networks which had an incentive to reach the widest possible audience. The Internet has also made it easier for groups to organize themselves and to communicate with each other in accordance with their value systems.
There is little cross communication between groups as they come to rely on the information circulated withing their social communities.

Some Believe that The US Trade Deficit With China Will Fall

link here to article

Mark Thoma provides a link to an article suggesting that the US trade deficit with China will decline even if China continues to peg its currency to the dollar. The argument is that US exports to China will grow faster than Chinese exports to the US. Exports to China will increase because China's growing middle class will consume more high value added products produced in the US. China already has a large share of the US import market and it will not be able to increase that share as easily as US exporters can increase their share of the Chinese import market.

This article reflects the hopes of many in the US. Outside of aircraft and agricultural equipment, I have a hard time coming up with a list of the products that we can sell to China's rising middle class. The US economy is predominantly a services economy. Some services, like insurance and investment banking may be tradable, but many are not tradeable. Moreover, China continues to increase its ability to provide high value added products to export markets. It will be in a good position to meet the rising demand of its middle class with domestic products. China is also investing heavily in developing its infrastructure with the latest technologies. The US is milking the investments that it made in infrastructure, and it is falling behind in the maintenance of its existing infrastructure. Its not clear to me that a nation battling over the extent of government spending on investments for the future will fare against a country that is heavily investing in the future.

Incentives Drive Behavior and Bad Incentives Drive Bad Behavior

link here to article

One of the reasons why banks take on excessive risk and leverage is because of the way that executive performance, and compensation, is determined. The prevailing incentive is return on equity (ROE). Return is maximized by taking risk and using leverage. ROE is maximized by keeping equity low as well. Efforts to raise the amount of equity that banks are required to hold, as a cushion against asset loss, are being resisted by bankers. Tax law and deposit insurance also encourage banks to prefer debt as a source of capital rather than equity. This article does a good job of describing how a faulty incentive system encourages bad behavior and increases the risk taken by shareholders.

Politics Kill US Carbon Capture Experiment

link here to article

Utility cancels most prominent plan to test technology for carbon capture in coal burning plants. The political climate, and the availability of funds from government to subsidize the extra cost, was responsible for the cancellation. The project resulted from an MIT study that concluded that US energy consumption could not be satisfied without the use of coal. The technology for capture and sequester was developed by MIT. The alliance between the GOP and the energy companies will prevent anything being done by government to fight global warming until a crisis makes it necessary. We are likely to be beyond the tipping point by then.

Wednesday, July 13, 2011

Why US Consumption is not Rising?

link here to article

Its somewhat remarkable that many smart people don't understand why the economy has not recovered like it has in previous recessions. The answer is simple. The middle class has lost $7.8 trillion of their wealth in housing and their wages have not grown with rising productivity. They can no longer borrow against their home equity to finance a life style that is not supported by wages. This is a problem that cannot be fixed by educating American's for the jobs of the future as Obama has proposed. The problem is a lack of jobs that provide the income necessary for the traditional middle class pattern of consumption.

Irish Debt Rated as Junk by Moody's

link here to article

Moody's downgraded Irish sovereign debt to junk with warning about future downgrades. The interest rate on 10 year Irish bonds rose accordingly. The Irish government cannot afford to fund its debt at the market rate of interest. It will have to depend on further support from other sources.

The Ryan Plan Has Been Replaced by Phantom Plan

link here to article

The Ryan plan is dead but Ryan lives. The latest GOP fund raising letter features Ryan who tells us that the GOP has a plan to keep the government solvent but the plan is not included in the letter. That is because the electorate likes Medicare and Medicaid and the Democrats have turned the Ryan plan into a weapon against the GOP. I guess the market has spoken but the GOP will not give up on their campaign to reduce the debt. They are relying on a plan to do so that does not exist at the moment. It will be hard for them to come up with another plan that enables them to cut taxes by $3.9 trillion and pay for it by cutting Medicare and assuming that unemployment will fall to below 4%. They are probably better off with an undefined plan that is harder to attack.

Freshwater Economists on the Defensive

link here to article

There are some very smart economists saying things about the Great Recession that do not make sense. They have been forced to insert things into their models in order to explain why they can't explain the downturn. Most of these very smart economists are from the "Freshwater School" dominated by the University of Chicago.

Krugman considers two reasons for their confusion: One is merely political. They are simply providing talking points for their favorite politicians. He believes, however, that they are simply trying to defend their reputations. They have spent their careers trying to undermine Keynesian theory and they won't let reality stand in their way.

