Wednesday, August 31, 2011

Sitmulating The Economy With A Balanced Budget

link here to article

The standard approach to stimulating an economy in recession is for the government to run budget deficits. This article suggests that the government can stimulate the economy with a balanced budget. The basic idea is to raise taxes and increase government spending by an equal amount. Essentially, this redistributes income to those who are likely to spend it.

While this is an interesting idea, there is little reason to believe that the GOP would be interested in reducing budget deficits by raising taxes on the rich and redistributing income. Moreover, one would not expect the White House to propose any remedy that would upset the GOP and appear to be partisan.

The Minimal State Versus the Extensive State

link here to article

Political and economic discussions are usually based upon differences in social values. This article sums up the social values purported by the Tea Party and contrasts them with those that characterize the Nordic States. The case is then made for the necessary role that should be played by the extensive state.

This article was written by a former member of the Reagan administration who has given these issues a lot of thought.

Overview of Banking Issues In Euro Zone

link here to article

The new head of the IMF called for higher capital in the banks to prevent risk of contagion. This was strongly rejected. This could raise the level of fear in Europe and lead to withdrawals which are taking place in large Greek banks.

Financial Times Summation of Current Economic Outlook

link here to article

Martin Wolf sums things up quite well. The six largest western economies are still below their levels of output prior to the recession. Unemployment in the US is twice its average level. To make matters worse, political leadership in the US and Germany is missing in action. Both leaders prefer to muddle their way through in politically divided countries. The odds that things could get worse are rising.

Reverse Class Warfare

link here to article

Warren Buffet wrote an op-ed critical of the low tax rates for the super rich. The GOP calls that class warfare. They prefer class warfare against the poor. They want poor American's to pay income taxes. They claim that 47% of Americans do not pay any taxes. What they don't say is that most Americans pay more in payroll taxes than they do in income taxes. The payroll tax is just another income tax on all income under $108,000. Federal income from the payroll tax is almost equal to federal income from the income tax.

The GOP attack on the poor serves two purposes. It deflects attention away from the low taxes paid by the super rich and it encourages middle class Americans to resent the poor instead of the super rich.

Tuesday, August 30, 2011

Murdoch Press Attacks One Of Its Own

link here to article

Warren Buffet wrote an op-ed in the NYT arguing for higher taxes on people like himself who are super rich but have a lower effective tax rate than ordinary citizens.
It didn't take long for the Murdoch empire to respond. The New York Post reported that Buffet's Berkshire Hathaway Corporation owes the IRS back taxes and accused him of being a hypocrite. This is standard procedure for the conservative media. If they don't like the message they attempt to discredit the messenger. In this case, they are going after one of their own who they view as a traitor to their class.

This article describes the tax issue quite differently. Berkshire Hathaway is in a dispute with the IRS over several of its reported tax returns. The dispute has not been settled and it is quite common for the IRS and corporations to take different positions on the very complicated returns that they file. Moreover, Warren Buffet's personal positions on tax policy are not necessarily that of the corporation that he runs.

Monday, August 29, 2011

Obama Announces Top Economics Advisor

link here to article

This article is about Obama's new top economist Alan Krueger from Princeton (which is the academic home of Krugman and Bernanke as well. He is a labor economist who has raised concerns about the important labor force participation rate which was falling before the recession and has not improved during the weak recovery. On the other hand, he had worked under Tim Geithner in the Treasury and spent much of his time defending the administration's attempts to stimulate the economy. His appointment has also been praised by several conservative economists. He is no doubt a competent economist, and his specialization as a labor economist is on target. Lets hope that he can stimulate some energy inside of the Obama Administration.

Aniti-Intellectualism in The GOP

link here to article

Krugman is concerned about anti-intellectualism in the GOP. My view is a bit different from his. We have always had anti-intellectualism in the US. The GOP has just figured out a way to capitalize on it. They have also learned how to use the Internet as a propaganda medium that can facilitate the organization of loosely connected strands of anti-intellectualism and turn it into a political weapon.

Fed Chairman Rethinks Our Understanding of the Recession and Recovery

link here to article

Bernanke's last speech was criticized by many as a weak response to our current problems. He did, however, acknowledge that the recession was deeper than we had thought and that the recovery was weaker than we first believed. Krugman provides a graph which depicts the depth of the recession and the anemic "recovery".

The "Great Recession" is More Like Depression Than Recession

link here to article

Robert Kuttner argues that our economic downturn is much closer to the dynamics of the Great Depression, and that it is should be given a name that reflects the similarities.
He also contrasts the aggressive government response to the Great Depression to our weak current response.

Closing The GDP Gap and Growth Rate Projections

This graph (click to enlarge), from the Bureau of Economic Research, shows the huge effect of future economic growth rates on the time that it will take to close the output gap from the recession. The economy must grow faster than potential GDP to close the gap. If the economy grows by 3.5%, which is 1% above potential GDP, the gap will be closed rather quickly. The gap will not be closed until 2020 if we grow at 3%. On the other hand, the gap will remain if growth is at 2.5%. The growth rate depends upon how quickly the housing market turns around, and it also depends upon what happens in the rest of the world. Shocks in Europe, Japan or in the emerging markets would slow the US growth rate.

Saturday, August 27, 2011

What is Debt? What is Money?

link here to article

This article about the origins of money, and the moral relationship between debtors and creditors is extremely interesting. The comments and responses are very thoughtful and informative. It could form the basis for course all by itself. Moreover, it helps us to think more deeply about some of the problems that have been made visible by the financial crisis.

The financial crisis was the result of actions taken by bankers to increase their wealth. They made loans that enabled households, and or speculators, to purchase homes. They packaged these loans into securities and some to investors. We all know how this turned out. Many of the loans are in default, and the value of the securities that were sold to investors, and held in inventory by the banks, have lost much of their value. This raises questions about how to deal with debtors who are unable to meet their obligations, and how to deal with the bankers who hold some of the debt, and how to recompense investors who were sold faulty securities even when the sellers were aware of their deteriorating value. Numerous legal and moral questions arise about the relationships between debtors and creditors, as well those between creditors and investors.

Governments answered many of these questions by the actions that they have taken or have not taken. They made many decisions that gave priority to the preservation of the banking system. Governments provided liquidity to the banks with loans, and they accepted the toxic securities held by the banks as collateral for the loans. The bad risks taken by the banks were assumed by government and ultimately the taxpayers.

Governments have done less to improve the status of debtors and investors. Banks have foreclosed on those who were unable to pay back the loans and they have been accused of using illegal measures in the foreclosure process. And also despite the fact that many of the loans were predatory. That is, the loan originators took advantage of their superior product knowledge in relation to the mortgagees.

Investors who purchased the toxic products have more power than most households. Many have sued for damages and some have recovered a portion of their losses. Since trillions of dollars of toxic securities were sold, the banks are not in a position to satisfy the claims of the investors. For example, the Florida State Pension Fund lost $60 billion on the securities that it purchased from Wall Street banks. The US government has taken the position that the banks should pay a penalty, well below the total value of losses by investors and households which were damaged by illegal foreclosure procedures. Moreover, that settlement would eliminate any future claims for damages by investors and households. Its fairly clear that the priority of government is to protect the bankers and the banking system.

Most of this information is well known, but the issues that are raised are quite profound. One of the issues is the question of hierarchy. It is very clear that governments have taken the position that the major banks, and the bankers that operate them, have a superior position to that of debtors and investors. Creditors are at the top of the social hierarchy.

Some of the issues also raise moral questions. The debtors are perceived as bad actors, who made poor decisions, and who should be punished for their bad decisions.
Investors are assumed to be rational agents who are responsible for making rational decisions. They were greedy in seeking higher yields from risky investments and they deserve the losses that they experienced. The creditors are a different story. Even though the public has been enraged by the favoritism shown to them by government actions to rescue the financial system, none of the top bankers has paid a penalty for their behavior and they still occupy a place at the top of the social hierarchy. Graduates from our elite colleges still compete fiercely for the opportunity to get internships at Wall Street banks and assume their place in the social and economic hierarchy.

