Monday, October 31, 2011

The German Press Takes A Close Look At Oligarchy In America

Der Spiegle reports on the new Gilded Age in America. America looks less like Europe and more like other oligarchical states like Russia, Brazil and Mexico.

How The Components of GDP Have Influenced The Business Cycle

The components of GDP are consumption, business investment, government spending and net exports. This graph shows the percent contribution of each component to real GDP just before the recession and during the recovery. The fall in business investment had the biggest impact on the negative growth in GDP during the recession. Business investment picked up and fueled the initial stages of recovery. The recovery stalled due to a decline in business investment and consumption has been the only real contributor to recent growth in GDP. Government spending picked up a bit with the stimulus but it fell after the stimulus ended. Total government spending, which includes state and local expenditures, has not compensated for the decline in business investment. Total government spending has been affected by the loss of around 800,000 state and local jobs due to depressed tax revenues which forced cutbacks on spending.

Uneven Growth in Wages and Other Measures 1990-2005

There has been a lot of discussion about growing inequality in the US. This graph illustrates some of the causes. CEO compensation grew 298% between 1990 and 2005. Wages for production workers grew 4.3% and there was negative real growth in the minimum wage of -9.2%. CEO compensation was down from the peak during the dot com boom when it was fueled by the stock market bubble, but it rose faster than stock prices and faster than corporate profits.

Slow Growth Outlook In Europe And Imposed Austerity Does Not Help

This article reviews several national economies in Europe and suggests that we had better get used to a slow rate of economic growth in Europe. Europe is also stuck in a quandary. Credit markets don't like the debt to GDP ratios in many countries. They want governments to cut spending and increase tax revenues or they might demand higher interest rates. Governments that have bought into this plan have seen lower growth and falling tax revenues. How does Europe escape from this trap?
They are damned if they don't reduce debt, and damned if they reduce spending and slow down economic growth.

NBER Report On Business Cycle Indicators

Calculated Risk reports on four major indicators used by NBER to date business cycles. GDP has returned to pre-recession levels and industrial production is moving in the right direction. National income and personal consumption expenditures are laggards.

German Financial Minister Proposes Greater Regulation Of Financial Industry

Brad DeLong praises a proposal from the German Financial Minister. He proposed a tax on financial transactions (Called the Tobin tax after the economist who first suggested it) theat would raise the cost of speculation in financial markets. He also argued for regulating the shadow banking system which was heavily involved in the financial crisis. The shadow banking system includes hedge funds, money market funds and other financial intermediates. The shadow banking system is almost the size of the regulated banking system. Wall Street bankers have used the shadow banking system as an excuse to escape greater regulation. They argue that their employees would jump ship and move to hedge funds and private equity if they were subject to regulations which affected their income potential.

The UK, which views its version of Wall Street (The City) as a national resource, has fought against similar proposals in Europe. The German Financial Minister suggests that the eurozone should act on its own to get the ball rolling on financial reforms that might prevent the next financial crisis.

Sunday, October 30, 2011

Larry Summers on Credit Issues That Slow Growth

Larry Summers (via Manan Shukla) argues that lending to small business is a problem and that mortgage financing has over-corrected for the bad loans made in the past.

Dean Baker Exposes The Washington Post's Attack On Social Security With False Information

Dean Baker criticizes an article in the Washington Post on Social Security for a couple of reasons. In the first place it is not really a news article. He believes that it should be on the op-ed page as opinion, and not reported as headline news. His other point is that the article is highly mistaken in the claims that it makes to support the attack on Social Security that the Washington Post has been promoting, along with those who want to pay for the Bush tax cuts that primarily benefit the wealthy, by cutting entitlement programs.

I won't repeat all of the inaccurate claims exposed by Dean Baker. Everyone needs to learn more about how Social Security really works in order to participate in the discussions about reductions in entitlements. Healthcare is a long term problem but Social Security is not a difficult problem to fix with minor changes. One of the common approaches in the war over Social Security is to lump it with Medicare which does have long term cost problems.