Comments On Federal Reserve's FOMC Minutes

link here to article

Mark Thoma provides an overview of the minutes released by the Fed on its last FOMC meeting. He also expresses concern over the divisions within the FOMC. They do not see a big problem with inflation on the horizon and they are very negative on the economic outlook. It appears that the Fed will stay pat, and not increase short term interest rates, but it will end quantitative easing. They don't see how they can do more to improve economic growth and they believe that deflation is no longer a threat.

The Free Lunch May Be Coming To An End

link here to article

Nirvana for a politician is to increase benefits to the electorate and to cut taxes. In other words, they like to give the public a free lunch. It worked for Reagan and it worked for the junior Bush. The public was less concerned about deficits and the national debt when they held office. Certainly, few in the GOP complained about providing a free lunch to voters or to contributors.

The reality is that the days of the free lunch are over. That means that taxes are likely to rise in one way or another and something will have to be done to contain healthcare prices that are inflating at 7% per year. The US military budget will also come under pressure. The US will not be able to fund a military budget that is about equal to the total military spending of the rest of the world, with a tax system that is one of the lowest in the world.

This article describes some of the current debate on the ways in which this is playing out in Washington. Most of this is familiar. One of the problems is that we have an electorate that has been poorly informed by the media and has a hard time understanding its own interest. For example, 23% of Americans benefit from the tax deduction on mortgage interest payments but over 90% support the deduction. The main reason why many with mortgages do not benefit from the deduction is that they take the standard deduction instead of itemizing their deductions. This is done primarily by taxpayers in the lower income brackets.

British Prime Minister's Reputation Harmed by Murdoch Relationships

link here to article

This article describes the mistakes made by the Prime Minister during the uproar around the revelations about the Murdoch empire in the UK. He has been forced to alter positions of support that he had expressed on several issues. His support for Murdoch was well earned. The Murdoch press strongly supported Cameron's rise to power. In fact, Murdoch was the second person to visit Cameron at 10 Downing Street after he took office.

Murdoch's media empire plays a similar role in the US. He owns the Fox network, which is like a wing of the Republican Party, and he recently acquired the prestigious Wall Street Journal. Some wonder whether Murdoch works for the party or whether it works for him. There is a similar relationship between Murdoch's press and the Conservative Party in Australia. He is best described as this generation's Citizen Kane.

Tuesday, July 12, 2011

More on Murdoch Scandal

link here to article

This article provides more information on the scandal in the UK regarding the illegal practices of the Murdoch papers which include the prestigious Sunday Times in addition to his two tabloids. This kind of activity not only endangers the people whose privacy was illegally violated but it is a danger to government itself. Murdoch has used his power to gain favors from government officials by adapting its coverage of them in return. I don't think that this is what is intended by laws which protect the freedom of the press.

Lessons in Rhetoric From David Brooks

link here to article

I posted this article primarily as a means of describing the "fair and balanced" rhetoric that defines David Brooks. He always describes at least two extremes and stakes out the middle ground for himself. It turns out that the middle ground is also conservative ground. There is also a theme that runs through most of his reporting. Human beings are not clever enough to develop grand schemes that are workable. This is the foundation for conservative distrust of governments that advocate reform.

In this article he describes three unworkable schemes that show the implicit hubris that he opposes. Bankers thought they knew what to do and they were wrong. Democrats tried to use Keynesian policy to stimulate the economy and that didn't work, and Republicans believe that tax cuts are a panacea. This frames the issues just as he likes it. He then stakes out the middle ground for himself. It turns out the the middle ground is the traditional conservative position on how to grow an economy. All of the proposals that he makes fall under the heading of "supply side economics".
The role of government is to focus on things that make business, and therefore the nation, more productive and competitive. In other words, government should not play an active role in the market. This contrasts sharply with the views of Keynes who believed that the government needed to run deficits during recessions and surpluses when there was price inflation. He did not believe that the economy was self correcting. In other words, government should play an active role in the economy in order to provide full employment and price stability. Keynes was even critical of Wall Street. He did not believe that speculation in the market for existing securities was the best way to allocate capital to its most productive uses. He believed that government needed to play a role in allocating capital to socially useful purposes. Conservatives call this industrial policy and this is a cardinal sin. Markets and not government should allocate capital to whatever purpose markets determine.

The lesson that we should learn from David Brooks is that framing the debate is the way to win debates. He has framed the debate so that the middle ground is occupied by a conservative view of the economy and society. Its best to leave things as they are.

Obama Takes the Middle Ground in Search of Independent Voters

link here to article

This article provides an analysis of Obama's speech on the fiscal policy debate. His speech was intended to position the administration as the responsible party that is not catering to its base. This puts the GOP, which is feeding the tea partiers in its base what it wants to hear, at risk. They may lose the support of the independent voters who are critical for both parties.