Today, our financial problems are somewhat different but the issues are also the same. Banks made loans to sovereign states that are at risk, primarily as a result of the recession. What is the priority that should be given to the creditors or to the debtor states? Many perceive the states as morally irresponsible debtors who should be punished for their behavior. The creditors who made the bad loans are not perceived in the same way. The IMF, the ECB and many in government place the highest priority on the preservation of the financial system. Most of the solutions to the Euro Zone problems put the burden on the citizens in the debtor states by demanding austerity in return for needed financial support. Creditors have a superior moral and social position relative to irresponsible debtor states.

In any case, the issues that we are grappling with today boil down to questions regarding the nature of money and the moral and legal positions that we hold about the relationship between creditors and debtors and their positions in the social hierarchy.

Friday, August 26, 2011

Akerlof and Stiglitz Lectures At Lindau

link here to videos

This is a link to presentations at the Lindau Lecture series this week. One is on identity economics and the other is a critique of current macro models by Stiglitz. They are both very good.

Undergraduate Economics at Harvard Subordinates Macro to an Imperfect Micro Theory

link here to article

Robert Barro teaches economics at Harvard along with Greg Mankiw who served in the Bush administration. The Director of Undergraduate Economics Education at Harvard is also a prominent libertarian. The undergraduates who leave Harvard after taking introductory courses from Barro and Mankiw will leave with their views of the economic world. This article criticizes an article by Barro in the Wall Street Journal (where else?) that assumes a view of the business cycle that has no empirical evidence behind it. It is called the "real business cycle" theory. Its key assumption is that events outside of the economy are responsible for recessions. The economy, as described by micro-economic theory, paints a perfect picture of the economic world. Macro-economics is unnecessary given the perfection found in micro economic theory. Moreover, fiscal policy espoused by Keynesians can't possibly work even in theory.

Krugman does a nice job of destroying Barro's argument. Unfortunately, our future leaders who graduate from Harvard, and move on to Wall Street, have been given a very different picture of the economy and how it operates.

Krugman Chastises the German Financial Minister

link here to article

The German financial minister argues that the world economic problem has been caused by high levels of public debt. Krugman argues that only one country got into trouble in the Euro Zone because of public debt. Ireland, Spain and Portugal had low levels of public debt prior to the recession that was created by high levels of private debt and predatory behavior in the banking system.

It seems as if some of our problems have to do with morality. Those who borrow in excess should be punished. It is immoral to bail out countries having difficulty using the private market to borrow money. They must have created this problem for themselves. In fact, the private bankers were responsible for the recession that caused the public debt problems.

German Politics Resemble US Politics

link here to article

This article in Der Spiegel on the speech by the German President at the Lindau conference on economics shows that the there is a wide range of opinion in Germany on how to deal with the financial crisis. Populism in Germany is becoming stronger just as it is in the US. Moreover, political leaders confuse household finances with state finances just as they do in the US.

Elmer Gantry for President

link here to article

David Brooks can be counted on to reflect what is happening within the GOP and to explain why it is good for America. In this article he describes the GOP race for the presidential nomination as a two horse race between Governor Perry and Mitt Romney. He seems to prefer Romney as the better candidate, but he is impressed by the success that Perry is having on the campaign trail. He is now dead even in the polls with President Obama. One would think that 8 years of George Bush would have made most Americans wary of another governor from Texas as their president. One would also expect that the media would have done a better job of informing the public about his actual accomplishments as the Texas governor. Brooks provides no information about the claims that Perry has made which are known by him and others to be untrue. Popular appeal is an end in itself.

Romney has a problem in running against a governor who can boast about the performance of the state under his governorship. Romney's biggest achievement was to pass the healthcare reform bill in Massachusetts. He believed that this would help him to win the presidency some day. Unfortunately, his healthcare reform plan is much like the bill that Obama passed and the GOP has convinced its base that only the devil could have created such a plan.

There was a time in America when the fictional character Elmer Gantry was portrayed as a sad salesman of Christian salvation who made his living selling snake oil to an ignorant public. Today we have a modern Elmer Gantry, in the form of Perry, who is able to sell snake oil to a gullible American public. We also have a media system which can only look upon anyone able to sell snake oil as a strong candidate to lead America to third world status.

Why China Will Be The Dominant Economic Power by 2030

link here to article

This article from Foreign Affairs makes the case for Chinese economic dominance by 2030. The US economy is projected to grow at 2.5% and China will grow at 7% for the next 20 years. With a 7% growth rate China's economy will double every 10 years.

Some in the US believe that it can overcome any threat to its economic dominance because it has always done this in the past. It was threatened by Japan in the 1980's and it created the new technologies that restored its dominance. This time, however, it might be different. The US is much weaker than it was in the late 1980's. The government is holding over $1 trillion of toxic assets, and its banking system is still weak from the bad loans that it made in the financial crisis. It is also the worlds largest debtor nation, and China is the world's largest creditor nation. The US is also struggling with high unemployment, rising income inequality and low social mobility. It no longer projects the economic model for the rest of the world. Its unfunded healthcare liabilities will also be a problem by 2021 due to unfavorable demographics. China has its problems as well, but its status as the world's creditor nation has made many countries dependent upon it for financial help.
It also graduates twice the number of students who majored in science or engineering as the US. It is capable today of manufacturing any of the high technology products that are currently on the world market, and the number of citations to its published scientific research is growing rapidly.

This article did not get into the problems with the US political system, but it is broken badly, and it will not be easy to overcome its numerous problems. Anyone in China, or elsewhere in the world, who pays any attention to the quality of the major candidates for the GOP nomination for the US presidency in 2012 must be shaking their heads in disbelief. Their success in attracting supporters among the electorate is also disturbing. A large segment of the US population has no respect for science, rational discourse or for the positive role that government can play in the economy. They are ignorant of US history, and seek to restore the country to the fantasy history that is fed to them by their exploiters who benefit from their ignorance. If the US political system continues in this direction it will accelerate China's rise to economic dominance.

Thursday, August 25, 2011

Loss of US Competitiveness is Due To Faulty Management Theory and Practice

link here to article

This classic article in the Harvard Business Review describes how US corporate managers followed a simple rule in running their businesses. The looked for ways to cut costs in order to increase profits. This was successful but for many companies they gave away the future. They lost the knowledge required for designing the next generation of products. In general, this is the problem in the US today. This article describes what can be done to restore the competitiveness of the US in high tech product development and manufacturing. Management needs to change in order for this to happen.

Wednesday, August 24, 2011

US Stock Prices and Demographics

This graph shows the strong correlation between age distribution and stock prices. The rise in US stock prices was predicted by the baby boomer generation and the aging of this generation in relation to the younger generation below it suggests slow growth in stock prices for 20 years unless international investor purchases stimulate growth.

President Obama Is Playing Like Tiger Woods

link here to article

Tom Friedman compares Obama to Tiger Woods who has lost his swing. He tells him that the GOP candidates are showing the electorate that they are crazy but he should not count on that to win in 2012. He needs to go back to the swing that got him elected and tell the public what needs to be done to get us out of our mess. He has it in him but he does not trust his good swing anymore.

Lindau Economics Lectures Online

link here to Lidau Lecture on Economics

The Lindau Lectures by Nobel Laureates in economics began August 23 and go to August 27. They are available for viewing online.

Lindau Nobel Laureate Lectures Available Online

Link here to Lindau Lectures

This is link to the lectures of several Nobel Laureates to young scientists in Lindau, Germany. They can be viewed online.

The Cost of Energy Minus The Cost of Energy In Extraction Limits Growth

link here to article

This article illustrates the importance of new metric that impacts the economy today and even more so in the future. The metric is the cost per unit of energy minus the energy cost of extraction. This is illustrated by a graph that shows the rising net cost of energy in the US during the last decade.

Energy Cost As Percent of GDP Linked to Slow Growth

link here to article

This article by an oil analyst suggests that low energy cost stimulated US growth prior to the recession. It also argues that rising energy costs as a percent of GDP are a barrier to growth. The implication is government spending should be focused on lowering the energy share of economic output cost. This line of reasoning could stimulate investment in renewable sources of energy.

Tuesday, August 23, 2011

Why Keynes Wins Rematch With Hayec Only In Theory

link here to article

Lord Skidelsky wrote a biography of Keynes. It included the contest between the competing views of each during the Great Depression. Keynes won that debate but Hayec outlived him by 50 years. Hayec's views gained credibility during the Thatcher regime in the UK, and also in the US where his free market ideology was repackaged by Milton Friedman and sold it to the public during the Cold War, and to Reagan in the 1980's.

