Sunday, September 25, 2011

Off To Europe Next Week

I will be heading off to Europe for the next 5 days. Posts will be scarce.

How We Got Into This Mess and How We Get Out

Brad DeLong's slideshow describes our current slow recovery and offers suggestions on how we should respond.

NY Fed President On Financial Cycles

The President of the NY Fed argues that financial booms and busts are built into the system and that they are often associated with innovations. The innovations create the boom, and feedback loops develop which lead to the deflation. His analysis reminds me of Minsky's analysis of the financial system. It makes use of system analysis concepts and feedback loops to make the case that booms always generate behaviors that lead to debt deflation.

The WSJ Brings In Another Economist To Blast Obama And Promote Tax Cuts

This article in the WSJ brings in Robert Lucas to make the points that it wanted to reinforce. They previously published op-eds by Mankiw and Borro to make the point that our slow recovery from recession has been caused by failed policies that originated in the White House. Lucas states that he voted for Obama, but he agrees that his policies have been a failure. The last paragraph in the article makes the point that the best way to stimulate the economy is to get rid of the tax on capital gains. Cutting taxes for the super rich is always the answer that the WSJ wants to promote.

Whats Happened To The Political Left?

This article describes the ways in which the American left organized to end the gilded age in which income was concentrated among the super rich. It took many years, and a depression that was brought on by greed among the super rich, for the left to become effective in altering the political and economic landscape.

The right responded by organizing itself around a common theme of cutting taxes in order to limit the ability of government to fund programs that promote social welfare. It started in the 1970's and it has become a well organized political machine that has built a popular base in the tea party, and it has funded conservative think tanks and mass media outlets that influence public opinion. It has also promoted laws and economic policies that undermined the influence of organized labor.

The political left seems to have disappeared. Its base of support among working class American's has eroded, and it has been content to promote causes which appeal primarily to a well educated liberal elite, and are used by conservatives to energize the tea party. It hoped that electing a new leader to the presidency would help its cause, but that has not worked. It can't depend upon politicians to provide the needed leadership. It has to build from the ground up like it did in the 1930's. This will take time and leadership. It will also be opposed by a well organized and well funded machine that wishes to solidify the new gilded age that we have today.

Saturday, September 24, 2011

A Picture Of A Bank Without An Ethical Culture

In an earlier post we reported that a trader at UBS lost over $2 billion and we raised questions about the gambling culture in the trading division of the bank. This article makes the point that it is the absence of a culture and code of ethics at UBS that is the problem. A long history of bad deals has cost the bank billions and forced the government to rescue the bank. It needed to be threatened with legal actions by the IRS in order force the bank to reveal the names of wealthy Americans that were evading taxes by hiding assets in UBS accounts. Shareholders have not been rewarded by this behavior.

Dr. Doom Tells Us How To Avoid Another Depression

Nouriel Roubini was called Dr. Doom when he predicted the financial crisis and consequent recession. In this article he describes another doomsday scenario. Unless governments and NGO's take appropriate actions we could face another Great Depression. Since most of the actions that governments might take are politically untenable, he believes that some of the at risk countries may have to leave the eurozone.

The Way Things Were, And What They Have Become

This article compares our response to the Great Depression to our current response. Government took actions during the Great Depression to improve economic security for families. Today government has been pushed into improving the relationship between government spending and tax receipts. The Great Recession, which, along with GOP sponsored tax cuts, reduced tax receipts and increased government transfer payments. The resulting increase in the federal budget deficit became the problem that needed to be fixed. The concern for improving the economic security of those affected by recession has been shifted to the background. It has been trumped by an exaggerated concern for fiscal responsibility, and the fear of future inflation and future tax increases. Government is portrayed as the enemy of the people, and fear of the future has replaced the hope for a better future.

Shifts of this magnitude in public attitude do not occur by chance. The reforms spurred by the Great Depression were never popular with a powerful minority of Americans. The "Great Recession" provided the opportunity to attack government and the social programs that were introduced in the 1930's. We have been told that the richest country in the history of the world can no longer provide economic security for its people. It is more important to provide higher after tax income to those who have no need for government help during economic crises. Like John Galt, they will refuse to work hard, and provide jobs, if they are forced by government to help fund the community that gave them the opportunity to be successful. They no longer identify themselves with any community. They have the liberty to move their activities to more receptive locations with lower taxes, and less intrusive governments. This expands their opportunity to win their race to the top, as others fight against the opportunity to escape the race to the bottom. This is the best of all possible worlds. It is a world that maximizes individual liberty and opportunity at the expense of community and a concern for others.

Friday, September 23, 2011

A Mathematician Pokes Fun At Economic Theory and Practices

This is a critique of economics by a mathematician. He wrote it in a way that he taught mathematics to 6th graders in Cambridge in his spare time. Some students of economics will appreciate the irony and humor. He goes after the giants of the profession who did their best to make economics look like theoretical physics.

Was The Cause of the Eurozone Crisis Systemic?

This article looks at data that may help to explain the causes of the euro zone crisis. Data suggest that there is enough blame to go around about the causes but there is reason to believe that some of the cause was systemic. That is, the common currency created capital flows from the core to the periphery that made a crisis inevitable.

All You Need to Know About Class Warfare

This article by Krugman summarizes several of the articles that we posted after the Obama speech on tax policy. If Krugman reached an audience the size of Fox News, we would have a better informed electorate. The Murdoch media empire, especially strong in Anglo countries, specializes in yellow journalism. The main purpose of yellow journalism is to inculcate an ideology in large segments of the population that is supportive of plutocracy and opposed to the self interest its audience. Many believe that they will win the lottery and become super rich, or they learn to perceive the super rich as their benefactors.

Thursday, September 22, 2011

How To Restore US Economic Growth

Michael Spence accurately describes the structural changes in the US economy that led to recession. In order for the US economy to grow it must increase its share of the global economy that will increase rapidly over the next 25 years. This means that it must become more competitive in the tradeable sector that it has allowed to erode in favor of the non-tradeable services sector. He outlines some of the things must be done to make this happen.

Some Details On Fed Announcement

This post (via Mark Thoma), provides some commentary on the Fed's announcement. The housing market has to be fixed in order for the economy to fully recover from recession. The Fed's plan to sell short term treasuries and to replace them with long term notes will encourage refinancing at lower interest rates. Lowering interest payments is probably the best investment that households can make in this market. Stocks are down and interest rates on savings are negligible. The opportunity cost of paying down debt is very low.

HP Is Looking For A New CEO Again

HP is looking for a new CEO. It plans to fire the CEO it hired less than one year ago because his strategy appears to be too radical. He was hired without being interviewed by the HP Board. He replaced a CEO who was sacked because of a personal relationship that he had with an employee that led to abuse of his expense reports. He had replaced a CEO who made acquisitions that created dissension on the Board.

The leading candidate for assuming the leadership of HP is Meg Whitman who headed up E-Bay and is currently a member of the Board. She ran for the California governorship by running a disastrous campaign that cost her a large portion of her billion dollar net worth. Many are concerned that she would be a bad choice for HP.

It appears that HP's Board is not any better than our political system in selecting leaders that are not afflicted with narcissism.

Market Reactions To Gloomy Announcement By The Fed

This article describes market reactions to the Fed's description of the US economic outlook. It is deeply concerned about the risk to the economy and it announced a new plan to keep long term interest rates down. This is primarily intended to keep mortgage interest rates low. The Fed also expressed concern about the risks in the banking system. Moody's downgraded the bonds of three of the largest banks in the US. The downgrade did not reflect any changes in their fundamentals. Moody's does not believe that it would be possible to rescue them in our current climate. In other words, they lost the implicit guarantee of government insurance against default. Of course there is also concern about the European banking system and the inability of the euro zone to solve the sovereign debt crisis that puts the euro at risk.

The takeaway from this article is that the global economy has problems that require government actions to alleviate the risk of deflation and recession. It does not appear that our elected officials have the capacity to effectively deal with these problems. Their skills reside in running election campaigns.

Some Detail on Obama's Tax Proposal

This editorial provides some details about the president's tax proposal. It also shows that most of the criticisms coming from the GOP are false. For example, the plan restores the top marginal tax rates on income to the rates that existed under Clinton when the economy was booming. There is no reason to believe that this action will hurt the economy and it will help with budget deficits that the GOP claims to care about.

There is little chance that some parts of the proposal will become law. The GOP House will block any new taxes. The Bush tax cuts were intended to be temporary when they were passed. They will expire unless Congress and the president extend the current law.

The president's proposal has put the GOP on the defensive for a change. It also makes them vulnerable by exposing their total concern for protecting the interests of the super rich. They try to deflect this by claiming that they are concerned about the effect on small businesses. This does not pass the smell test and it is easily countered.