The reaction from progressive Democrats has been strong and many are wondering why they voted for Obama. Some may stay away from the polls but few would risk putting the GOP into a position of power. The GOP has become a party with a single agenda: Tax cuts for the super rich and a shift of federal spending to its constituents.

Unfortunately, we are learning that electioneering dominates politics, and it shows how difficult it is to make the decisions necessary to optimize results for the common good.

Reliving the Mistakes of the Great Depression

link here to article

Bruce Bartlett, a conservative economist who was in the Reagan administration, shows that the GOP used to include people who looked objectively at facts in order to interpret events. He provides useful information on the mistakes that the Democratic administration made during the Great Depression. Roosevelt made the same mistakes that are being made today in the US and in much of Europe. They are also providing the same rationale for the mistakes. The "confidence fairy" was invoked to explain why business was not investing, while consumers had no money to spend. And there was a desire to balance the federal budget within the administration and probably echoed by the GOP, which at that time, regarding itself as the fiscally responsible party.

Monday, July 11, 2011

An Overview of Italy's Economic Issues

link here to slideshow

Italy's stock index is down 10% over the last 5 days. Banks have been hit particularly hard. Some its problems come from issues in Greece but its economy has not done well either. This is a link to a slide presentation on some of Italy's economic issues. Italy is one of the largest countries in the euro zone. If it gets into real trouble the ECB would not have the resources to handle the likely problems.

Herbert Hoover's View on Fiscal Policy In Depression

link here to article

Brad DeLong posted Hoover's perspective on the 1932 and 1933 federal budgets. He clearly wanted to keep government spending in line with revenues. He wanted to balance the federal budget during the depression.

Brad posted Hoover's remarks because a conservative pundit has been claiming that Hoover was not attempting to bring federal spending in line with tax revenues. Hoover's commitment to balancing the budget is pretty clear. It is not that different from what some conservatives are proposing today. Some have even raised the idea of a balanced budget amendment to the constitution. Actually, Ronald Reagan proposed a balanced budget amendment during his campaign. He quickly ran up large deficits during his administration by cutting taxes and increasing spending on the military. It may be good politics to propose a balanced budget amendment but its unlikely that it would ever be enacted.

The EPA Moves to Reduce Greenhouse Gas Emissions

link here to article

It has been politically impossible to get Congress to consider legislation that would cause power plants and other energy users to internalize the costs passed on to others from pollution. Carbon taxes and cap and trade proposals are off the table. The EPA, however, has a mandate to limit the environmental impact of greenhouse gases and it has decided to use its authority to do so. This article describes some of the actions that it is taking to limit greenhouse gas emissions from power plants. The GOP will respond with threats to cut the EPA budget and other tactics but the EPA has current law on its side.

Saturday, July 9, 2011

Why There Have Been Few Criminal Cases Against Bad Bankers

link here to article

Many questions have been raised about the lack of criminal prosecutions by the Justice Department given evidence of fraud and other crimes during the financial crisis. This article explains the alternative to criminal prosecution that is favored by the Justice Department. The alternative is called deferred prosecution agreements. Companies are told that they are under investigation and they are given the opportunity to hire a law firm that will investigate the alleged wrong doing and recommend corrective action. Penalties may also be assessed where they are called for. The intent is to provide restitution to those who may have been harmed by the behavior and to better manage the scarce resources of the Justice Department. The SEC, which is similarly affected by resource scarcity, also uses the deferred prosecution approach to deter criminal behavior by corporate executives.

There are many arguments against this approach. It is certainly a weaker approach to crime control and a poor deterrent to criminal behavior. It also gives the appearance of a two tiered criminal justice system in which white collar crime is not as vigorously prosecuted as blue collar crime. At a deeper level, it may affect the reputation of the US Justice Department, and the SEC. The US has especially benefited from the reputation that it has had for policing the information that corporations provide to investors. This has made the US a more attractive country in which to invest. Some even argue that the US is moving in the direction of other countries which are sometimes referred to as "Banana Republics" because of widespread corruption in law enforcement and other aspects of government.

Analysis of Recent Data on US Employment

link here to article

Calculated Risk provides a nice summary of the factors that are slowing the US recovery and it provides the latest data on employment trends. One analysis breaks down unemployment by education level. Not surprisingly, the unemployment rate decreases as educational level rises. Perhaps more surprisingly, higher levels of education do not make it easier to replace the job that was lost.

Friday, July 8, 2011

How FDR Did It

A short quote from FDR (via Mark Thoma). For nearly four years you have had an Administration which instead of twirling its thumbs has rolled up its sleeves. We will keep our sleeves rolled up. We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred. I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second Administration that in it these forces met their master.