Income and Mobility for the Middle Class Can't Be Improved By Government Tax Policy

The NYT has a couple of conservative op-ed writers. David Brooks and Russ Douthat have the job of telling the conservative story. In this article we are retold the story about falling middle class income and low social mobility in the US. We are then given reasons why we can't reduce inequality by raising taxes on the rich and redistributing it.

We are given reasons why social security does not redistribute income from the rich to the poor, but we are not given the right reason. The social security tax is a regressive tax because the tax rate falls as income rises above the $106,000 cap on earned income. It was not intended to redistribute income from the rich to the poor. It could be made more progressive by raising the cap but this argument is not made. The government raises almost the same amount of income from the social security tax on income below $106,000, as it does from the progressive income tax. The tax revenues from both sources go into a common pot to fund all government expenses. When Congress increased the social security tax, by claiming that the funds would be needed to provide benefits to baby boomers as they aged, they were effectively making the total income tax system less progressive. The surplus funds collected by the social security tax also allowed Congress to lower the income tax rates for those in the highest wage brackets. In effect, Congress redistributed income to the rich by raising the social security tax and by making the federal income tax less progressive.

We are also told that we are spending twice as much for public education today as we were in the 1970's without improving educational outcomes. Therefore, investments in education do not redistribute opportunity. What he doesn't mention is that real spending on education has not doubled since the 1970's. It has not even kept up with inflation. If the inflation rate were 3.5% in this period, prices would double every 14 years. The dollars that we spend on education today would have needed to more than double in order to correct for inflation over 30 years. This kind of mistake is not made by accident. Anyone writing about changes in spending or income over time understands that we must correct for the effects of inflation.

The article ends up telling us that the only way to make things better for the middle class is to make government smaller. This will probably make its way into GOP talking points as the primary campaign moves forward.

Tom Friedman Has Learned About Fraud On Wall Street

This article by Tom Friedman tells a story about Wall Street that is about two years late. This story is about Citibank putting together a security made up of bad CDO's and selling it to investors. Since Citigroup knew that the security was worthless, it shorted the security and made a nice profit when it became worthless soon after it was issued. There have been lots of stories like this over the last few years. Friedman is a little late on this subject but its good that he is now writing about it. He has a much large audience than Rolling Stone or Mother Jones.

The story would have been better if Friedman had tried to learn more about why Citigroup got away with a fine, and none of those involved were punished for committing a multimillion dollar crime. The answer, of course, is that the SEC filed a civil complaint. Its almost impossible to win a criminal complaint on a fraud charge because the law requires proof that the perpetrators intended to commit fraud. Its difficult to prove criminal intent in a court of law. Despite widespread fraud, similar to this story about Citigroup, the bankers who were involved in these kinds of transactions have not faced criminal charges. In this case Citigroup paid a fine that was about twice the profit that it made on the deal. That is not much of deterrent for this kind of behavior.

The other part of the story that is seldom told is the effect of fraud on the victims. Pension funds, university endowments and many European banks were sold toxic assets like those described in this article. Some of these losses were insured by AIG who sold credit default insurance to investors. When AIG was unable to make good on the insurance, taxpayers made good on the insurance loss of around $175 billion.

Saturday, October 29, 2011

Ending Entitlements For The Entitled Class Is Defined as Class Warfare

This article reinforces the message that Elizabeth Warren is using in her Massachusetts Senate campaign. Its not class warfare when one fights back in a class war. She argues, correctly, that the entitled class has been conducting class warfare against the middle class for over 30 years. The entitled class is eager to reduce benefits, that it calls entitlements, to the unentitled middle class. Now they are upset that some politicians are bold enough to describe the war correctly and fight back. This does not make the entitled class happy. They assume that entitlement belongs to them because they earned it the easy way. They elected governments that acknowledged their divine rights and rewarded them with tax cuts, subsidies and deregulation which benefited them at the expense of the middle class. Now some have the nerve to question their privileges. That, they declare, is class warfare, and not an appropriate response to the more sophisticated way in which they engaged in class warfare, by paying a respectable price for government favor in the free market for government entitlements.