Wednesday, September 21, 2011

Welcome Elizabeth Warren To The Political Battle

This video has Elizabeth Warren who is running against Scott Brown for the Mass Senate seat doing her own spin on class warfare. She is leading in one of the polls against Brown by a few points and her campaign has only just begun. The GOP is going after her as another professor from Harvard and as an elitist. Her populist credentials will make this approach difficult for the GOP.

Cognitive Style Is Purported to Determine Belief in God

Tyler Cowen is a conservative economist from James Madison University that is supported financially by the Koch family. He has reported on research which led him to the conclusion that belief in God is a function of cognitive style. The research is based on a psychological test that is purported to distinguish between individuals use of intuition or reflection to make cognitive decisions. Those who favor intuition over reflection have stronger beliefs in God. There is also the implication in how the study is reported that intuition is a more natural cognitive style, and perhaps favorable to the use of reflection.

The full study is not reported in this post, however, I am highly skeptical of the study and how it might be used. In the first place, the test that purports to measure cognitive style is not a commonly used test that has been examined for validity and reliability. We know nothing about the ability of the test to measure what it claims to measure. We also know nothing about how the results might differ if other kinds of problems were used instead of math problems. One of the comments on the post raised a good question. We know that evangelical Christians, who have a strong belief in God, presumably because of an intuitive cognitive style, are also strong disbelievers. They don't believe in evolution and they deny global warming. Is the implication that disbelief in evolution and global warming is also intuitive?

This post makes me even more skeptical of Tyler Cowen and the economics that flows from James Madison University. Cowen has also made favorable comments on the op-eds by Mankiw and Borro which blame the Obama administration's policies for the slow recovery in the US. Any organization supported by the Koch brothers would also affect the credibility of research produced by the organization.

Congressional Leaders In GOP Attempt To Influence Monetary Policy

This post provides commentary on the decision by GOP leaders in the House and Senate to deter the Fed from another round of quantitative easing. The Fed is required by law to maintain price stability and employment stability. The Fed has also been organized to insulate it from politicians who often place the interests of their party above those of the country. Politicians have generally avoided interference in the operations of the Fed in the conduct of monetary policy. This action taken by GOP leadership in Congress is highly unusual, and it raises the risk that the Fed's ability to conduct monetary policy will be guided by political interests. It would certainly raise questions about US monetary policy that would affect the Fed's reputation within the community of central banks that cooperate on international monetary policy issues.

This letter from GOP leadership is also harmful because the Fed has also been a target in its political campaigns. For example, Rick Perry has a accused the Fed of treason, and Ron Paul would like to abolish the Fed. This feeds into the conspiracy theories that are conspicuous among far right political groups like the Tea Party. The GOP has also been accused of interfering with government actions that might improve the economy prior to the 2012 elections. It has been using budget deficits and the fear of rising inflation to limit fiscal policy as well as monetary policy.

Another Black Eye For The SEC

This article raises more concerns about the senior management at the SEC. The top lawyer at the SEC participated in decisions on the compensation of those harmed by the Madoff Ponzi scheme. His family had a substantial gain from the Madoff fund and the top SEC lawyer had a conflict of interest that should have led him to recuse himself from the deliberations. He had informed the head of the SEC about his conflict of interest, but she did not inform her fellow commissioners about the conflict. Moreover, the head of ethics at the SEC knew about the conflict of interest but he found no problem with the conflict. It turns out that he reported to the top SEC lawyer who wrote his review.

One of the primary roles of the SEC is to insure that corporations abide by laws which protect shareholders and investors from corporate officers who might make decisions that benefit them against the interests of shareholders and investors who do not have access to information available to corporate officers. It appears that senior management at the SEC does not take conflict of interest as seriously as it should.

One Graph That Explains Why This Recovery Is Different

The GOP propaganda machine, which includes prominent economists, has been blaming our slow recovery from recession on Obama policies which have led to low business confidence. This graph tells the real story on why this recovery is different. The correlation between new housing starts and the unemployment rate is very strong. Previous recessions were triggered by declines in housing starts and the recoveries were spurred by a pick up in housing starts. Movements in housing starts were related to the Fed's interest rate policies. The Fed raised rates when it worried about inflation, and it lowered rates when it worried about unemployment. Since housing starts are interest rate sensitive, they tend to respond strongly to changes in the interest rate. This recession is different because lower interest rates have not stimulated new housing starts. That is the result of the bursting of the housing bubble. Home prices have fallen dramatically, and homeowners with principle balances greater than the market value of their homes, cannot afford to sell their home and move up to a bigger home. Moreover, they no longer have equity in their homes that they borrow against to finance consumption.

Since investment in new homes is included as part of business investment, the decline in new housing starts exaggerates the impact of business investment on the recovery. Economists, like Mankiw and Borro from Harvard, pay little attention to this effect when they make use of the business confidence fairy to put the blame on Obama's policies which are purported to be the cause of low business confidence.

Tuesday, September 20, 2011

The Real Class Warfare on Tax Policy Since 1979

This article shows how tax policy has affected different income groups between 1979 and 2005. Tax Policy has improved the post-tax income of those in the highest income groups more than any other group. In other words, tax policy has shifted the tax burden from the wealthiest Americans to the less wealthy. Should we call that trend "class warfare"? The super rich received the lion's share of pre-tax income, and tax policy added to their share of post-tax income.

This article does not speak to another point on which we need to be reminded. Conservatives argue that the top income groups pay more in income taxes than low income groups. How could it be otherwise? The greater their share of income, the more income they have to be taxed. The real issue is over the progressiveness of tax policy. The US tax system is only slightly progressive, and it has become less progressive since the 1980's. The regressive social security tax produces almost as much federal income as the income tax, and the largest share of income for most states is derived from the regressive sales tax.

The Tea Party Is In A World Of Its Own On Global Warming

This article in The Economist shows that members of the Tea Party are more convinced that global warming is not real than any other group. They are also more certain that they are well informed about the topic and that they do not require any more information to hold to their opinion. In other words, the Tea Partier's operate on faith. They have been told what to believe, and it is not necessary to confuse them with information. They live in world where strong beliefs about most subjects make them incurious about the world that they live in. They certainly are not "sickled over by thought" like Shakespeare's Hamlet

David Brooks Does Not Like Obama As A Democrat

The conservative op-ed writer for the NYT admitted that he has been a sap. He liked the Obama who tried to work with Republicans to implement bipartisan solutions to our problems that Republicans rejected because they did not get everything that they wanted. Obama's recent speech in which he announced his intention to let the Bush tax cuts expire was the last straw for him. He can go back to being a sap for the GOP which has done everything that it can to destroy his presidency.

I like the new David Brooks who puts on his team uniform so that there is no question about where his loyalties lie. I also like the new Obama who has apparently decided which team he is on. I agree with Brooks that this is electoral politics on his part but its good that he has decided that its better to campaign as Democrat than to run as a Republican Lite.
The IMF reduced its growth forecast for the US and Europe for 2011 and 2012 to below 2%. Global growth forecast is 4% led by emerging markets.

Monday, September 19, 2011

IMF Study On Income Inequality Growth And Negative Current Account Growth Current

This post is on research conducted by the IMF that shows a relationship between the growth in income inequality and negative current account balance growth. Governments do not respond directly to the causes of income inequality. Instead, they reduce the cost of borrowing so that the bottom 95% can take on more debt to support consumption. Some of the borrowing comes from internal sources, but it is supplemented by borrowing from abroad, which produces the fall in the current account. Global imbalances are the result.

Studen Loans By For-Profit Colleges As The Next Sub-Prime Mortgages

This article compares default rates on sub-prime mortgages with the default rates on student loans. The default rate on student loans made by for-profit colleges is 15% and compares with that of sub-prime defaults.

Several points can be made about these data. Its pretty clear that for-profit colleges are using government supported student loans to sell folks on getting a degree that may not be able to finish the degree, or may not get a job after they get the degree. The primary motivation of the for-profit colleges is to produce profits. They have little interest in what happens to their recruits who are stuck with loans that they cannot afford to repay. The government gets stuck with guarantees that it provided, and those with the loans will not be in a position to form households or lead a normal economic life. The effect is much like what happened with the sub-prime mortgages. Income is extracted by the for-profits from the disadvantaged who made bad decisions and the entire economy suffers from the result.

The Earth Is Not Flat. Why Do We Have This Debate?

I have been critical of the Mankiw and Barro op-eds which argue that our current weak recovery is the result of low levels of business investment. They argue for lowering taxes on business so that they will invest in the economy. This post provides some data to refute their explanation. Fixed business investment is not the real problem. Low levels of investment in new real estate construction is the culprit. The recoveries from our previous recessions were led by increases in real estate construction. This recovery is weak primarily because of historically low levels of real estate construction.