FDR understood who his enemies were. I saw a newsreel of him signing a progressive income tax bill. He said this is for Randolph Hearst when he signed it. Hearst was the Rupert Murdoch of his day. He published the tabloids that kept people informed about nonsense fully informed about conservative political ideology. He was especially opposed to the progressive income tax

Current Solutions to Sovereign Debt in Euro Zone Depend on G rowth That Can't Happen

link here to article

A critique of the current approach to solving the sovereign debt problem in the euro zone. Reasons are given for the likely failure of the approaches being discussed and alternative solutions are evaluated.

George Washington On The Dangerous Tendency of Two Party Politics

George Washington agreed, saying in his farewell presidential speech: (via Naked Capitalism)

The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries, which result, gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of Public Liberty

Without looking forward to an extremity of this kind, (which nevertheless ought not to be entirely out of sight,) the common and continual mischiefs of the spirit of party are sufficient to make it the interest and duty of a wise people to discourage and restrain it.

It serves always to distract the Public Councils, and enfeeble the Public Administration. It agitates the Community with ill-founded jealousies and false alarms; kindles the animosity of one part against another, foments occasionally riot and insurrection. It opens the door to foreign influence and corruption, which find a facilitated access to the government itself through the channels of party passions. Thus the policy and the will of one country are subjected to the policy and will of another.

There is an opinion, that parties in free countries are useful checks upon the administration of the Government, and serve to keep alive the spirit of Liberty. This within certain limits is probably true; and in Governments of a Monarchical cast, Patriotism may look with indulgence, if not with favor, upon the spirit of party. But in those of the popular character, in Governments purely elective, it is a spirit not to be encouraged. From their natural tendency, it is certain there will always be enough of that spirit for every salutary purpose. And, there being constant danger of excess, the effort ought to be, by force of public opinion, to mitigate and assuage it. A fire not to be quenched, it demands a uniform vigilance to prevent its bursting into a flame, lest, instead of warming, it should

Murdoch Closes Tabloid in UK in Response to Scandal

link here to article

Ruppert Murdoch's media empire in the UK is now a bit smaller. He closed one of his tabloids in the face of a rising scandal which has created a furor in the UK. Murdoch is the king of feeding the masses gossip and misleading information in the english speaking world. The scandal has exposed the relationship that he has with the police, who fed information to his tabloid, and with the conservative government that includes one of his operatives in a high position. Murdoch has a history of selling support from his media outlets to both conservative and labor governments in return for political favors. In any case, The Guardian has complete coverage of the scandal and its implications.

Everything You Need to Know About Income Inequality

link here to article

The Big Picture has compiled a lot of data and comments on the problems of growing income inequality. Some might be surprised to learn that income inequality impacts economic growth. It also affects the duration of growth. Growth spurts are shorter in periods of high inequality. The spurts are often financed by debt. Some may also be surprised to learn that government policies contribute to inequality. Tax policy has been made less progressive over the last 30 years which increases after tax income inequality. Monetary policy during the financial crisis also increased inequality. Lower interest rates helped to increase stock prices and almost all of the stock is owned by the those in the top income brackets. Income inequality also has a negative affect on the democratic process. Wealth concentration is related to power concentration. The more it costs to run a political campaign the greater the dependence of candidates on financial contributions from the super rich. The super rich also influence public opinion by ownership of the media and by funding "think tanks" which produce information that supports their goals. The denial of global warming is a good example. Energy companies funded much of the research that countered the bulk of scientific evidence coming from independent scientists. In any case, this is a good compendium of information and analysis. Unfortunately, few will have access to this information. The media do a better job of keeping the public informed about the life of celebrities and the latest sex scandals.

Thursday, July 7, 2011

The US has Morphed into Greece According to Conservatives

link here to article

I watched a CBS newscast this week in which the spokesperson on the economy they selected compared the US to Greece. Apparently, that is what CBS wants the public to believe. Not surprisingly, Mitch McConnell, the GOP minority leader in the Senate, is saying the same thing. This article should put the comparison of the US to Greece where it belongs. It is utter nonsense. The US debt to GDP ratio is much lower than that of Greece and it does not have a market risk of default on its debt (there is some political risk coming from the GOP). US Treasuries have plenty of buyers at historically low interest rates. Moreover, the US borrows in its own currency, Greece must borrow in euros and it has no control over euro zone monetary policy and the value of the euro.

The battle over government spending and the national debt is a proxy for taking apart the social welfare system that was put in place following the Great Depression. It is also about reducing the progressiveness of the US tax system.