President Obama, who seems to prefer drone warfare, and has a distaste for political confrontation, has raised some questions about the continuation of government support for the entitled class. They regard this as treason, and reasonable pundits like David Brooks, are advising him not to support those who would fight back against those who been conducting a gentlemanly form of warfare for over 30 years. They tell him that this is certain way to lose the election because the public does not like class warfare when the middle class fights back. They are full of advice that might help him to lose the election, as well as campaign contributions from the entitled class. It remains to be seen whether the President will take their advice.

Republican's Have Become Keynesians

Richard Nixon famously said "We are all Keynesian's now". He made that comment in reference to his plans to stimulate the economy prior to elections. The GOP attitude towards Keynesian ideas changed when Obama took office and proposed a stimulus plan to deal with the recession. They argued that the private economy would grow its way out of recession without increasing government spending. Moreover, they argued that rising deficits would cause business to lose confidence in the future. Business investment would stall and jobs would be lost. Deficit reduction, produced by cuts in government spending, was proclaimed as the best way to end the recession and create jobs. Keynes was declared dead by the GOP in favor of the living dead, or zombie ideas that refuse to die.

Today, we are witnessing a revival of Keynesian economics in the GOP. They are now arguing that cuts in government spending will lead to a loss of thousands of jobs. Government spending is now a critical component of employment in the economy. What caused this dramatic transformation in the GOP? It turns out that the GOP takes a Keynesian position on government spending and employment when there is a threat to a cut in military spending. They are opposing cuts in the military budget by claiming that it will lead to the loss of jobs. This is an amazing display of cognitive flexibility and illogic that will endear the GOP to its base. The message is that cutting government spending on things like education, and reducing the numbers of teachers, will reduce budget deficits and produce jobs. On the other hand, cutting government spending on the military, which would reduce budget deficits, is bad for the economy and it will increase unemployment. Keynesian economics is only viable in a military state. It will play well in South Carolina and other southern states that depend upon military spending.

US Gets Failing Grades On OECD Report Card

This is a sad report card. The US is close to the bottom of the heap on this report card produced by OECD. Its a report card that has produced the OWS protests. Unfortunately, many will claim that the report card is flawed, and that the high achieving countries at the top of the pile are terrible places to live, equality and social justice are over rated. We have more hand guns per capita than any country in the world and the most powerful military in history. We also have the largest prison system in the world that we are making more efficient by outsourcing it to private enterprise. American exceptionalism is alive and well.

Since the report card is quite busy, and many of your acquaintances that you may want to discuss it with, do not have a lot of time to waste on such nonsense, you can tell them that its better to have more grey than red on the report card.

Bond Investors Perceive Risk In Italian Debt

Friday's auction for Italian 10 year Treasuries indicated that investors are cautious about Italy's financial situation. The yield on the notes exceeded 6%. That represents a 3.78% risk premium over German 10 year notes. This will make it difficult for Italy to service its debt as bonds with lower interest rates mature.

The European Central Bank is prepared to purchase Italian debt to keep interest rates from rising and the Italian Treasury is looking for ways to sell its debt to wealthy Italians directly. Italy has one of the largest pools of wealthy individuals in Europe. International investors are primarily concerned about the ability of the weak Italian government to implement plans to reduce its debt burden and to grow its economy.

Friday, October 28, 2011

US GDP Back To 2007 Level

The good news is that US GDP is finally back to where it was in 2007. The bad news is that the output was produced with 8,000,000 fewer jobs.

Martin Wolf Of The Financial Times On Protest Movement

The Financial Times offers an opinion on the OWS protests. Its not typical of previous left wing protests and it is raising legitimate concerns about developments in capitalism and government that need to be addressed.