I often get the feeling that I spend too much of my time responding to false claims by conservative economists who know better. They provide the "academic" cover for the conservative politicians who we expect to make stupid claims. Its really a waste of everyone's time and energy to debate whether the earth is flat or round. My time is wasted as well as the time of smart people like Mankiw and Barro who could be doing much better things with their education and the important positions that they hold in academia.

Google Chairman Answers Questions About Business Spending

The Chairman of Google responds to questions about why business investment has not been stronger. Unlike conservative politicians, and their cheerleaders in some economic departments, he argues that business investment will grow when demand picks up. Consumers and business leaders do lack confidence in the economy but it is the result of the gridlock in Washington rather than the policies of the Obama administration.

The Relationship Between Tax Rates And Economic Growth

Occasionally, you might run into a Republican who expects that facts will support a cherished belief. This article provides the available data on the relationship between the top marginal tax rate and economic growth. One could make a better case that the relationship was negative rather than positive.

Let The Class Warfare Begin

If anything, Republicans are predictable. They filled the Sunday "news shows" arguing that Obama's plan to let the Bush tax cuts for the wealthy expire, according to the law which made the cuts temporary in order to get it passed by Congress, is class warfare. Predictably, they also argued that it would hurt the economy if the super rich had to pay higher taxes.

Sunday, September 18, 2011

A Strong Argument Against International Banks From The Financial Times

This Financial Times article uses the occasion of the $2 billion loss by UBS to make a strong case against the expansion of the international banking system at public expense. The UBS loss shows that the banks are still unable to control the trading side of their business. It supports proposals in the UK to separate investment banking from depository banking and also the imposition of higher capital requirements on elite banker who fear that it will affect their compensation. The article also shows sympathy for citizens in Germany who do not want to support states in the eurozone that have been unable to manage their fiscal affairs. It takes the position that commercial elites in Germany benefit from the EU, but the benefits to ordinary Germans are not obvious.

The Evidence Is Against A Supply Side Explanation of Our Slow Recovery

This post does a great job of describing the current argument that the GOP and its friends in the economics profession are making. Conservatives, since Milton Friedman, have attacked the demand side explanation of recessions and have promoted a supply side explanation which makes government the cause of recessions. I have posted articles by Mankiw and Borro who follow in Friedman's footsteps by advocating a supply side explanation that puts the blame for our slow recovery on government policies that decrease the willingness of business to invest in the economy.

It probably won't make much of a difference to those who have a religious faith in supply side economics, and who want to limit the role of government in the economy, but the data presented in this article makes a convincing case against a supply side explanation our current economic problems. You won't see this in the WSJ; you won't see it on Fox News, and you won't hear it on talk radio, unfortunately even Harvard economics students will not see the data. You can have some fun, however, teasing you tea toting friends with a foreign substance: empirical data.

We Deserve A Good Laugh About A Sad Story

Maureen Dowd has a way of telling a story that makes her points with laser sharp humor. The GOP candidates are attempting to sell themselves to the "no nothing public" by portraying themselves as "no nothing candidates". Its a close contest between Rick Perry and Michelle Bachman in that contest. Rick Perry does a better job, however, of imitating the GOP icon John Wayne, and that gives him a big edge in the dumb and dumber race to the bottom. GOP politicians understand that the majority of Americans could not have been in the top 10% of their class in school. After all they have some competence in counting votes. It makes sense, therefore, to position themselves with the bulk of the population that has never liked those smart kids who did better than them in school.

This article is very funny but the success of this strategy is not funny at all. Its hard to imagine that American's actually want to put this kind of leader in charge of the country's future. I can just imagine one of these candidates applying for a leadership position in one of our major corporations. Their resumes would produce a howl of laughter from Human Resources. Yet many Americans would vote for one of them to be the President of the United States of America. I can just imagine a statue of Rick Perry on horse right next to the Lincoln Monument.

Its Time For Leadership From Obama

This editorial provides polling data which suggests that Obama has an opportunity to show leadership on many issues that are supported by the majority of the public. This makes more sense than his futile effort to show that he can work with the GOP to provide bipartisan solutions to our many economic problems. This effort has failed and it is time for the president to put a stake in the ground on issues that can separate him from the GOP. He can't be successful running as moderate Republican.

Obama's Tax Plan May Be A Move In The Right Direction

This article describes Obama's plan to tax incomes above $1 million per year at a higher tax rate. In effect this would replace the alternate minimum tax (AMT) which was put in place years ago to insure that those with high incomes cannot avoid taxes by using a variety of deductions to reduce taxable income. The AMT has been a problem because it was not indexed to inflation. Consequently, it frequently required adjustments as wage inflation boosted upper middle income taxpayers into the income bracket that made them subject to the AMT.

The GOP will certainly oppose this proposal but it will enable Obama to draw a bright line between himself and the Republicans. They typically oppose tax cuts for the super rich, while simultaneously aligning themselves with populist positions on non-economic values issues such as abortion,"family values" and "real Americanism".

Friendly economists, who carry water for the GOP, will, of course, make an effort to blur the bright line drawn by the Obama plan. Mankiw, for example, is quoted in this article making claims about millionaire sources of income that blur the bright line. Others will also make the argument that it will discourage the wealthy from working, saving, and investing in the economy. Therefore, economic growth will slow down and jobs will be lost. Even though these claims are false, it will require that the evidence against those claims is presented, and it becomes an academic debate that will turn off the public. The plan will also be framed as class warfare against the rich. The GOP has been successful in making the case that raising taxes on the super rich is class warfare, while denying that shifting the tax burden from the super rich to lower wage earners is class warfare. Tax policy since the 1980's has, in fact, done exactly that. The highest marginal tax rates have been reduced substantially and income from capital gains and dividends is taxed at a lower rate than earned income from wages.

Hopefully, this will be the first among other tactics that the administration will use to draw a bright line between the values of the Democratic Party and the GOP. He has lost lots of support among those who voted for him by failing to do so. His efforts at bipartisanship, and his willingness to compromise on numerous issues have not helped him with his base. Regaining the initiative, and displaying leadership, may be more important to him than his efforts to attract low information voters to his cause.

Saturday, September 17, 2011

Geithner's Advise to Europe Falls on Deaf Ears

The US Secretary of the Treasury found that he was welcome to participate in the discussions with leaders in Europe on how to deal with their crisis. He also found that it is difficult for American leaders to impact such discussion like they have in the past. First we have to be able to deal with our own problems effectively, and we have to stop causing problems for the rest of the world, as we did by exporting toxic securities to the rest of the world.

The Jobless Future

This article (via Mark Thoma) is about a book called "The Jobless Future" which described the underlying dynamics that would shrink the number of jobs that could provide a middle class living standard. After, rather accurately predicting what we have been seeing in the jobless recovery, the book turns to steps that might be taken to provide meaning and worthwhile activities for individuals whose identity has been linked to their occupation. In a sense, the forces that required fewer workers to produce the products that we consume, sets the stage for developing an economy that takes advantage of the "end of scarcity". This will present challenges to a system of economics based upon an assumption of scarcity. The recommendations made in the book are diametrically opposed to our current political trend which minimizes the role of the state. If our our economy is moving in the direction predicted, it might serve to describe the two poles that we are observing. Some will work even harder to cut taxes and limit efforts by the state to mitigate the economic impact of these forces, since they have little concern for a broader based system of social welfare. Others will struggle to expand the activities of the state which might take advantage of the "end of scarcity".

Friday, September 16, 2011

The GOP Knows Why The Recovery Is Slow and Many Democrats Agree

Ezra Klein provides a snapshot of politics via his Washington Post blog. His lead article is about the major difference between the political parties about economics. They don't agree about what caused our economic problems. Therefore, it is not surprising that they cannot agree on solutions. In essence, the GOP is united in blaming the Obama administration for the slow recovery. The politicians and their supportive economists, like Borro and Mankiw from Harvard, claim that businesses will not invest because they worry about tax increases, regulation and future debt problems. The Democrats, as usual are divided on the economics. Many have joined the GOP chorus in denouncing government spending and deficits.

US Fed Providing Dollars to Europe

Banks in Europe need dollars to serve the needs of their multinational customers. They have usually borrowed dollars from the "shadow banks" in the US. For example, money market funds would make short term loans against collateral provided by the banks. The money market funds have pulled back on making these loans. Consequently, the Fed has been cooperating with the ECB and the Bank of England to provide the dollars that they require. The Fed simply swaps dollars for their respective currencies with the central banks and they provide them to their banks. This does not involve risk, and swapping, instead of buying and selling currencies, does not alter the relative price of currencies.