The Great Recession has revived the debate between Keynes and Hayec. They both trace the economic problem to debt induced overspending by business and consumers. The remedy proposed by Hayec is austerity. Savings need to increase, and debt should be liquidated. Keynes used the "paradox of thrift" argument to rebut that approach. He argued that if all agents decided to save at the same time, savings would actually decline. The fall in spending would cause national income to decline, and there would be less income available for savings.

It appears that Hayec has won the debate in Europe and austerity has become the favored solution to the current crisis. Skidelsky believes that Hayec provides no solution to our current economic problems, and he hopes the Keynes can prevail in the US.

Since the GOP has proposed austerity as the solution in the US, and the Obama administration seems to favor debt reduction over a Keynesian stimulus, largely for political reasons, it is unlikely that Skidelsky's wish will be realized.

Bad US Demographics Imply Weak US Stock Prices

link here to article

The San Francisco Fed reports that US stock prices are related to demographic data. They show that their measure of age distribution correlates with the P/E ratio. Stock prices increased as the baby boom generation reached peak earnings age and they have begun to decline as the boomer generation ages. If this correlation holds, US equities will not do well in the next decade.

How to Fix The Economy Debate

link to video

This is a link to a video debate between Paul Krugman and Ken Rogoff on how to fix the economy.

Video Interview of Warren Buffet

link here to article

Link here

This is a link to a one hour video interview of Warren Buffet by Charlie Rose.

Investor's Worrying Over Risk To European Banks

link here to article

This article has a graph which shows the price that investors are willing to pay to insure against the risk of default on the debt of six of Europe's largest banks. The price of insurance against default is higher now than it was in 2008.

Monday, August 22, 2011

How Italy Is Adjusting to the Crisis

link here to article

The fate of Italy plays a key role in the euro crisis. Italy must recover from its recession or enormous stress will be placed on the Euro Zone. This essay provides a snapshot of some of the economic, cultural and political issues in Italy. Its economy has been growing at a lackluster 1% for years; people have lost faith in government and the younger generation is looking outside of Italy for opportunities.

An Economist Explains The Jobless US Recovery

link here to article

This explanation links two major ideas that help to explain the jobless recovery in the US which is far worse than that in several other countries affected by the recession. Changes in management behavior, and the weaker bargaining position of employees, led to a 30% increase in job loss from the recession compared to prior periods. The slow recovery is explained by the double hangover caused by the collapse in housing prices; a rapid rise in the household debt to income ratio from 90% in 1995 to 130% in 2007, and the loss of local and state government jobs due to declining tax revenues.

The weak recovery in the US demonstrates the ineffectiveness of monetary policy in the current downturn. The Fed has kept interest rates at an historically low level but they have not stimulated business investment or consumer spending. Business won't invest in new capacity unless demand increases, and consumers are paying down their debt instead of spending.

Free Market Fundamentalism May Impede Economic Development

link here to article

This article describes a system for integrating technological development in the US. Critics call this sort of arrangement industrial policy. It is an article of faith, among free market fundamentalists, that industrial development be left to market forces. The evidence, in the US and elsewhere, does not support the case against industrial policy. Countries without an industrial policy may be at a disadvantage against those who have one.

Sunday, August 21, 2011

Germany Must Choose Between Two Undesirable Choices To Save Euro

link here to article

Barry Eichengreen boils the Euro Zone crisis down to the problems in Italy. Its debt is too large for current approaches to remedy. Italy's economy must grow at least 1% and inflation must be at least at 2% so that the sum is equal to or greater than the 3% that it pays for debt. The future of the Euro Zone is in the hands of Germany. It has to choose between two fixes: support for Euro bonds, or support for greater Euro Zone inflation.

Saturday, August 20, 2011

Keynes is Dead, Long Live Austerity

link here to article

This article attempts to argue that our current sovereign debt problems show that Keynesian economics is dead. There are limits to government borrowing to stimulate economies in recession that his theory does not address. This seems to be true for some countries, and not for others, but it has little bearing on Keynesian economics.
Keynes argued that countries should run surpluses in good times and use the surplus to stimulate economies in bad times. Politicians like to do two things to win elections. They like to provide benefits to those who vote, and they like to reduce taxes for those who fund election campaigns. High levels of sovereign debt is a function of the way that politics work in many countries. Its much more popular with the electorate to pay for government funded benefits by borrowing instead of paying for them with taxes.

There is a good link, at the end of this article, to a rebuttal that provides a better analysis of the debt crisis.

HP Shares Drop 20% After Weak Earnings Report

link here to article

Hewlett Packard (HP) is the world's largest computer company. Its stock price fell 20% yesterday after announcing that earnings per share for the year would be 16% less than it had forecast earlier in the year.

This article is also about how HP attempted to manage the bad news. It announced an acquisition of a UK software firm which boosted to stock price ahead of the bad earnings announcement. The stock price rose after the acquisition announcement. The next day it lost all of the gain plus the 20% drop from its price prior to any announcement.

Investors were disappointed by the lowered earnings announcement but they were further concerned with HP's plan to spend $10 billion on an acquisition while also announcing that it was looking to sell its PC division which has low profit margins. HP had made a huge investment in the PC business when it purchased Compaq. The Compaq acquisition was contentious at that time. Founders of the company, on the Board of Directors, were unable to stop the acquisition. By announcing the intention to sell the PC unit, they have confirmed the concerns of its founders. IBM sold its PC business for similar reasons to Lenova. I wonder who will be interested in purchasing HP's PC business.

Structured Loans Sold By European Banks Are Its Version Of Sub-Prime Trap

link here to article

Municipal debt in Europe may be its version of the US sub-prime fiasco. Major banks have sold "structured products" to municipal borrowers that they are unable to pay back. The loans start out with low interest rates as a teaser to get the deal. After a fixed period of time, payments are based upon the value of the Swiss franc. The euro crisis has caused the value of the Swiss franc to rise dramatically against the euro. There are huge penalties associated with termination of the contracts.

Friday, August 19, 2011

link here to article

The Economics Department at the University of Chicago has had a mission to put an end to Keynesian Economics. One of its basic tactics is to find reasons why the business cycle is determined by supply factors rather than by changes in aggregate demand. This article describes how one of the Chicago economists has attempted to make that case and it provides a critique of evidence used to support the claims. Paul Krugman takes this criticism one step further and argues that he does not understand the fallacy of composition. If one group does something that is good for that group, it does not follow that it would be good for the entire population of groups. Every group in the population cannot have below average wages.

Governor Perry's Lies About Global Warming

link here to article

Governor Perry has lied about his role in creating jobs in Texas, and he has lied about the benefits of the tort reform bill that he sponsored in Texas. This article, by Fact Checker describes his lies about global warming. We can learn from his lies. He obviously lies about the things that will improve his chances to win the GOP nomination. Job creation, improving healthcare, and debunking concerns about global warming are at the top of his list. Job creation is important but his Texas miracle is a fabrication. Improving healthcare is also important but it did not happen in Texas. Debunking global warming is not important but it plays well to his base which has learned about climate science from Rush Limbaugh and Fox News.

Concerns About The Euro Zone Are Spooking Markets

link here to article

Concerns about banks in Europe are affecting markets around the world. Several European banks are heavily invested in sovereign debt markets in Italy and Spain that are increasingly risky. Major US banks are closely connected to the fate of European banks as well. Investors are also worried that the risk of recession in Europe and the US is growing. That would place further stress on the banking systems. Economists are also worried about widespread austerity programs that are being implemented in many countries. They fear that government cutbacks in spending could increase the risk of recession.

Thursday, August 18, 2011

Who Will Win the Clean Energy Race?

link here to article

Renewable energy capacity has now passed nuclear energy capacity. Europe has been leading the effort by providing a market for clean energy by way of energy policies. Germany has been the leader in Europe. China has passed the US in renewable energy capacity and it is making big investments which has given it a large internal market, particularly for solar panels. Its large internal market has cut manufacturing costs and it is the largest exporter of solar panels which have fallen rapidly in price. Italy, because of its climate, is now cost competitive using solar panels with fossil fuels for electricity generation.

It looks as though this huge market opportunity will bypass the US. Opposition from the GOP, which is totally committed to fossil fuels, will block any efforts in the US to become competitive.