What Does The Balance Sheet Of Insolvent Banks Look Like and Options To Restore Them

Uwe Reinhardt is an economics professor at Princeton and one of our leading experts on healthcare economics. I am always impressed by his ability to clearly explain economic concepts. I also respect him for his ability to explain economics to his students at Princeton in a manner that often ruffles the feathers of their wealthy parents who cherish a more conservative description of economic concepts.

In this article he does a great job of describing a banks balance sheet and explaining the difference between a liquidity problem that exists when banks are short of cash and insolvency that exists when banks do not have adequate capital to cover their liabilities. Since the European recovery plan requires banks to write down the value of their holdings of Greek debt, many of the banks will need to increase their level of capital in order to remain solvent. The method by which the banks will recapitalize has not been defined. They may be able to raise capital from private investors or they may require a capital infusion from nation states within the union.

In any case, this article will give everyone a better understanding of a bank's balance sheet. In a subsequent article, he will present some of the options that might be used to recapitalize the banks.

Iceland Took A Different Path to Recovery

This article contrasts the path taken by Iceland to recover from its financial system collapse with the path taken by everyone else. Iceland let it banks fail and it strengthened its social safety net rather than dismantling it. It's economy has not fully recovered but it is doing much better than most would have expected after the failure of banking system. There might be a lesson here for those states that have rescued the failed banks with taxpayer money, and are weakening their social safety nets. They believe in restoring prosperity to the thankless bankers and in punishing those who were harmed by the failures of bank management.

Europe Takes A Big Step Forward But More Is Required

This editorial praises the step forward taken by European leaders on the debt crisis but it argues that much is left to be done. In particular, it argues for the European Central Bank to operate like central banks in sovereign states. It should become the lender of last resort. The leaders of ECB have shied away from that responsibility and it is not politically popular in the nation states that have to put up the money.

The article supports many of the structural changes that are being imposed on states that require financial support, but it makes that case that fiscal austerity has made it impossible for Greece and other troubled states to grow their economies in order to produce the needed tax revenue for deficit reduction.

Crony Capitalism Is Linked To Rising Inequality

This article describes the Occupy Wall Street protesters differently than its critics on the right. It argues that they are opposed to crony capitalism. We have crony capitalism when the state protects capitalists from their mistakes. This encourages the excessive risk that we have seen in the financial system which led to rich rewards for success and for failure. It not only occurred on Wall Street but it is also common in corporate executive suites. The growth in executive compensation is not closely related to business performance. Even those who fail badly exit from their jobs with golden parachutes.

Crony capitalism is partially responsible for the rise in inequality that we are experiencing, and rising inequality leads to a perversion of democracy. That is what the OWS protests are about.

Thursday, October 27, 2011

Wages of Recent College Grads Are in Decline

This article describes the decline in wages for recent college grads. They do better than those without degrees but their income is falling. If there were a real shortage of college grads incomes should be rising. If the law of supply and demand still works, falling wages must mean that supply is greater than demand. This result suggests that a shortage of educated employees is the cause of unemployment and falling wages.

Fiscal Stimulus In US Versus Fiscal Austerity In UK

This graph (via Brad DeLong) shows that GDP in the US is almost at the level it reached prior to the recession. Some of this growth is the result of US fiscal policy. It isn't great but it is much better than what is happening in the UK. GDP in the UK has stagnated since the imposition of fiscal austerity. Where is the "confidence fairy" hiding?

Will Efforts To Lower Risk In Financial Services Harm The Economy?

This article raises many excellent questions about the value added by the financial sector. The financial sectors share of GDP, corporate profits and employee compensation has risen dramatically in recent years. The financial crisis imposed costs on society that raise questions about the real value added by financial services. This is a relevant question today since government efforts to reduce risk in the financial sector are being blocked by claims from financial industry lobbyists that the changes would have a negative impact on the sectors ability to innovate and stimulate economic growth. Financial service company executives e.g., the CEO of Goldman Sachs, argue that wages at Goldman Sachs are high because its employees are highly productive. Revenue per employee is very high at Goldman Sachs. This raises questions about the source of the high productivity as well as about the value of the services provided. These issues are explored in detail in the article and some answers to the questions are offered. Economists have a good understanding of the value added by manufacturing industries, and the factors that contribute to productivity and wages. Its about time that we reach a better understanding of these concepts in the financial services industry. The analysis in this article suggests that there are good reasons to question the social value added, and the productivity of the financial services industry.