Some Background on European Politics That Impact EU Crisis Intervention

This clip from Der Speigle provides some insights into the political situation in Germany regarding the future of the EU. It contains comments from several news sources.
Merkel's coalition partner went public with opposition to euro bonds while Merkel has been trying to maintain a consistent stance that reflects Germany's perspective. If Merkel loses support from her coalition partner she may have to bring in the opposition Social Democrats to form a government.

France also has issues. There will be new elections next year. Consequently, the two major economies in Europe, are dealing with political uncertainty at a time when very important decisions have to be made about the future of the EU. The politics in Europe are not as bitter as they are in the US, but they face much more difficult decisions.

Thursday, September 15, 2011

UBS Trader Loses $2 Billion In London Based Investment Division

This article is about the loss of $2 billion by a rouge trader in the London based investment banking division of UBS. The bank had increased its efforts to protect itself against such events but smart traders seem to find ways around compliance. The rewards to traders who game the system are enormous. For some traders the incentive to game the systems in place outweigh their calculation of the potential costs. In many ways, the casino-like atmosphere on trading floors attracts individuals with an instinct and taste for gambling.

Does the Euro Have a Future?

George Soros attempts to answer his question. If the euro has no future, the implications are disastrous for all concerned. In order for the euro to have a future tough steps will be necessary. Trying to buy time, in the hope that the crisis will end without taking stronger measures, has only made things worse. Soros believes that Germany and other countries need to think clearly about the abyss that they would face if the euro fails. Only by viewing the abyss, and exposing it to the public, will they be able to take the political steps that are necessary, but not popular with the public.

Our Jobless Recovery Had Its Origins in the 1980's

This post by Mark Thoma suggests that the rate of job creation in the US began to slow down well before our current downturn. Changes in executive compensation, and its connection to what Wall Street rewards with higher stock prices, is a big part of the problem. Higher stock prices are associated with lean and mean management. The 90's were an exception because of the boom. High tech start-ups were creating lots of jobs and mature companies invested heavily in new applications that took advantage of the Internet.

The end of the boom led to the jobless recovery in the Bush administration. It was fueled by the real estate bubble and debt instead of job related income. The implication of this analysis is that we are in for an extended period of high unemployment as long as corporate executive compensation is linked to the single goal of increasing shareholder value. Multinational corporations will continue to operate "lean and mean", and they will continue to find customers and opportunities in locations where the middle class is expanding rather than shrinking as it is in the US. From the viewpoint of standard economic theory, this is a good thing. It leads to efficiency and the free flow of capital to its most productive use. Perhaps we need an economics in which efficiency is not the primary objective of economic activity. The financial crisis should cause us to rethink the relationship between our incentive system and socially valuable economic results. Bank executives did just what they should have done to increase shareholder value and their compensation. It turned out that the increase in shareholder value was short lived for many investors. Bank stocks have performed poorly, and we are still suffering from the consequences on Main Street.

Another implication from this analysis is that short term stimulus of the economy, which I have been advocating, may not be the answer to our economic malaise. We have structural problems in the economy that need to be corrected by political action. Unfortunately, the most politically active elements in our society would only aggravate a bad problem. We have a new "silent majority" in America. Richard Nixon activated his silent majority during his presidency. We need to activate our passive middle class which has learned to suffer in silence.

Wednesday, September 14, 2011

Tea Partiers Scream to Let Uninsured Man Die

This incident at the GOP Tea Party debate may not surprise many Americans but it will come as a surprise to the rest of the world. When asked whether we should let an uninsured citizen die who was unable to fund his treatment, the Tea Party audience yelled that we should let him die. The GOP candidates running to please this segment of society are pushing America in a strange direction with no sense of community. This is what libertarianism has come to mean among Tea Partier's and to those who seek their votes.

German's Do Not Believe in Expansionary Austerity

While reading some of the comments on a post by Paul Krugman, I came across a comment by someone from Germany that raised some questions that should be answered. The commentator claimed that nobody of importance in Germany believed that austerity would produce economic growth. Austerity was being imposed to placate the bond market. Krugman was wrong to claim a link between austerity and the hope for economic growth. My response is that austerity has worked to decrease economic growth and increase deficits because of falling tax revenues. The bond market has has been concerned about the ability of countries at risk to fund their debt because of their poor economic performance. Countries with good growth prospects have not had to pay higher interest rates to sell bonds.

The commentator also defended Germany against those who claim that it lacks solidarity with its economic partners in the Euro Zone. He said that Texas does not do anything to help California deal with its unemployment problem. He is correct. Texas does nothing to help California. The important point, however, is that California does not look to Texas for help. The US federal government has helped by providing funding to California and other states in need of help. The Federal Reserve has also kept interest rates low in order to encourage investment spending and consumer spending in California and other states.

It was not easy for the US to move from a confederacy of sovereign states to the federal system that we have today. Many political battles were fought, including a civil war over these issues. It might help people to look at US history to understand this better. We were helped by a common language and we did not have to deal with extreme cultural differences, and a long history of conflicts between the states, but it was still not easy. Germany should not be blamed for its concerns. It has to decide whether the benefits of a common currency outweigh the costs, and to determine what the implications might be for the break up of the euro zone.

Government Outsourcing Study Shows Higher Costs Of Doing the Work

This link is to a study by a government oversight agency that did some research on the potential cost savings by government outsourcing to private contractors. The study found that while labor costs were less than government labor costs, the cost to government was 84% higher than the cost of doing the work in-house.

More research needs to be done on this topic, but there has been a trend in which outside contractors have become lobbyists in areas where it might benefit them, and they are a source of campaign contributions to parties that support their interests. For example, some states have outsourced prisons to private contractors. Contractor's have lobbied for changes in laws that would create greater demand for inmates to imprison. Of course, they also fund the campaigns for sympathetic politicians.

In other words, outsourcing of government functions has implicit moral hazards which may be a more important reason for outsourcing than cost reduction. Politicians can also argue that they have cut the number of public employees which appeals to many voters.

Equillibrium Based Macro Models Failed To Predict Financial Crisis New Models Proposed

This study by Dirk Bezemer of the University of Groningen, argues that our macroeconomic models based upon equillibrium analysis failed to predict the financial crisis because they are based upon inappropriate accounting models. He describes flow of funds accounting methods that would have predicted the financial crisis based upon the expansion of debt relative to income. He suggests that a new form of economics based upon flow of funds accounting would provide a better basis for macroeconomic models.

Tom Friedman Asks Good Questions About Carbon Taxes and Global Warming Denial

Tom Friedman asks whether things are crazy enough yet. His reference is to Governor Perry from Texas who denies global warming, which probably plays well in Exxon land. He finds it hard for Perry to take this position while Texas is fighting the greatest forest fires in its history that result from global warming. Friedman also makes the case for a carbon tax as a way to stimulate demand for green technology and green jobs. He argues that the recent failure of a solar company, backed by government, was the result of inadequate demand in the US which results from low fossil fuel prices that fail to reflect their external costs. He asks whether it is better to pay a carbon tax, and reduce the threat of global warming damages, which might also be used to provide social security and healthcare benefits, or to reduce those benefits to citizens.

European Central Bank Purchases Italian Debt in Return for Austerity

Italy is voting on a new austerity package that is required by the ECB which has begun to purchase Italian bonds on the market in order to keep the cost of debt in Italy affordable.

Moddy's Downgrade of Two Large French Banks Discussed and Explained

This article explains why Moody's downgraded the credit ratings of two of France's largest banks. The french government said that it would not permit its largest banks to fail and it said that the downgrade was less than what some expected. The downgrades reflect concern about the banks exposure to sovereign debt that has declined in market value.

In response, the euro zone agreed to purchase some sovereign debt. This presents concerns in Germany which may face higher borrowing costs by backing up the risky sovereign debt.

US Treasury Secretary Geithner will participate in discussions with his peers in Europe to discuss potential responses that might mitigate the risk of contagion. This reflects exposure that US banks might have in Europe.

A Brief Description of The Collapse of the Shadow Banking System and the Financial Crisis

This report by Gary Gorton from Yale, and the National Bureau of Economic Research, was presented to the US Financial Crisis Inquiry Commission. The report describes the changes that had taken place in the banking system prior to the crisis which were not well understood by academics and by many government regulators. A shadow or parallel banking system had developed which was equal in size to the traditional banking system. The financial crisis was caused by a bank run on the shadow banking system. The shadow banking system functions as an intermediator between investors and the traditional banking system. It became a major source of funds for the traditional banking system. This report describes the structure of the banking system and explains how the run on the shadow banking system led to the global financial crisis.