Is The Fed Guilty of Treason?

link here to article

Simon Johnson compares the Great Depression with the Great Recession and concludes that we are not at risk of anything like the Great Depression. He is concerned that GOP politicians who accuse Ben Bernanke of treason present a more serious problem. He points out that the US was once an agricultural economy that was dependent upon debt. Farmers needed to finance crop preparation and pay back their debt at harvest time. The economy suffered severely during a period of price deflation. The farmers got less money from their harvest and they had to pay back their loans with more expensive dollars. The Fed did some things poorly during the financial crisis but its primary goal is to prevent deflation. This would make it more expensive for heavily leveraged households and businesses to service their debt. Without actions taken by the Fed to limit deflation we could wind up with something worse than the Great Depression.

Malpractice Reform in Texas and Results

link here to article

I recently posted an article that was critical of the claims made by the Texas Governor Rick Perry about the benefits from the tort reform bill that he passed in 2003. This article provides data that rebuts his claims. His bill caps the payment for pain and suffering at $250,000. It does not limit awards for lost income. It has reduced suits from claims based primarily on pain and suffering. It has not affected claims for those with high incomes that sue for lost income. The bill has reduced malpractice claims and the cost of malpractice insurance in Texas. The question is whether it has improved healthcare in Texas relative to the rest of the country. The data reported here do not support Perry's claims.

Tort reform in Texas raises another question that needs to be considered. Suppose that physicians did migrate to Texas in order to lower their cost of insurance. Is that good or bad? Physicians who have lost suits and who have been hit with higher premiums would have the most incentive to relocate to Texas. Is that good or bad for Texas? The state is also a "right to work" state. That is, it makes it more difficult to unionize in Texas. Is that good or bad for wages and working conditions in Texas? More generally, is it good or bad for America to have states competing with each other for jobs and physicians by offering less regulation, lower taxes for business, protection from unionization etc. etc.? Do we want see a race to the bottom between states, that is based upon providing incentives to business that have a negative impact on wage earners?

The GOP has other reasons for being in favor of tort reform. It is part of its campaign under Tom Delay to defund the Democratic Party. Lawyers have been major contributors to Democratic campaigns. The defunding program, initiated by Tom Delay, targeted groups that tended to fund democrats running for political office. Threats from lawsuits is also another form of business regulation. Businesses are more mindful of doing things that may result in legal claims. GE, for example stopped polluting the Hudson River after it was hit with law suits.

All of The GOP Candidates Oppose The EPA Plan To Regulate Carbon Emissions

link here to article

The Environmental Protection Agency (EPA) has become one of the favorite targets of all of the GOP candidates in the primary campaign. It is called a job killer. The science is decried as faulty, and it is linked to the major GOP theme of less government. The sound bytes that they deliver bring big cheers from their base which believes that the earth is 15,000 years old. The candidate with the biggest problems is Mitt Romney. He had proposed bills as the Governor of Massachusetts to limit carbon emissions. His position today is directed at the EPA's program to limit carbon emissions under the Clean Air Act, which gives it the power to regulate pollutants. His position hinges on the definition of "pollutant". He claims that carbon is not a pollutant because it does not cause bodily harm to humans. He must have taken lessons from Bill Clinton who raised questions about the definition of sex in the Monica Lewinsky case. Its pretty clear that GOP messages about global warming and the EPA plays well to its base. It less clear how it will play in the general election. Most American's are more sophisticated than the GOP base.

Wednesday, August 17, 2011

Criticism of Michael Lewis' Article on German Culture

link here to article

This article (via Manan Shukla) is critical of Michal Lewis' attempt to deal with the debt problems in Europe using cultural stereotypes. He has been criticized within Germany, Greece and Ireland for misusing that method. This critique is about the cultural stereotypes that he used in his article on Germany (which I posted without without alluding to his use of stereotypes). The stereotypes which he used in the article on Germany were indeed over the top and offensive. My wife asked me why I posted it. I think that Lewis understands the Wall Street culture very well. He was also aware of Wall Street's exploitation of several German banks during the mortgage securitization scandal. He also knew that German bankers were counter parties to the huge bet that John Paulson made by shorting the market, after participating in the choice of the mortgage securities that were used in the security that he shorted. Lewis' explanation centered on his knowledge of how Wall Street operates and also on the false impressions that German bankers had about how Wall Street really operates. His use of cultural stereotypes was not central to his analysis.

His explanation of the problems in the Euro Zone were insightful, and did not depend upon the stereotypes that he used in his articles on Germany and Greece. There are cultural difference between these countries which makes it difficult for each to understand the other. I agree with Lewis that one can't turn Greece into Germany, and that part of that problem resides in the different value systems and political systems that dominate in each culture. Lewis' article would have been more effective if he had not used the offensive material about toilet habits, and references to Hitler and Germany under Fascism.

The SEC as a Toothless Tiger

link here to article

The SEC has been given broader responsibilities by the Dodd-Frank bill. The GOP has responded by cutting the SEC's budget request that would enable it to perform its new duties. After reading this article (via Manan Shukla), I don't understand why the GOP has bothered to limit the work of the SEC. It has not done its job properly for the last 20 years or so. It even destroys the records that it obtains from investigations to determine whether to move forward on complaints that it has received. Moreover, SEC management punishes insiders who raise questions about its failures to perform its duties. It is apparently a toothless tiger, especially when it involves Wall Street banks.

Everything Is Bigger In Texas, Governor Perry Tells Whopper Lies

Governor Perry tells us that he should be President because his policies have enabled Texas to escape the unemployment problem. This graph shows that Texas looks pretty much like the rest of the nation. The economy has benefited from migration and from the energy industry which is still growing but its employment to population ratio looks pretty much like the rest of the nation. He seems like the perfect GOP candidate for the presidency.

The GOP Lie Machine Has A New Champion

link here to article

Unfortunately, people are not surprised when politicians tell a lie or two. The latest candidate for the GOP nomination, Governor Perry from Texas, may set the world record for political lying. He has based his campaign on his record in Texas. He lied about how his policies have produced job growth in Texas, and this article, shows that he has lied about the how the medical malpractice law in Texas has increased the number of physicians in Texas and has led to lower medical costs. Healthcare prices have not gone down in Texas and neither has the cost of medical insurance. Moreover, Texas leads the nation in the number of uninsured citizens. He has attempted to build on the GOP claim that malpractice reform will lower costs and enable more to purchase insurance. His base may respond to his unsubstantiated claims, but they won't stand up to analysis in the general election if he is nominated. Even Americans don't expect politicians to lie about everything.

New Home Construction, Recession And Recovery

link here to article

This article from Calculated Risk, shows the strong correlation between new housing starts and the unemployment rate. This recession differs from all but one of our previous recessions which were triggered by declines in new housing construction and the recoveries which were also led by rising demand for new homes. Our current recovery is being held back by weakness in the housing market. High unemployment, high inventories of unsold foreclosures and stock market volatility, is keeping new housing starts down despite the Fed's efforts to maintain low mortgage interest rates.

An Approach to Understanding Profit In Capitalism

link here to article

This article is about profit in a capitalist society. It may take several readings to grasp the main ideas but it is worthwhile. Some of the conclusions may be surprising. One of the oldest problems in economics is the problem of a general glut. That is, the chance that demand will be insufficient to consume all of the goods and services that are produced. Classical theory assumes that this cannot happen over the long term. Prices will adjust over time to assure that everything that is produced will be sold.
One of conclusions, in this analysis of profits, is that without government deficits and household debt, general gluts would be more common, and profits would be lower than they are in a mixed economy in which government and debt play essential roles.

This analysis also shows that household saving or thrift is not necessarily a virtue. Unless savings are absorbed by investment, all of the potential output will not be consumed. Unemployment, deflation and falling profits would be the result. Business investment is dependent upon the hope of future profits. Since the hope for future profits is variable, business investment is unstable, and will not always absorb household savings. Government investment and government spending compensates for some of the variability in business investment. Household debt also plays a role in maintaining adequate demand when business investment does not produce the level of employment and income that is needed to absorb potential output.

Marx's critique of capitalism, and predictions of its ultimate demise, was essentially a critique of classical Ricardian economics, whose assumptions ruled out the problems of a general glut. Marx did not perceive the roles of government and the use of debt to moderate some of the inherent instabilities in capitalism. Ironically, Utopians who advocate pure forms of capitalism, without recognizing the essential roles played by government and debt in modern capitalism, risk validating Marx's predictions about its ultimate demise.