(The link to this article has been repaired. I strongly encourage a careful reading of the article)

Germany Comes Through In Brokering Greek Relief Package

Der Spiegle reported on the deal reached early in the morning by European leaders. It is similar to the NYT report below. The major difference is that the German Chancellor is praised for her leadership. She had to sell the plan to her coalition as well as to other European leaders. Many had believed that she had been acting too cautiously prior to the summit meeting by focusing too much on internal politics. She did what she had to do internally to get the job done. The euro is very important to Germany. Its export based economy benefits from a stable euro. Given Germany's trade surplus a national currency would have appreciated in value relative to that of its trading partners and made German exports more expensive.

Europe Takes Big Step Forward To Resolve Crisis

Leaders at the European summit made some important progress in dealing with the debt crisis. The two big steps were to get the banks to take a loss on their holdings of Greek debt. They will voluntarily write down 50% of the debt that they hold. Since it was "voluntary" it does not trigger a default on the debt and trigger the use of credit default swaps to cover their loss. This was a big victory for Germany. French banks are more exposed to Greek debt than German banks and its government was concerned about the potential impact on its banks. The banks will get some government assistance in building up their capital base so that they can absorb the loss.

A decisions was also reached that would enable Europe to deal with potential problems in Italy. A fund to guarantee a portion of Italy's debt was increased to restore investor confidence in the safety of Italian debt. Without this support Italy would face higher interest rates when it issues new debt to cover debt that matures. That would have increased Italy's debt to GDP ratio beyond legal limits imposed by the eurozone treaty.

Stock markets in Europe and elsewhere responded positively to the news.

Wednesday, October 26, 2011

CBO Graph On Income Growth By Income Group 1979-2007

Sometimes a picture helps to tell a story. This graph from the Congressional Budget Office illustrates the growth in income by income group from 1979 to 2007. The growth in income by the top 1% accounts was dramatically higher than that for all other income groups. The income share for all other groups fell in this period.

To make matters worse the tax system was made less progressive as well. After tax income for the top 1% grew faster than pre-tax income.

More Americans Are Sympathetic To Occupy Wall Street Than To Tea Party

A new poll shows that a large majority of Americans are unhappy with the direction that the country is taking and they do not believe that government will do much to move things in the right direction. A recent report on the growth in income inequality in the US confirms the views held by most Americans. The share of income going to the top 1% doubled between 1979 and 2007. This feeds into what the Occupy Wall Street protesters are saying about the direction that the economy has taken. They believe that government policies have favored the top 1% and that government has done everything possible to protect them from bad decisions, while doing little to help those who have seen their income and wealth erode.

Almost twice as many American's have favorable views about the Occupy Wall Street protests compared with those who have positive views about the Tea Party. Support for the Tea Party is about equal to the percent of Americans who say that they belong to the Tea Party.

Conservatives have tried to portray the Occupy Wall Street protests negatively. They accuse them of class warfare and claim that they are envious of successful Americans who have worked hard to earn their increasing share of income. They also argue that they have not presented a focused list of changes that they would support. In fact, the protesters are more concerned about fairness, and the manner in which the share of income going to the top 1% has been achieved. They also recognize that growth in the share of income held by the top 1% reduces the share of the income pie available to the bottom 99%. While Wall Street has been their primary target because of the damage that it created with government help. They also resent the growing share of income going to the top executives of US corporations who have benefitted from globalization at their expense. They believe that government policy has accelerated the rate of globalization. Unfortunately, while they recognize that Republicans promote policies that favor the wealthiest Americans, they believe that Democrats have been pushed in a similar direction in order to compete for campaign contributions that have become a necessity in order to win elections in the US.