Traditional banks borrow money from depositors and pay a low interest rate for the deposits because they can be withdrawn on demand by the depositor by the simple act of writing a check. They make money by investing in longer term assets such as Treasuries or loans which pay a higher rate of interest. Traditional banking became less profitable, starting in the 1980's. As a result the banks began to originate loans and sell them to investment banks. Thus the investment banks became a source of funding to the traditional banks, and they were able to use the loans that they purchased as collateral for deposits that they received from a different group of depositors. For example, Fidelity may have $500 million in cash, on which it would like to earn interest until it might be needed. Fidelity would deposit the $500 million in the investment bank but it does not want to take a risk on the deposit. The investment bank would "sell" a $500 million security to Fidelity which it agrees to repurchase at face value. Therefore, Fidelity is protected from risk as long as the $500 million security retains its value. The investment bank is also protected as long as the asset retains its value. It is at risk if the asset loses value because it has agreed to repurchase the asset at face value. These agreements were typically short term. Fidelity might earn 3% on its deposit, and the investment bank might earn 6% on the assets that it held. In other words, the investment bank was operating as a depository bank by borrowing short term, and by investing long term at higher interest rates.

This market became known as the "repo" market and it grew to become a bit larger than the traditional depository banking system. There is a key difference, however, between the two systems. The depository banking system is protected from mass withdrawals by depositors because their deposits are insured by government (FDIC). The shadow banking system is not insured by government. It is at risk if depositors, like Fidelity, become concerned about the value of the securities that it holds as collateral. In fact that is what happened. For example, suppose that Fidelity decided that the $500 million security that was offered as collateral for its $500 million deposit might be worth only $400 million. The investment bank would be forced to provide $100 million of additional security. In essence that would be like a withdrawal of $100 million from the investment bank. It would be forced to sell off other assets to meet Fidelity's demand. If other customers made the same demands, the investment bank would be forced to sell even more assets and the market value of these assets would decline if the "fire sale" proceeded. That is what happened. Investment banks, like Lehman and Bear Stearns were unable to meet their needs for capital on the "repo" market, and the forced sale of assets at lower prices made them insolvent. The government stepped into this market and rescued Bear Stearns by a forced sale to JP Morgan but it let Lehman enter into bankruptcy. The government also was forced to provide liquidity to the remaining investment banks in order to prevent a wholesale sale of assets at fire sale prices which would make them insolvent as well.

The US Fed was criticized for making a claim that the sub-prime market was not large enough to present a risk to the entire banking system but it did not realize how it would affect the repo market on which the investment banks depended for capital. An analogy was used by Gorton to describe what happened. Suppose that e-coli was suspected in the beef market but nobody knew the source the of e-coli. Everyone would stop purchasing beef until the source was found. Something like that happened in the repo market. Investors knew that some securities were infected with sub-prime but they did not know which one's were infected. The securitization market and the repo market which depended upon it collapsed. This market has not fully recovered and governments have not taken actions to prevent further deterioration of this market that might result from other derivatives like the sub-prime infected securities.

Tuesday, September 13, 2011

Japanese Analyst Argues That We Are Repeating Japan's Mistakes

Richard Koo from Nomura Securities is an expert on Japan's Lost Decade. In this article he claims that Obama's jobs bill is modest relative to the problems in the economy. Moreover, he expects that the GOP will only agree to the tax cut portion of the bill. We will not see much improvement in unemployment.

He also disagrees with economists who separate short term stimulus from moderate term fiscal consolidation. We should fix the economy before worrying about longer term debt to GDP ratios. He argues that Japan made the same mistakes that we are making. Government kept shifting from fiscal stimulus to fiscal consolidation and the economy see sawed back and forth. Japan has the worst of both worlds as a result. It has a slow growth economy and an extremely high debt to GDP ratio.

Why Are We Unable To Separate Short Term and Moderate Fiscal Policy Response to Crisis?

Dani Rodrik argues that historians will look at our response to economic problems as a failure of political imagination. Our political systems are not designed to insure that fiscal decisions made by the incumbent administration will be followed by subsequent administrations. Consequently, it is difficult to develop short term fiscal responses to recessions in the absence of assurance that medium term policies to maintain a stable debt to GDP ratio will implemented. He proposes a solution to this problem by establishing an independent entity that has the responsibility for maintaining longer term debt stability.

Income Inquality and Sustained Economic Growth

This study by the IMF raises the question about the relationship between income inequality and sustained economic growth. All economists agree that some level of income inequality is needed to motivate individuals and organizations to take the initiatives that foster economic growth. This study shows that extended periods of economic growth are associated with low levels of income inequality. Nations that have have experienced spurts of growth and then declines in growth rates have typically had higher levels of income inequality. They conclude that the level of income inequality in a nation is a good predictor of sustained economic growth.

Research by the Dallas Fed Shows That Our "L" Shaped Recovery Is Typical In Financial Crisis Recessions

Two of Harvard's conservative economists have correctly argued that the V shaped recovery from recessions has been the typical pattern of recovery from recessions in the US, and that our current L shaped recovery is atypical. Robert Barro takes this a step further and argues that the Obama administration's response to the recession is the cause of the L shaped recovery. He claims that the administration's policies have created uncertainty and loss of confidence in the business community. He proposed structural reforms to tax policy and government regulation to encourage business investment and restore economic growth.

This article from the Dallas Federal Reserve shows that the L shaped recovery from recessions is the typical pattern of recovery from recessions associated with a financial crisis. There is no reason to believe that the Obama administration has caused a loss of confidence in the business community and the L shaped recovery. A good case can be made that the administration could have done more to stimulate the economy, and that opposition from conservative politicians and economists, like Barro, contributed to the weak response.

How Will Germany Respond to the Euro Zone Crisis?

This article describes the crisis in Europe and the important roles that its two largest economies play in resolving the crisis. Germany and France have worked together to patch things together but more needs to be done to deal with the issues. The German Chancellor has been put in a tough position. She does not have support among her coalition partners to take more dramatic steps to prevent a Greek default. A default by Greece would stress the large French banks that purchased the lion's share of Greek debt. The French government has been forced to back up its largest banks as a result. The Euro Zone crisis is no longer confined to its periphery.

Monday, September 12, 2011

Bank of America Announces New Directions

Bank of America announced that it will eliminate 30,000 jobs, which is more than 10% of its workforce. This is part of a plan to reduce costs by $5 billion. Bank of America is the largest bank in the US. Some of its problems are the result of the acquisition of Countrywide and Merrill Lynch. There were unexpected costs associated with each of them

Why Social Security is Not a Ponzi Scheme

This Socratic dialogue provided by Brad DeLong, explains why Social Security is a pay as you go system and how that is different from a fraudulent Ponzi scheme. It was necessary for DeLong to provide this distinction because Rick Perry, who is running for president said that it is a Ponzi scheme, and because conservative economists like Greg Mankiw from Harvard and Tyler Cowen lend credibility to Perry's statement without really calling it a Ponzi scheme. They do this of course, because economists have to choose sides on real economic policy issues, but they do not want to lose all of their credibility. Mankiw and Cowen know better, but they are on the GOP team and they are good team players that must defend the alternative universe in which their party resides.

A Better Description of Economic Reality and The Problems We Face

This interview is about our current economic problems and why they will be with us for a long time. The discussion is about the financialization of the economy and its implications. It is also about consumerism which has been the fuel for growth, but which has depended upon debt that is now being deleveraged. Economic growth and consumerism have been decoupled in the process and it will take a long time for this economic problem to be resolved.

The article provides an interesting analysis of our problems, and it offers a glimpse of some resolutions to our dilemma which will not be easy to realize. It also has lots of interesting quotes. I particularly liked this one: "Growth for the sake of growth is the ideology of the cancer cell". That is a succinct definition of cancer, and it is also a good description of an economic system that does not have the means to limit growth. Limiting the ability to grow would destroy the cell.

The Alternative Universe of the GOP Candidates

This article describes the strange world in which facts do not interfere with false claims, and logic has been repealed. It is the world imagined by GOP candidates, who have to distort reality, and repeal logic, in order to enter the universe inhabited by their base which wants to return to its imagined nirvana of the 18th century. This could be the basis for a new situation comedy if it were not so serious. It would be about a magic tea that would remove the impediments of rational thought that prevents ordinary mortals from enjoying the free exercise of hallucinogenic thinking. There is no other way of describing what we observe during the GOP debates. Read this article and watch the GOP debate this evening on CNN. It is being advertised as a Tea Party Debate. You can keep score and rank each candidate on how well each reflects the alternative universe.