The GOP and The Tea Party May Not Be A Successful Combine

link here to article

Everyone talks about the Tea Party but few really understand what it is about. This article, written by political scientists who did an extensive survey, gives us some valuable information about the Tea Party.

Despite the energy and support that the Tea Party provides to the GOP, they are also a potential problem for those who are connected to it. A large majority of Americans have come to dislike the Tea Party. They are disliked even more than Congress and that is saying a lot.

The Tea Party shares one value that is widely held by Americans. They favor smaller government and so do most Americans. The other values held by the Tea Party are less widely held and some are even very unpopular. They tend to be racist and anti-immigration which is unpopular with most Americans, but they are also Christian fundamentalists who desire a Christian state and believe that politics and religion should be blended together. Most Americans have a strong negative feeling about blending religion with government.

Michelle Bachman and Governor Perry have appealed to the Tea Party by mixing religion with their politics. Governor Perry could be stand in for Elmer Gantry. This has helped them to win support in several primaries which attract the most rabid element of the GOP. On the other hand, it is unlikely that either of them could survive a general election campaign where their views on religion would repel most Americans.

Tuesday, August 16, 2011

Merkel and Sarkozy Meeting Gets No Applause

link here to article

The meeting between the heads of the two largest countries in Europe was a downer for the market. Nothing they said was surprising or sufficient to make investors more comfortable.

New IMF Leader Presents Positive Views on How To Deal With Crisis

link here to article

The recently elected head of the IMF argues, in the Financial Times, that effective methods of dealing with the current sovereign debt crisis are available. She identified ways that short term growth could be stimulated while putting in place plans for improving the medium term debt to GDP performance of countries at risk.

Economic Growth Slowed Down in Euro Zone Last Quarter

link here to article

Slower economic growth in Germany and France may make it more difficult for the two largest Euro Zone countries to deal with the current debt crisis. Greece is still in recession and growth has been negative in Portugal and slow in Spain. That will make it more difficult for them to deal with their debt burdens since tax revenues are correlated with economic growth.

Monday, August 15, 2011

Is Capitalism Doomed?

link here to article

An economist suggests that our current forms of capitalism have run aground, and socialism has been shown to have is flaws as well. Some even wonder about the future of democracy under our current forms of capitalism. This article explains how many of our current global problems have exposed flaws in the ideologies that underlie our various forms of capitalism. He proposes some changes that may be necessary so that capitalism may evolve into a system that is more adaptive to globalization and other changes that have occurred at a rapid pace in modern society.

Another Analysis of The Euro Zone Recovery Plan

link here to article

The problems in the Euro Zone are much more important to the global economic problem than our problems in the US which are mainly political problems associated with the 2012 election cycle. This article goes into detail about the approaches taken to resolve the sovereign debt problems in Europe. It is complicated, and not easy to grasp in its entirety, but it is clearly a long way from resolving the major issues with Greece, let alone the issues that might arise with contagion to other countries which are struggling with weak economies and debt that is increasingly difficult to service.

The bulk of the sovereign debt is held by European banks. If all of the bad debt were written down by the banks, there would be another major banking crisis in Europe that would burden national governments. They would have to provide another rescue package on top of what they did to deal with the real estate bubble. On the other hand, this plan transfers risk to European entities and to the IMF. That risk is ultimately born by the stronger national governments of Europe.

A major concern with any rescue plan is that the economies of the peripheral countries will have to recover from recession in order to service the debt that has been restructured. It is not clear how that might happen.

Spreading Fear And Ignorance With Pictures

link here to article

This website provides a visualization of the US debt. It has been very popular via Facebook and other internet sources. The primary intent is to scare Americans about the US debt. The visualization is very effective because most people have no experience with numbers as high as one trillion or more. The problem is that people get frightened about the debt, but they don't really understand the implications. I thought that it would be helpful to provide some points to consider along with the size of the debt.

The debt is around $14 trillion today which is about the size of national income. A large percentage of homeowners in the US with mortgages have a total debt that is greater than their annual income. Moreover, the interest rate on their debt is many times higher than the interest rate paid by the US Treasury, and they have to pay down the principle along with their interest payments. The US Treasury does not make principle payments. It sells new Treasuries to make the principle payments on notes as they mature. The US Treasury has a much better debt to income ratio than most Americans, and its annual interest expense is lower as a percent of national income than it is for many Americans. That is why the government can borrow at low interest rates.

The US debt is an asset to those who own the Treasuries. They have purchased the debt to earn interest and to put some of their wealth into a risk free asset. Most of the debt is owned by Americans who receive the interest payments. A growing share of the national debt is held by central banks, including the US Federal Reserve. Foreign central banks purchase US Treasuries with the dollars that they earn by selling us more of their output than we sell to them. As long as we have trade deficits, and the US dollar is the global reserve currency, they will continue to purchase our Treasuries. Another way to think about a portion of our debt is to view it as a way to pay for US imports that are not paid for by US exports.

The US runs a budget deficit when it spends more on government than it receives in tax revenue. The US debt is the sum of its annual budget deficits, and rare budget surpluses. One way to think about the $14 trillion in US debt is to view it as debt that was accumulated in lieu of taxes. Politicians like to cut taxes to get elected, and to use debt to fund government expenses. That huge $14 trillion pile of US debt can be viewed as pile of foregone tax revenue. The GOP has put most of the foregone tax revenues into that pile by cutting taxes without making similar cuts in government spending. Government spending under GOP and Democratic presidents has been very similar over the years as a percent of GOP. The major difference between the parties has been in tax policy, which has been used as the dominant campaign issue by the GOP. It is the spend and borrow party in America.

My point is not to argue that increasing levels of national debt is a public good. It would be better if government spending and tax revenues were in closer balance. We should just have a better understanding of the national debt and its relationship to tax policy, and to trade policy. We should also understand it in relation to our national income, and to our ability to make interest payments. The US government is not bankrupt, and it is more able to service its debt than most US households and most US businesses.

George Soros Describes The Leadership Needed From Germany, US and China

link here to article

George Soros is rich enough to tell the world what he thinks. That is probably why he has never been asked to appear on the major television news shows in the US. He may not be correct about what he states in this article but he understands the issues as well as anyone and he is not running for political office or managing a hedge fund any longer. This article in Der Spiegel is well worth a careful reading.

Warren Buffet Tells Us To Stop Coddling the Super Rich

link here to article

Warren Buffet is one the worlds richest men. His friend Bill Gates is also very rich, and he has made many of the same arguments made by Buffet in this article. Our major problem is that most Americans that don't read the NY Times, and they get most of their information about tax policy from those who are good at distorting the information. Every American should be given the opportunity to read this article by Buffet. He loves the America in which he was given the opportunity to become successful. It was a very different America than the one that we have today in terms of tax policy. We have been living through 40 years of class warfare against the middle class, in which the tax burden has been shifted to them from the super rich. Their hired guns in the GOP, including some Democrats, have called any plan to restore their contribution to running this country class warfare. They argue that the rich won't invest or work as hard if they pay their historical share of the tax burden that existed when the country was prospering. Buffet claims that this is nonsense. Americans should understand that there has been class warfare, but it has been against the middle class.

A Plan For Dealing With Unemployment

link here to article

This article describes a plan for creating jobs that is probably the only way to turn this economy around. It is important for the US and the rest of the world as well. We should be be providing the right kind of leadership that others expect from us. It will be difficult to sell the GOP on any spending plan since they have based their 2012 election strategy on a slow economy, and on the idea that deficit reduction is the way to restore the confidence fairy who will fix the economy after they get elected. Obama has tried to preempt their strategy but many, including me, believe that the public could be sold a better strategy if he is willing to take the lead.

Saturday, August 13, 2011

We Know What To Do About The Economy, Just Do It

link here to article

Christina Romer uses our experience from the Great Depression for examples of what to do, and what not to do, in our current situation. Those who do not learn from history are doomed to repeat it. If politicians in the US and in Europe were more concerned with improving the economy ,so that we could better deal with longer term debt issues, we could restore economic growth. A failure to do so would be a failure of a democracy that is broken and in need of revival as well.

GOP Primary's Providing Weapons For Democrats To Use

link here to article

In order to win the GOP nomination for the presidency the candidates are feeding the GOP base what it wants to hear. This is providing ammunition for the democrats to use against them. This is a link to an attack ad against one of the top GOP candidates. It is using a statement that Romney made in response to a question at a town meeting. He claimed that corporations are people in order to explain why he wants their taxes to be reduced.