The Latest Poll on The GOP Horse Race

The latest poll for the GOP nomination shows Herman Cain slightly ahead of Mitt Romney. Cain's support has mushroomed since September, while Romney's support has been steady. The big loser since September has been Rick Perry. Herman Cain's support is centered in the Tea Party. His supporters are also more enthusiastic about him that are those who support other candidates.

Rick Perry is attempting to regain support by proposing his flat tax plan to counter Cain's 9-9-9 tax plan. They both argue that their plans make it possible for their supporters to do their own taxes because their plans are so simple. They both represent a real threat to H.R. Block that serves those who are unable to fill out their tax forms.

China's Approach To Developing Its Freshwater Industry

This article describes China's approach to industrial policy. China has a shortage of freshwater and it also realizes that other nations have a similar problem. Consequently, it builds state of the art desalination plants by partnering with external technology partners. After acquiring the best technology, manufacturing know how, and economies of scale, it will enter into the export business

This could not work in the US. In the first place our politicians would rather criticize industrial policy rather than praise it. In the second place, a huge lobbying machine has been funded and organized to represent the interests of those with legacy approaches to providing energy and freshwater. These approaches are usually less expensive, and this acts as a barrier to entry for those with new technologies.

Tuesday, October 25, 2011

Rick Perry Tells Us Why A Flat Tax Will End Recession

Rick Perry has bet that the GOP base will reward him for arguing against the progressive federal income tax. He claims that a system in which everyone pays the same tax rate is just what we need to fix the economy. This is a view that resonates well in the GOP base. George Bush was compelled to base his campaign on cutting the taxes for those with high incomes because one his opponents for the GOP nomination, (Steve Forbes) was gaining popular support by proposing a flat tax.

Rick Perry makes his case for the flat tax by arguing that those with low incomes will be better off if those with high incomes have their taxes lowered. The only problem with this claim is that it does not explain how the US economy prospered for the last 70 years with a progressive income tax in place. The tax system does not seem to have much bearing on economic growth, unless one wants to argue that our high growth rates after the war were due to the much higher tax rates in place prior to the Reagan era.
Its easy to explain why those with high incomes would ignore the evidence against Perry's argument. Its more difficult to provide a charitable explanation for why those in the GOP base with low incomes also support Perry's claims.

Those Who Ignore History Are Doomed To Relive It

This article contains a some of the suggestions that Keynes made to FDR after the second dip in the US depression. Keynes recommended many of the fiscal policy actions that have been heavily debated today. He also recommended that the Fed purchase long term debt in order to reduce long term interest rates (Operation Swift). He also warned that taking weak actions might prove disastrous. Critics would use the failure of government actions to restore growth as a reason for limiting the potential for future governments to take necessary actions to deal with recession.

A Republican Describes GOP Tax Policy

Bruce Bartlett is a Republican who has served in several GOP administrations. In this article he provides some of the GOP approaches to tax reform beginning with Reagan. This is an interesting history that refutes some of the GOP talking points about tax policy. The most important take away from this article, however, is that he tells us what the GOP goal is for tax policy. They really hate the progressive income tax which imposes a higher tax rate as income increases. They really want a flat tax system in which everyone is subject to the same tax rate.

This is not discussed in this article but the total tax system in the US already a fairly flat tax system. The federal income tax is somewhat progressive, but the rest of the tax system is regressive. That is the tax rate falls as income rises. The most prominent example is the social security tax. There is no tax on income above $108,000. That means that the tax rate on earned income is lower as income rises above the cap. Furthermore, sales taxes and most state and local taxes are also regressive.