The Role of the ECB in Europe Is the Issue That Must Be Resolved

Krugman explains his description of the problems in the euro zone as a run on governments. The price that troubled governments in Italy and Spain have to pay in order to borrow on the market is twice the rate that the UK has to pay. This hurts their delicate fiscal positions by increasing the cost of debt service. If that happened in the UK, its central bank could purchase government bonds at lower interest rates. This runs the risk of inflation, but only after the economy recovers and people are back to work. Italy and France cannot do this since the ECB is charge of monetary policy in the euro zone. Some believe that the ECB should continue with its policy of purchasing sovereign debt but it is very unpopular in several nation states. Some worry more about the threat of inflation, and some believe that the sinner states should be punished for their irresponsible behavior. In essence it is a moral story that may play itself out and endanger the delicate fabric of the euro zone.

Markets Are Reacting to Bad News From Europe

This article describes the response of global stock markets to increased concerns about the euro zone. Moody's may downgrade the largest French banks which hold large amounts of Greek debt, and the political situation in Germany has made it more difficult for its government to take some steps that might be necessary to defend the euro which is losing value to the dollar.

Sunday, September 11, 2011

The Financial Times on The Future of Banking

The Financial Times has started a series on the future of banking. The first articles on this issue appear in this link.

The Harvard Plan for Fixing the Economy

Greg Mankiw headed up the CEA in the Bush administration and he is currently an economic adviser to Mitt Romney's campaign. He and his colleague at Harvard, Robert Barro must talk about these things a lot. Mankiw offers a plan for recovery that has some resemblance to the plan that I posted by Barro. They both argue that Keynes placed a big role on business investment in his analysis of the economy, and that business confidence about the future is critical for business investment. They both downplay the role that consumer spending has on business investment decisions, and neither of them talk about the relationship between household balance sheets and household income to their spending decisions. Moreover, they ignore the problems in the banking system and the difficulty that small business has in getting loans that are not backed by collateral. Apparently, business confidence is dependent upon cuts in the corporate tax structure. Mankiw uses data from OECD which show the the US corporate tax rate is at the high end of the continuum. He ignores the effective tax rate, after deductions, which compares favorably with other OECD countries. The contribution of corporate taxes to federal tax revenues has fallen over the last 30 years. Its hard to believe that high corporate tax rates are responsible for low rates of business investment. The investment spending boom in 1990's would be hard to explain if corporate tax rates were the limiting factor in business investment.

Mankiw and Barro both teach the undergraduate courses at Harvard that are taken by most of the Harvard students. They are doing a great job of preparing them for the leadership roles that they will play in society. Tax cuts and deregulation are the medicine that they will remember. Keynes argued that "in the long run we will all be dead", Mankiw and Barro want us to ignore short term solutions to restore growth, and to focus on structural changes that will encourage supply side solutions to our growth problems.

Is There A Run On European Governments?

Paul Krugman argues that we are currently witnessing a run on governments in Europe, that is much like runs on banks. In that case, Europe needs a lender of last resort, much like the role played by central banks in most countries. He takes the position that Europe may not be ready to provide a lender of last resort under its current structure.

We should understand that the repercussions of a banking crisis in Europe will have profound affects on our interconnected international banking system. Who knows how many credit default swaps have been written by US banks?

A Leading Conservative Economist Has a Plan For Fixing The Economy

This article by Robert Barro provides a conservative approach to fixing the economy. Barro teaches at Harvard and he is a Senior Fellow at the conservative Hoover Institute. He starts out by arguing that fiscal stimulus and monetary policy have not worked. The economy has not recovered from this recession like it has from most recessions in the past. In fact, most of our recoveries from recession have been V shaped and this recovery is L shaped. The problem with Barro's comparison is that recoveries from balance sheet recessions, and associated problems in the banking system, are typically L shaped like this recovery. Barro knows this but he chose to ignore it because he wants to argue that our economic problem is not caused by inadequate demand. He takes the conservative position that the slow recovery is the result of inadequate supply. Business is not investing and increasing supply because it lacks confidence in the Obama administration's approach to tax policy and government regulation. It does not occur to him that the lack of demand would affect investment decisions. Moreover, he ignores the fact that spending on new home construction is included under business investment in our national income accounting. Business investment on equipment and software has returned to pre-crisis levels. Spending on new home construction is at a historic bottom.

In any case, Barro provides a typical list of changes that are supposed to stimulate confidence in the future. In other words, he believes in the "confidence fairy". All we need to do is to cut business taxes, and reduce spending on Social Security and Medicare, and business investment will skyrocket and end the recession. He supposes that this will happen without increasing consumer demand. The bottom line in Barro's remedy is that government will be even more conservative than it was in the Bush administration. He believes that is a good thing. It will be good for his reputation among conservatives who refuse to look at demand side analyses of the slow recovery, but tax policy and government spending are not the causes of the slow recoveries in western economies. Until we address the problem of flat or declining growth in household income, we won't see an economic recovery like those we have seen in the past.

Saturday, September 10, 2011

Banking Industry Described as an Employee Compensation Engine

This article was written by an author who wrote about the misuse of probability theory by bankers to minimize the risk in the securities that they were packaging and selling to investors. That is why so called "black swan" events occurred so frequently during the banking meltdown. Events that were calculated to be extremely rare became common. He is still highly critical of the banking industry in the US and elsewhere. He views the industry as a banker compensation engine that extracts wealth out of the economy without putting anything back into it. Over the last 5 years, in the US, bankers have extracted over $2 trillion out of the economy as compensation. They do so by taking excessive risk and using leverage to bolster profits. They benefit from the upside but they transfer the risk to taxpayers on the downside.

Teleb describes this scheme as a massive tax on the public, and as a penalty to savers who are harmed by low interest rates. The tax will reach $5 trillion over the next 5 years. He does not believe that government, which has been captured by the industry, can do much about the problem. More regulation won't work either because the bankers will always stay one step ahead of the regulators. He argues that money managers should step into the void and stop buying the securities of banks with excessive compensation schemes. He believes that they are paying prices that do not reflect the real value of the shares that they purchase.

Friday, September 9, 2011

The Financial Times Tells Us To Listen to The Bond Market and Borrow at Low Rates

Martin Wolf tells us that we should be listening to the bond market in this Financial Times article. The ten year bonds in the US and Germany are yielding under 2%. Even the UK can borrow for 2.5%. The problem that we have is not the risk of default in these markets. It is the problem of unemployment, and there is room in fiscal policy and in monetary policy to stimulate economies that are expected to grow at less than 2% for the next two years. Governments must be able to find investments that can produce a return that exceeds the cost of borrowing.

Deficits are a problem, of course, but they are fueled by unemployment, and falling tax revenues, as well as by government spending. The duration of unemployment is also a problem. Long term unemployment contributes to the loss of job skills, and it increases the likelihood of unemployability.

The Dark Age of Macroeconomics

This is Paul Krugman's Presidential Address given at the Eastern Economics Association meeting. He offers a criticism of the professions role in not predicting the financial crisis and the economic collapse. His strongest criticism, however, is about how the profession responded to the recession. He calls this the "Dark Ages Of Macroeconomics in which the profession failed to use what it had learned from previous deep recessions.

Washington Post Overview of Obama Jobs Speech

The Washington Post outlines President Obama's jobs plan. There were no surprises in the plan but Obama set an aggressive tone that was designed to put the GOP on the defensive. It was the real beginning of his 2012 campaign. He has to sell the American public on the need for action to reduce unemployment. The GOP has been selling them on the need to cut budget deficits. Obama tried to make the case that debt reduction was a longer term target.

The Response to Obama's Speech Produced Giggles Among Smug GOP Politicians

This article makes the case that Obama's speech fell on deaf ears among GOP members of Congress as well as on some Democrats. The speech was intended for the electorate. If the president uses his bully pulpit aggressively following the speech, he may put the smug members of Congress on the defensive and energize his base for the 2012 election. His chances of getting support from the GOP in improving the economy prior to the election is about zero. They are already touting their own plans, which will have no effect on the economy, as their sideshow to the speech.

Reducing One's Indvidual Carbon Footprint Is Not Enough

This article argues that individual initiatives to reduce ones carbon footprint are a necessary but not a sufficient condition for saving the planet. It will take changes in government policy to do the job. Without cap and trade or a carbon tax, the job won't get done. The belief in individual initiatives may stand in the way of taking the necessary political actions.

Thursday, September 8, 2011

What Are The Odd's For Recession and How Does This Affect Politics?

This article looks at the chances that the US economy will go into a second recession. Nobody is forecasting a rapid turnaround in the economy. Most projections for growth in 2012 are anemic. It will feel like a recession, whether or not we have two consecutive quarters of negative growth, which is the formal definition of recession.

It is interesting to look at the history of economic forecasts of recessions. An economist from the Fed has determined that an economy that experiences weak growth, like we are currently experiencing, reaches a "stall speed" that usually leads to a double dip recession. Economic forecasters have not been good at predicting recessions. One reason is that since recessions are rare, it is not wise to predict a rare event. Consequently, few forecasting organizations are predicting recession.