The Major Job Growth Engine Is Stalled In The US

link here to article

Job growth in the US following recessions has been greatest in young companies (not small business in general) that become successful. That is not happening today. The major problem is the lack of consumer demand and not the lack of credit. Young companies cannot ramp up employment as long as demand for their products or services is weak.

The End of The Greenspan Put

link here to article

This article (via Mark Thoma), suggests that the erratic behavior of stock prices may be related to confusion in Wall Street about the possibility that the Greenspan put is no longer operative. The Greenspan put gave investors the belief that the Fed would do what it could to moderate the business cycle. This eliminated some of the risk in owning equities. The worry today is that Fed is out of ammunition to moderate the current business cycle and that the risk premium for stock ownership will have to be increased. In other words, political uncertainty is putting pressure on stock prices. Many investors are worried that the government can not moderate the business cycle.

We Have A Candidate For The Next John Galt

link here to article

Starbuck's founder and CEO wants to be John Galt. In Ayn Rand's Atlas Shrugged John Galt asked the nation's entrepreneurs to go on strike in order show how dependent the nation was on its business leaders. The Starbuck CEO is asking business leaders to stop funding the campaigns of both parties. He believes that it is the only way to get politicians to put the national interest above their dominant focus on winning elections at any cost.

Largest French Bank At Risk Because of Sovereign Debt Holdings

link here to article

This article explains why France's largest bank has seen its stock price fall by 40% and why it is paying higher interest on interbank borrowing than its peers in Europe.

GOP Primary Campaign Sets Stage For General Election Defeat

link here to article

The GOP propaganda machine has sold its most rabid constituents a bill of goods about the economy and fiscal policies that are complete lies. All of the GOP contenders for the presidency have no choice but to repeat the lies that have been sold their base in order to win in the GOP primaries. This is likely to haunt the winner of the nomination in the general election. Their lies will be put on full display for those who have not been sold on the GOP bill of goods.

Dissension Within GOP on Fiscal Policy

link here to article

Republican economists are putting pressure on GOP politicians to alter their position on fiscal policy. They worry that current policies that Democrats have accepted, under threat of not raising the debt ceiling, will stall the economic recovery. GOP politicians in the House have based the 2012 election campaign on their pledge to cut government spending and to maintain the Bush tax cuts.

The European Crisis From a Cultural Perspective

link here to article

Michael Lewis has written some of the most insightful stories about the Wall Street culture, and how it explains much of what happened to sink the global economy into recession. One of the things that he understood about Wall Street was that its behavior is predatory. Smart people from Wall Street create complicated securities that are impossible to really understand and they search the world for stupid people who will buy things that they don't understand. Moreover, they will do it gladly because the Wall Street bankers are the best in the world at hooking their customers with the use of unlimited expense accounts. When Wall Street banks realized that they had to get rid of the toxic assets that they held in inventory, they found willing suckers in the German banks. In this article (via Manan Shukla), Lewis describes his experience with the German culture, and with German bankers, that helped him to understand why the German banks were so easily exploited by Wall Street bankers.

Of course, the larger problem today is to understand the crisis in the Euro Zone. Lewis describes this crisis in a way that everyone can understand it. He had already taken a trip to Greece and had written a brilliant story about the Greek culture and how it relates to the economic problems that they face. This is the story of his trip to Germany where he explores the cultural differences that separate the national cultures in Europe that are united by a single currency. In a large sense, Germany is the only country in Europe that can save the Euro Zone, but Greeks cannot behave like Germans and Germans have problems understanding why they should bail out countries that have behaved so irresponsibly. The answer, of course, is that German banks are on the hook for much of the debt that has been lent to the countries who have behaved irresponsibly. French banks are also at risk. The Euro Zone crisis is Europe's banking crisis.

Friday, August 12, 2011

Arctic Ice Breaking Up At 4 Times Predicted Rate

link here to article

Research at MIT indicates that the IPCC forecast for the reduction in Arctic ice is happening four times as fast as predicted by the latest IPPC forecast. The study cites mechanical forces that are at work to make the ice more vulnerable to break up from bad weather as it loses mass from global warming.

A Bond Investor Argues That We Have An Aggregate Demand Problem

link here to article

Bill Gross, the founder and Chief Investment Officer for the world's largest bond fund echoes Paul Krugman. He argues that our economic problem is inadequate global demand. The debt problem is a result of the use of debt in response to inadequate demand. He provides some reasons for the fall in demand but he does not get into this in much depth. Our focus, however, should be on understanding that problem and not on reducing demand by cuts in government spending.

The Markets Are Telling Us That We Are Focused On The Wrong Problem

link here to article

Krugman uses the crisis in the market for securities to make the points that he has been making for a long time. Stock market volatility is telling us that it is worried about the state of the global economy. The rising demand for US Treasuries is telling us that investors still view the US Treasuries as a safe haven, and that it is not concerned about an inflation threat. We should be focused on restoring economic growth and creating jobs. Instead attention has shifted to dealing with perceived entitlement problems that we may need to deal with in the longer term.

His explanation for the fixation on debt reduction, and the myopic stress on spending cuts that pay for tax cuts, is that others are using our current crisis to their advantage. They were unable to get the reductions in social welfare programs that they have always wanted without the large deficits that occur during a recession.

Thursday, August 11, 2011

Its The Political Economy Stupid

link here to article

Economists like Paul Krugman can't understand why so many economists are making the case for austerity and why they ignore the fundamentals of economics as he understands them. The answer given in this article is that the folks who run the economy decide who will get the microphone. He does not blame economists for the directions being taken by governments. He does not even believe that it makes much difference who we elect to office. The answers to our economic issues would be the same.

George Soros On The Euro and Germany's Importance to Solution

link here to article

George Soros has built his fortune by understanding how currency markets work. He describes the response in Europe to the current crisis and he argues that more needs to be done. He argues that Germany really has no other choice but to assume the leadership role needed to produce a viable solution that will salvage the euro. He understands, however, that this will not be easy in the current political environment within Germany. There is not a lot of popular support for bailing out the countries that have are believed to have brought their problems onto themselves.

Current International Trade Theory Can't Explain Trade Within Multinationals

link here to video

This is a link to video interview of Dalia Marin who holds the chair in International Economics at the University of Munich. She argues that the new trade theory advocated by Paul Krugman and others does not explain the current trade regime in which there is extensive trade within multinational corporations for intermediate goods. That is a big and unexplained problem today. For example, Apple has the largest market capitalization of any corporation in the world. Ostensibly, it is a US corporation but it has 10 employees outside of the US for every domestic employee. Apple assembles the iPad, for example, in China but it sources many of the components from a variety of countries that export them to China. This is not easily explained by conventional international trade theory.

The interview touches on many topics, including CEO pay and rising income inequality as well as the transfer of corporate cultures across nations. She argues that the US corporate model is more decentralized and more productive than the European model. The European corporations are moving in the direction taken by US corporations.

Where Will The Growth Come From?

link here to article

This article raises the question to which everyone would like an answer. Without economic growth, bad things will continue to happen. Unemployment will persist and the global economy will continue to be at risk. Some even argue that capitalism and democracy will be at risk. This article explores some of the potential avenues for growth and concludes that we can't depend upon the emerging economies to provide the needed growth. The US and Europe have to do their share but they can't seem to manage the political equation that is required.

Why Fox News Viewers and Rush Limbaugh Listeners Are Better Informed

link here to article

This article describes the twin problems of a weak economy and long term debt issues. It then looks at the ways that the GOP and the President look at those problems and how they have proposed to deal with them. The expectation among the pundits is that the president can come up with a magical solution because that is what we expect president's to do. No magical solution is possible, however, because the GOP and the President have opposing views and opposing objectives. That is why Fox News viewers and Rush Limbaugh listeners are better informed than the pundits. The know exactly what the GOP position is and they also know that it is intransigent. They don't desire or anticipate a magical solution from the President.

Why The US Does Not Have An Unsustainable Debt to GDP Ratio

link here to article

Jamie Galbraith explains why the US does not have a long term debt to GDP ratio problem. He argues that the flaw in the CBO long term budget forecasts is the assumption that the US must offer investors a real interest rate greater than the GDP growth rate. That assumption guarantees unsustainability. It would require that the US run a budget surplus in order to achieve a sustainable path. If it ran a budget surplus, the GDP growth rate would fall below the real interest rate and become unsustainable.

Galbraith provides a simple model that defines sustainability and which shows that the US can have a real interest rate on its debt, below the growth rate of GDP. That would require that the US runs a budget deficit and that the sustainable deficit gets larger as the debt burden grows. That is what the US has done by running budget deficits since the 1930's. That also explains why Japan can get away with a 200% Debt to GDP ratio. It borrows money at negative interest real interest rates.

Galbraith concludes by arguing that US policy should be to maintain low interest rates via Fed policy and to let the economy recover without worrying about the current debt to GDP ratio. We are on a sustainable path as long as the real interest rate is below the growth rate of GDP.

Wednesday, August 10, 2011

Problems in The Student Loan Market

link here to article

Moody Analytics released a study that raises concerns about the growing student debt problem and the outlook for future lending. Student debt, unlike other debt which has declined, has been growing during the recession. The growth is driven by enrollments which have increased by 300% over the last 40 years, and by prices which have increased faster than inflation. Price increases have been fueled by lower public support at state colleges, and lower endowment supported subsidies available at private colleges. For-profit colleges have also increased enrollments by over 300% in the last decade. They have lower graduation rates than other colleges and their graduates have been less successful at obtaining jobs. The 15% youth unemployment rate in the US also increases the burden of recent graduates who leave college with an average debt burden of $27,000.

The outlook for future lending also raises concerns. The Budget Control Act of 2011 will require that interest charges will accrue to graduate students while they are attending college. That will expand the amount of average debt at graduation by 16%.
There may be further cuts to student loan subsidies as cuts to discretionary spending are targeted in the next round of deficit reduction negotiations.

The issues raised in this report may impact the economy by curtailing the growth in spending on education and by lowering the productivity of the workforce as fewer students are prepared for the jobs of the future which will require higher education.

Lets Put The Investment Demand Curve in the Junk Pile

link here to article

The investment demand curve relates the cost of money to the expected return on an investment. It implies that an investment should be undertaken as long as the expected return exceeds the interest rate. The Table in this article shows that the real interest rate on US treasuries is negative, or close to zero, depending on the maturity of the bond. The decision to cut government borrowing means that the government is unable to make an investment that would yield a positive return. It also suggests that a government investment that makes use of idle workers at zero interest would be of no value to the economy or to the government.

Why The Obama Administration Puts Debt Reduction Above Employment Growth

link here to article

This article explains the Obama administration's motivations for joining the GOP in its deficit reduction thrust. The political operatives in the administration decided that they would not be able to pass any bill to stimulate the economy or to deal with unemployment. Instead of attempting to pass a job creation bill and blaming the GOP for obstruction, they decided that it made more political sense to defend themselves against GOP accusations on overspending. In other words, they assume that the GOP is better at framing the debate than they are. Recent experience suggests that their assumption may be correct.

Federal Reserve Announces Intention To Keep Interest Rates Low

link here to article

The Federal Reserve lowered its outlook on the US economy by announcing that it would keep short term interest rates close to zero for the next two years. It is very unusual for the Fed to signal its intentions so clearly. It believes that there is little threat to inflation and it is concerned that 25 million Americans are unable to find full time work.

The announcement stimulated the US stock market and it helped the Asian market to rebound earlier today. The Fed still has some ammunition left if it becomes more concerned about the economy. It could decide to purchase long term US treasuries and other securities that would keep long term interest rates low.

Monday, August 8, 2011

Is There A Magical Debt to GDP Ratio?

link here to article

Robert Shiller raises questions about the misuse of the debt to GDP ratio. He points out that looking at the ratio on annual slices is arbitrary, and that there is nothing magical about ratios that reach a particular and arbitrary point. He provides data to support his view. He argues that the ratio increases when either the numerator or the denominator change. For example, if GDP falls and debt remains constant, the ratio will rise. He is concerned that the imposition of austerity will cause GDP to fall, and produce a rising ratio, in the distressed countries that are at risk. The result is a feedback loop that is self destructive.

Banks Are Selling Off REO's But There Are More On The Way

link here to article

Calculated Risk summarizes a lot of data on mortgage delinquencies. Real estate owned by banks (REO's) is declining as the banks sell off their inventory of foreclosures. On the other hand, the quantity of mortgages in which payments have not been made for 90 days is rising. Many of these will eventually be foreclosed and refill the REO bucket.

Can Politicians Deliver What American's Want?

link here to article

This article argues that Americans want change that its politicians can't deliver. America's shrinking share of global output is the problem. It has been obscured by the huge entry of women into the workforce which supplemented the loss of male income. It also depended upon debt fueled consumption that reached a peak prior to the financial crisis. The implication is that a shrinking share of global output eventually means that US living standards cannot grow at the pace that Americans would like.

S&P Is Not Credible But The US Debt Problem Is Primarily A Political Problem

link here to article

The US has its problems but S&P's downgrade of US debt is not credible either. The US debt problem in the short and medium term is not serious but it is serious in the long run. The major long run problem is the rising cost of healthcare which gets worse over time as prices inflate and more citizens qualify for benefits. That problem can also be fixed since the US pays far more per person for healthcare than any country in the world. If we could control price inflation things would be much better. Furthermore, the US is one of the lowest tax countries in the world and it has the largest economy. We should be able to afford to fund a more efficient healthcare plan. Our basic problem is that we are not politically able to address either solution as long as one of our major parties is under the control of right wing radicals.

Central Bank Intervention In Europe Steadies Bond Market

link here to article

The European Central Bank (ECB)stepped into the market for Italian and Spanish bonds and the yields, which had been rising, fell substantially. That will make borrowing for both governments less expensive. The action taken by the ECB is similar to what the US Fed had been doing in its quantitative easing program.

Reassuring the bond market in Europe was important but there are still concerns over economic in growth in Europe and in the US which is a big export market for several Euro Zone countries.

Sunday, August 7, 2011

Learning About Banking From A Western Movie

link here to article

This post (via Krugman) shows how John Ford, who taught Americans about rugged individualism via his western movies, portrays a crooked banker. Ford's banker sounds a lot like many of those on Wall Street. He could also have been a leader in the Tea Party.

There Is No Recession For Corporations

link here to article

Corporate profits for 2010 were 14% of national income. That is the highest level of national income going to corporations in our recorded history. On the other hand, the recession has not been good for small business or for employees. Small business profits were at a 17 year low at 7.7% of national income in 2009 and 8.3% in 2010. Total employee compensation, which includes benefits, were 62.1% in 2010. That was the lowest level since 1965, and the higher share of compensation going to benefits depressed wage income even further.

Ordinarily, corporate profits as a share of national income have been highest when the rate of unemployment was low. A good economy was good for corporate profits. That pattern did not obtain in 2010 when corporate profits set the record for its share of national income. The unemployment rate was 9.4% in 2010.

These data may indicate why there has not been more pressure on government to deal with unemployment. Our politicians are not getting lobbied by large corporations to do something about unemployment. Small businesses are hurting, and so are employees, but they don't have lobbyists working for them. They have been told to worry about the national debt and to keep taxes low for the corporate executives who are benefiting from this economy.

Saturday, August 6, 2011

Krugman Explains Keynes and Attacks his Chicago Critics

link here to article

Our current economic problems have revised the debate within economics about the relevance of Keynes. The economics department at the University of Chicago has been the most consistent opponents of Keynes since Milton Friedman started the attack on Keynes over fifty years ago. I have posted this lengthy article by Krugman on the debate between Keynes and the Chicago school, which has been the strongest opponent of government intervention in the economy, and also one of the dominant forces within economics. Krugman does an excellent job of defining Keynes and putting the ideas of the Chicago school in their place. If you start reading it, you may not want to put it down.

London School of Economics Debates Keynes and Hayec

link here to article

The London School of Economics hosted a debate on Keynes versus Hayec. The debate is critiqued in this article. The thrust of the critique is that Keynes's views were distorted in the debate and an effort is made to present his real positions on the issues that were discussed.