The bottom line is that 2012 will not be a good year for the economy. The 2012 elections will be held in period of poor economic performance. The president's speech on jobs this evening will signal the administration's approach to the campaign. He will make "bipartisan" proposals which have often been on the GOP wish list for ways to encourage economic growth. This is consistent with his plan to enlist independent voters to his cause. The GOP will not support his plan, and progressive democrats will find fault with it as well. Independent voters are independent for a reason. They don't have strong feelings about politics, and many are low information voters for that reason. They will cast their votes in 2012 based upon their perception of the direction that the economy is taking. The president's strategy of assuming support from progressives, and campaigning for the elusive independent vote is very risky. The GOP has been much better at marketing to low information voters than the democrats have been. Sound bites are superior to rhetoric in marketing campaigns. Running as a Republican Lite may turn out to be a bad strategy. American's tend to expect strong leadership from their presidents. Placing the blame for a poor economy on an obstructionist GOP may not sell.

OECD Economic Outlook

This link is to a slideshow on OECD economic outlook.

Wednesday, September 7, 2011

This Would Have Been A Good Labor Day Post

this article describes the good old days when America began its industrial revolution and moved from an agricultural economy into a manufacturing economy. It then describes some of the changes that were made by government to provide greater security and better working conditions for the common person. The question is than raised about the motivation of those who would like to reduce the protections that government has provided for ordinary people. Do we want to return to the good old days when government did not provide a countervailing power to capital?

The Implications of a Steady State Economy And The Challenges it Presents

This article describes the ecological constraints on economic growth. These limits to growth are described well, and they will place limits on growth that are difficult to deny. It then moves to the problem of a steady state economy that has been advocated by several economists who advocate for sustainability. They argue that a steady state economy is achievable by making some modest changes in our economic system. The argument is then made that a steady state economy is not possible under our current system of capitalism. It is argued that capitalism cannot exist in its present forms without economic growth, and the accumulation of wealth as its motive force. To make this point, several examples are given of the required changes that would be required. These would not be easy changes to make while preserving the system.

Lastly, the article outlines the kind of changes that would be required to implement a steady state economy. Most of us would not recognize this kind of society. It would not be easily achieved or desired by most of us who have become accustomed to a life style based upon consumerism. It would be tough sell, and it would have to forced upon most people by necessity rather than by intent. Consequently, unless the ecological limits to growth are less stringent than they have been described in this article, the outcome will not be pleasant. The powerful few will find ways to maintain their advantages at the expense of the less powerful.

The President's Speech On Jobs Contrained By GOP Focus On Deficits

This article about the President's speech about jobs this evening is part of our problem. We could be facing a double dip recession but our economic policy is being shaped by the party that controls the House of Representatives, and not the party that controls the Senate and the White House. The president's proposal is constrained by what he believes to be doable in a situation in which the GOP has made deficit reduction more important than the problem of unemployment. That issue is not addressed in this article. Its all about describing the horse race between the two parties.

A Fragile Democracy Under Attack In America

This article (via Manan Shukla), is in response to the post that follows it. The Atlantic article provides support for the arguments made in that article by including the remarks of another Washington staffer who has made similar observations about the American political system. Low information voters are at the center of the problem. The GOP has been better at marketing to this group, and it is aggressively pursuing a strategy of denying access to the polls among low information voters who are likely to vote for Democrats.

The issue that we are dealing with today is not the horse race between the two parties that is cultivated by the media. What is at issue is our system of democracy. The forces at work in our society are not sympathetic to the democratic process unless they can control the outcome. Democracy is fragile and most of us take it for granted. These two articles should serve as a wake up call to Americans who would like to preserve our democratic system.

The US Political Situation In A Nutshell

This article by a retired GOP staffer (via Manan Shukla), in the House and Senate, describes our current political situation better than anything that I have read. He has taken all of the themes that I have been thinking about, and posting about, and put them into an integrated essay. The GOP's dependence upon a misinformed, but politically active, grouping of religious fundamentalists, began in the Nixon administration when he based his electoral hopes on the "Southern Strategy". It has become the center of its political base, and it is also the strongest supporter of the militarists in the GOP. They have a "holy war" attitude that is similar to that of the religious fundamentalists in the mid-east. They just have different enemies. Without this popular base, the GOP would not be able to win the elections that enable it to serve the much smaller base of monied interests that it has traditionally served.

Sadly, the Democratic Party has been a weak opponent. It has to compete for campaign funds in order to win elections, and this makes them dependent upon the monied interests that fund both parties. The media have also been captured by corporate interests, and some are simply propaganda arms of the GOP. This puts the Democratic Party on the defensive since public opinion is primarily under GOP control, but the Democratic Party is simply not as good at marketing as the GOP.

The public has become disenchanted with our political system. The recent debacle over the debt ceiling limit was a disaster but it serves the interest of the GOP. It wins when the public loses faith in government and it becomes less active in elections. Its base of fanatics becomes more active when it is successful in undermining progressive forms of government. This puts our system of democracy at risk and exposes most Americans to political attacks on their economic and social interests. An American political system that is more like those in third world countries would serve the interests of the GOP very well.

Tuesday, September 6, 2011

GOP Favored Keynesian Stimulus When Bush Was President

This article reminds us that the GOP was in favor of using tax cuts to stimulate the economy when Bush was president. Even Paul (Mr. Deficit Hawk) Ryan favored the tax cuts in order to stimulate the economy which was in recession.

The article offers a psychological explanation for why Republicans changed their minds about stimulus when Obama assumed the presidency. I don't put much store in the explanation. Bush campaigned for the tax cuts when he ran for office by arguing that we had a budget surplus and that we should give the money back to the taxpayers. He changed his tune when he assumed office and used the recession to argue for the tax cuts. GOP leaders, like Paul Ryan, were all for it because cutting taxes for the super-rich is in their DNA. Their opposition to the Obama stimulus is based on politics. By raising the deficit issue they can run against Obama as the tax and spend liberal that they always use against Democrats. This also plays into the hands of conservatives who have been after entitlements, and all forms of government spending, that do not directly support their constituents.

Switzerland Announces Plan to Prevent Appreciation of Franc to Euro

The Swiss Central Bank announced that it will intervene in the currency market to halt the appreciation of the Swiss franc. It has set an upper limit to its price relationship to the euro.

Gary Becker Defends Zombie Ideas

The Wall Street Journal provides a platform for Gary Becker to defend the Chicago School of Economics and to make the case for zombie ideas. Becker uses his Nobel Prize pedigree to polish several zombie ideas. He claims that government failure was more responsible for our economic problems than market failure. Government regulation keeps business from investing in the future; Fannie Mae and Fannie Mac, along with the Federal Reserve, were the real causes of the financial crisis. Moreover, the economic stimulus package failed to restore the economy and it is responsible for our large government deficits. He also attacks entitlement programs and claims that we should have used Paul Ryan's approach to reduce healthcare spending. He ends the article by telling us that Adam Smith was correct after all. Apparently, economics has not progressed much over the last few centuries. Conservatives love to invoke his "invisible hand" whenever they can, even though they have systematically distorted the meaning of much of what Smith wrote about. There is a reason why zombie ideas never die. They tend to support the naive idea that free markets actually exist and that government can never do anything right.

Another Effort to Kill the Living Dead Zombies

Zombie ideas surface again on ABC Some economic ideas are called "zombie ideas" because they cannot be destroyed by evidence. One of the ideas is that business investment, which includes capital spending by business, and spending on residential housing, is down because of over-regulation by government. Brad DeLong provides a graph that shows the real situation: business investment in software and equipment is back to pre-crisis levels. Our real problem is that the decline in residential investment is greater than the rise in residential investment during the boom years. Numerous surveys also show that business is less worried about government over-regulation than it is about the slow economy and the potential for a decline in consumer demand. Evidence, however, does not matter to the carriers of zombie ideas. Moreover, they get equal time on national television. Television news has become entertainment. The basic idea is to find someone who will argue that the earth is flat, to argue with someone will provide evidence that the earth is really round. They get into an entertaining battle on TV that the audience loves. That is good for ratings as well as proof of objectivity for the networks. The audience learns little from this form of reality TV. The zombie ideas have been given a platform on TV and they can survive the battle. The Wall Street Journal and talk radio will follow up the battle by declaring victory for the zombies.

Great Discussion of Western Economic Issues

This article provides an excellent description of the discussions going on inside the Federal Reserve. It shows how monetary policy works and it shows some of its limitations as well. we also get a good analysis of the direction that the economy is taking. The economy needs to grow beyond trend to reach "escape velocity" from recession. Currently, we are operating at stall speed. There is increased risk of recession, or, at best, a very slow growth economy for many years. The crisis in Europe is also reviewed. They have a choice between greater economic integration or evicting some of the peripheral countries from the Euro Zone. Bets are placed on eviction.