The debate was interesting, and it reflects increased interest in both Keynes and Hayec,that has resulted from concerns about how to deal with our current economic problems. In general, I think that many of the criticisms about Keynes and his ideas are distortions of his real positions. I agree, however, with one of the comments posted about this article, that the real cause of our current problems is the result of the dominance of the ideas on macroeconomics, and the economics of finance, that come from the University of Chicago's economics department. Hayec, and the Austrian School of economics have had much less influence than the Chicago economists.

PIMCO CEO Blasts Debt Ceiling Deal

link here to blog

Brad DeLong posts an article by the CEO of PIMCO on the debt ceiling deal. He states that the PIMCO CEO is more pessimistic than even he is about US governance and recovery from the recession.

Italy Claims That ECB Will Purchase Italian Debt

link here to article

Italian financial minister states that the European Central Bank (ECB) will begin purchasing Italian debt on Monday. Italy plans to amend its constitution by passing a balanced budget amendment. This is intended to assure creditors that Italy will be fiscally responsible. It will be interesting to see if Italy can stimulate economic growth, that is needed to pay down its debt, while government balances its budget.

Ken Rogoff Tells Us to Liquidate Debt

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Ken Rogoff suggests that our policy response to our current economic problems are partially semantic. We currently have a balance sheet recession that is called the Great Recession. He believes that it should be called the Great Contraction. His point is that the acceleration of the deleveraging that is taking place would shorten the period of the contraction. He suggests some ways to speed up the deleveraging, and he argues that a bit of inflation would also help debtors at the expense of creditors.

He also claims that fiscal policy has been the wrong way to deal with a balance sheet recession. My feeling is that both fiscal policy and monetary policy are necessary. Businesses and households have increased savings at the expense of spending. If government also deleverages and cuts spending, the economy will shrink further and lower tax revenues will increase government deficits.

A Good Overview of Current Economic Issues by Stiglitz

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Joe Stiglitz sums things up quite well. Bad economic ideas (zombie ideas)are viral. They have spread among the North Atlantic countries and they keep us from doing what is necessary to deal with the problems of restoring economic growth. The debt crisis cannot be solved without growth in tax revenues, which is largely dependent upon growth in the economy.

A Perspective On Financial Markets in The UK and Issues in the Euro Zone

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This editorial in The Guardian provides some insight into the behavior of the financial markets in Europe and the issues that are worrying investors. Bank stocks in the UK took a beating in the recent sell off. This reflects investor concern about the exposure of the UK banks to sovereign debt and to the weakness of the UK economy. The other concerns are that governments are running out of ammunition in which to put out the fires as the problems in the Euro Zone periphery are spreading to other nations that are at risk.

Another Reason Why Friends Should Not Let Friends Read The WSJ

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Most economists don't pay much attention to the Editorial Page of the WSJ. It was bad before it was purchased by Murdoch and it is even worse now. This article rips apart an editorial that was recently published by the WSJ. I posted it because it sums up the position of the WSJ quite well. Anything that Obama did or wants to do is bad.

Economic Governance In Europe Not Any Better Than In US

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This article explains why economic governance in Europe is not up the task of dealing with economic problems in the periphery of the Euro Zone.

An Apology to the Tea Party

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I wonder who put a horse's head in Joe Nocera's bed. This article is his apology for intemperate comments that he made about the tea party in a previous column. If anything, his comments on the tea party were more moderate than I believe are warranted. It is a group of no-nothings who have been put into a position to clog the wheels of US government in order to serve the needs of radical right wing groups that have no interest in their well being or for the great majority of Americans.

S&P Downgrades US 10 Year Debt to AAa

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S&P dropped its AAA rating on 10 year treasuries below AAA for the first time since 1941. This does not affect shorter term treasuries held by money market funds and it does not affect the status of 10 year treasuries held by banks. The banks will still be able to hold them as perfectly safe assets.

S&P downgraded the US bonds because they do not believe that the US Congress is functioning in a manner that will allow the government to address its medium term debt problems. Ordinarily, a bad economy is the problem that causes a downgrade. S&P is confirming a problem that 82% of Americans recognize. The US political system is operating like those in third world countries which do not have AAA ratings.

This Recession is Very Different

This graph shows that the average duration of unemployment is now twice as long as any other recession since the Great Depression. This only includes those who are still looking for work. If we added those who have stopped looking the number would be much higher. This means that many of those currently unemployed will become unemployable. The employment to population ratio will be permanently lowered.

Friday, August 5, 2011

Krugman Declares Victory

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Krugman says "I told you so" and crosses his fingers. He would like to believe that policy makers will give up on their expansionary austerity fantasy and focus on the real problem which is economic growth.

Day Two Of the Market Fall

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This article describes the reaction to yesterday's market collapse today in Asia and in Europe. Investors are selling equities and are purchasing US treasuries and German bonds which is driving down yields below the inflation rate. Apparently, the bond vigilantes are on vacation along with the confidence fairy.

A Failure To Launch

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The global economy has deep structural problems. Some attempts were made to contain the crisis but they were not sufficient to provide the needed "escape velocity". Now we are out of fuel and it will be difficult to attain orbit.

I would add a couple of things to the aerodynamic analogy that was used to describe the problem. Ground control screwed things up by arguing over the kind of fuel to use and it decided that a lean mixture was better than the high octane stuff that was described in 1936 by an out of date theorist. We won't be able to try another launch because ground control is trying to figure out who to blame for the failure and the public has lost confidence in the space program and won't fund it. Some believe that the space craft is able to lift itself into orbit by defying the laws of gravity, which after all, are only theoretical, and are not in the constitution or described in the scriptures.

A View of the Stock Market Collapse From the UK

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The Guardian provides a blow by blow description of the stock market free fall in Europe and the US.

Thursday, August 4, 2011

A View From The UK On The War Against The EPA

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The Guardian reports on the war against the EPA. The war is being waged by tea partier's who are funded and organized by the likes of the Koch brothers who use free market dogma to protect their energy companies from government regulation.

Banking Worries In Italy and Spain on the Rise

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The fall in the market value of sovereign bonds in Italy and Spain is the latest problem that is causing concern in Europe. The large banks in these countries have been major lenders to their governments. When the bonds fall in value on the market, two bad things happen to the banks. The bonds are held as assets on the bank's books. When they fall in value the amount of capital backing bank assets falls below acceptable standards. The other problem is that banks borrow from other banks, and from wholesale lenders like money market funds, to meet liquidity needs. They use the government bonds as collateral to make those loans. As those bonds fall in market value it becomes more expensive for the banks to satisfy their liquidity needs. That was the problem that caused the failure of Lehman and Bear Stearns in the US during the financial crisis. They were borrowing from other banks, and from money market funds, to meet liquidity needs and they were using AAA rated mortgage backed securities as collateral. When those assets fell in value they became less acceptable to wholesale lenders as collateral.

Wednesday, August 3, 2011

Tea Party Loses Support Among Moderates

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The Tea Party supported House may have won a victory in the debt ceiling debate but the Tea Party and the GOP have lost support among moderates and independent voters. It is unlikely that the Tea Party crowd will tone down its rhetoric and it may be harmful to the GOP in 2012.

The Thinking Process in the White House

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This article provides an analysis of the way that decisions are made in the White House. The president has been criticized by many in his own party for not being aggressive when attacked by the GOP and by the compromises that he has made against his own value system. This article offers a picture of the president as a pragmatic realist.

AAA Sovereign Debt Ratings

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Felix Salmon explores the AAA rating held by only a few sovereign countries and the prospects for restoring a lost AAA rating. The interest costs on US debt would be enormous if it lost its AAA status. There are a few other articles on this site that are worth reading.

How Is Apple Different From The US Government?

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Ordinarily, there is enough difference between operating a business and running the government that analogies between them break down. This article contrasts what good companies like Apple have done to overcome bad times with what the US government is doing today. It may be instructive. Apple invested in the future and it has prospered. The US government is preparing to curtail investments in the future. The implication is a more difficult future for out kids, than we might otherwise have, if we had a more effective government that could wisely invest in the future of the country.

Larry Summers On The Debt Ceiling Deal

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This article provides some insights into the recent debt ceiling deal. Letting the Bush tax cuts expire under current law is critical to long run debt reduction. Congress does not have to do anything and the cuts will expire. If Congress tries to extend the cuts, Obama can veto the bill and it is unlikely to be over ridden. The other point is that much depends upon restoring economic growth. Without some stimulus from government, recession or very slow growth may cause the debt to GDP ratio to rise.