Economic Integration Discussions In Europe

This article describes discussions in Europe about the steps that might be necessary to save the common currency, even though greater integration is not politically popular. At present there is a European Central Bank (ECB) that conducts monetary policy, but fiscal policy, which includes tax and spending policy, is left to individual states. Without a common fiscal policy, many believe that common currency will be at risk.

Why "Green" Industrial Policy Can't Work

David Brooks tells us that industrial policy does not work. It has failed to create "green" jobs because government is not good at picking the companies that will survive and prosper. He did not need to produce any evidence to support his claim. Industrial policy is outlawed in conservative dogma. He did so anyway by listing some of the "green" companies that were supported by government but failed. They failed because China was better at industrial policy than the US government. I wonder if Brooks would like to argue that a socialist government is better at industrial policy than a democratic form of government. I also wonder how he would defend the financial industry in its role as the allocator of capital to its most productive uses. It gave us the dot com boom in the 90's, and the real estate bubble, funded with fraudulent securities ( AKA financial innovation) in the last decade. There is one thing that I like about conservatives. You never have to guess what they will say about almost any subject. The catechism was written centuries ago and they stick to it with conviction.

Monday, September 5, 2011

Why Can Conservatives Get Away With Saying Crazy Things?

Kevin Drum raises a good question. He wonders why conservatives can say crazy things that they don't believe but they get a free pass. The media understands that they have to say crazy things in order to win over their crazy base. On the other hand, if liberals say crazy things they will be strongly criticized by the media.

A Labor Day Article About The Middle Class and Economic Recovery

We are currently concerned with the results of the financial crisis which produced the "Great Recession". Reich tells us that our real problem has been the hollowing out of the middle class that has been going on since the late 1970's in the US. The entry of women into the workforce enabled households with two wage earners to live like they did when one wage earner could provide a middle class living standard. When two wage earners could no longer provide a middle class living standard, households were able to dip into their savings, primarily in the form of home equity, in order to maintain their living standard. At the top of the economic pyramid, things have gone well. They have have extracted the wealth from the middle class, in the form of stagnant wages, in order to raise the compensation of the top executives in corporate America. Government has contributed to the wealth extraction by shifting the tax burden from holders of capital to wage earners. The marriage between Wall Street and Corporate America began in the 1980's when executive compensation was tied to stock price appreciation, otherwise known as shareholder value. The incentive system encouraged executives to ignore the interests of other stakeholders, such as employees, vendors, the broader community and even their customers. The alignment of government with corporate interests in America is built into the structure of the electoral system. The costs of running for political office in the US are the highest in the world and they are growing rapidly. Politicians are dependent upon those who fund their campaigns. The US Supreme Court has confirmed the capture of the state by corporate interests by a recent decision which protects corporate campaign contributions under the first amendment of the constitution as "free speech". Some have argued that globalization and technology, which enabled the hollowing out of the middle class is inevitable and cannot be reversed. Reich provides the example of Germany to dispel this myth. Germany has prospered during this period but its middle class has not been hollowed out by wealth extraction. Government has not allied itself exclusively to the interests of the top executive class in Germany. Moreover, even though it has large multinational corporations, Main Street has not been wedded to its investment banking sector as it has in the US. Industrial firms in Germany still view their employees, and the broader community, as stakeholders. Increasing shareholder value has not been their sole objective. This could change in Germany if executive compensation is aligned primarily with stock price appreciation as it has been in the US. Certainly its executive class is aware of the benefits that have been extracted by their peers in America. Perhaps cultural traditions in Germany will prevent this from happening as long as its government is not captured by corporate interests. While Reich describes the problems in the US with clarity, his solutions fall short of the mark. The US cannot become more like Germany or other European states which have stronger social support systems and stronger representation by labor in decision making in industry and government. The elite class in the US describes those states as "Old Europe" and it constantly preaches the doctrine of free markets and the virtues of creative destruction in capitalism, along with limited government and lower taxes for the super rich, as the superior American Way. The hollowed out middle class in America still responds to this gospel.

Sunday, September 4, 2011

Obama's Planned Speech on Job Creation Is Already Under Attack

The Wall Street Journal has already begun its attack on Obama's planned speech about job creation. They cite an analysis by a consulting firm that put some of the ideas that have been leaked into its model of the economy. They conclude that the plan does not include ideas that will create many jobs. The WSJ also takes issues with the proposal for another extension of unemployment benefits. It argues that it will keep people from seeking jobs more aggressively. While I doubt that claim has much substance, my guess is that he will propose a weak plan for job creation that he can use in the 2012 election. For example, if he proposes a suspension of the payroll tax, and if the GOP opposes the plan, he can claim that the GOP does not want to cut taxes for ordinary Americans. If he proposes a tax credit for firms who hire new workers, he can also hit the GOP for opposing tax cuts for business. In any case, most economists do not believe that tax credits for hiring new workers will cause businesses to hire workers that they would not otherwise hire. Moreover, they are not likely to encourage the hire of permanent workers. I hope that he proposes a more aggressive plan that puts the GOP on the defensive, but it seems like he no longer puts much stock in "audacity".

Why Obama's Decision Not To Reduce Ozone Concentration is Bad Policy

Krugman argues that Obama's most recent attempt to deny the GOP arguments that can be used against him in 2012 is also bad economics. Forcing business to invest in new technology that will reduce ozone concentration is exactly what the economy needs. This will not only create jobs but it will improve health outcomes. Moreover, it will not prevent the GOP from complaining about over-regulation as job killing, and accusing him of socialism. Krugman would like him to stop being a wimp who continues to run away from the bullies in the GOP.

Unlimited Economic Growth, Community, And Moral Obligations to Each Other

This article is very timely. We are watching Europe grapple with the issues that arise from establishing a common currency among a group of nations states with different senses of community. We are also observing some of the problems in the US that has established a single nation state among a disparate grouping of ethnic, geographic, and religious communities. This raises the whole question of community, and the obligations that others believe they have to each other. We are also witnessing a conflict between the goals of capitalism and the sense of community. The goal of capitalism is the accumulation of wealth, which depends upon the expansion of markets. Globalization facilitates that goal. Multinational corporations are the means by which the globalization of markets and the free flow of capital to its most productive use is facilitated. This has the effect of destroying community. Also the need for continuous economic growth creates a culture of consumerism and it threatens our ecosystem. This raises questions about morality in a steady state economy. This is a good starting point for looking at the philosophical implications of infinite economic growth versus a steady state economy. The questions raised about community, and moral obligation, are deeper than the narrow argument for sustainability which also raises questions about our obligations to future generations.

Are Obama's Policies Responsible for the Slow Economy?

This article explains why fear of government regulation is not the reason why businesses are not creating jobs. The short answer is that the degree of government regulation is pretty much the same as what was before the Obama presidency. This article does not go into the next set of reasons used by conservatives to explain the failure of the economy to grow but they are false as well. Corporate profits are at a 60 year high and corporate tax payments are at a historical low. Can fear of taxation really explain why businesses are not investing? When we ask business leaders to tell us why they are not investing, the most common response is that consumers are not buying their products. They have excess capacity, and they see no need to expand as long as consumers are not beating the doors down to buy their products. Besides, there are good opportunities elsewhere where consumers are buying their products.

The Stock Market As a Beauty Contest

Robert Shiller tells us why there is volatility in stock prices and why uncertainty about the future cannot be overcome by mathematical analysis of events. Keynes described the market as a beauty contest. The goal is not to select the most beautiful candidate but to guess who others will regard as the most beautiful. Our economy, and the direction of our governments, is determined by guesses just like that. What do other people think? What will they do next? Polls are used to overcome some of this uncertainty, but its hard to predict what might happen that will change the way that people look at things.

A Defense of the Obama Presidency Against "Magical Thinking" Progressives

This article defends president Obama's actions during his first term on the grounds that he did what could be done with a fiercely opposed GOP that was committed to discrediting his presidency. Progressives criticize him for exactly that reason. Instead of leading he did what he believed he could get through Congress. There will be books written on this topic. Our system of government, with its checks and balances, makes it very difficult to change the direction of the country. This is especially true when one of the political parties is aligned with wealthy interest groups that have the ability to mold public opinion. The Tea Party did not appear out of thin air. It was created for the purpose of derailing the Obama presidency. Its success in electing a Republican to the Senate, in the most liberal state in the nation, sent a warning signal to the White House that did not fail to get its attention. Some will argue that Obama could have done more to lead the public in a more progressive direction. There are examples of presidents who have provided that kind of leadership. Some will even argue that Obama is not really as progressive as he appeared to be during his successful campaign for the presidency. The history is yet to be written.