A Critical Analysis of Potential Solutions For Rescuing The Eurozone

This is another critical article that speculates upon what European leaders might do to rescue the eurozone. The banks will have to write down the value of the loans that they have made to Greece. Some say that the write down could be as high as 60%. This is much higher than the 21% that the banks were willing to write down voluntarily in the original plan. No matter what happens, some banks will need government help to recapitalize, and credit will be less available. That will slow down economic growth. Its also hard to imagine how the countries which need help in servicing their debt can grow their economies and also satisfy the austerity demands required of them in order to receive help. There is also a plan to provide a guarantee for the funding needed by countries that would otherwise face very high interest rates. The problem with this plan is that some of the countries that need help would also be part of the guarantee that is provided to investors.

A Plan For Adding 4 Million Jobs and Increasing GDP by 2%

The US economy is in the midst of a very slow recovery. Moreover, government does not have much ammunition left to deal with the problem. Fiscal policy is off the table because the GOP will block any plan to improve the economy prior to the 2012 elections. The Fed has lowered short term interest rates to the zero bound and it has used quantitative easing to lower 10 year treasuries to around 2% which is approaching the limit lower bound for longer term debt. This proposal (via Paul Krugman) is for the Fed to purchase mortgage backed securities in order to drive mortgage interest rates down even further. It will stimulate refinancing and help to prevent foreclosures, and it will stimulate the housing market. The plan is presumed to raise GDP by 2% in two years and it will increase employment by 4 million.

The mechanisms by which the proposed plan will work to stimulate the economy and promote job growth are outlined in the proposal. It may be ambitious but it does get to the heart of our economic malaise. We need to rebuild household balance sheets and perhaps restore some the lost wealth from the decline in home prices.

World Population At Seven Billion And Growing At Over 1% Annually

This article describes the demographic challenges that we face. The global population did not reach one billion until the early 1800's. We are now approaching seven billion and heading towards 10 billion. Population density is also shifting. Europe was several times larger in population than Sub Saharan Africa (SSA) a short while ago. It won't be long before SSA has several times the population of Europe. SSA will even overtake India in population not too long after India passes China in population.

The challenges of growing population, as well as the growth in household formation, will present enormous challenges. So will the aging of our population. There will be fewer of working age to support those above 65 who have typically left the labor force.

Some of these challenges are described in this article. One of the problems that we face in dealing with the challenges is that our institutions and households typically plan and organize activities to deal with short term problems and goals. We seldom think about the problem of providing for the needs of future generations. Intergenerational social justice is a problem that looms larger on the horizon.

Monday, October 24, 2011

An Interactive Picture of Global Debt Relationships

This picture from the Sunday NYT depicts the debt relationships between countries in the eurozone as well as US connections to Europe. Its interactive and it provides a good way to visualize the problems.

Brad DeLong On Greg Mankiw

Brad DeLong dumps on Greg Mankiw from Harvard for writing a ridiculous op-ed in the NYT. When I read the article I was tempted to dump on it as well but I felt that it was pointless to continue posting criticisms of Mankiw, and his partner in crime at Harvard, Robert Borro, who is also a very prominent economist who has enlisted in the GOP army. The comments made by other economists on DeLong's blog go even further in their criticism of Mankiw. The real shame is that he is a brilliant economist who has chosen to carefully slant his views to support the GOP party line on the critical economic issues that we face. I was surprised when he accepted a position in the Bush administration, I was not surprised when he joined the Mitt Romney team. I cringe when I think about the influence that Mankiw and Borro have on the impressionable students at Harvard that they prepare for jobs on Wall Street.

Krugman Is Not Hopeful For Good Solution In Europe

Krugman describes the eurozone problem and raises concerns about arriving at a credible solution. One problem is that investors are demanding higher interest rates on Italian and Spanish debt. This makes it difficult for them to service their debt and increases the risk of default, which causes investors to demand even higher interest rates. Another problem is that if countries, like France, agree to provide funds to an agency that would support countries at risk, investors will believe that French debt is riskier and demand higher interest rates to purchase French debt.

Krugman is also concerned that imposing austerity on nations at risk, as a condition for granting support, will slow their growth rates and worsen their debt to GDP ratios.
He believes that the European Central Bank should do what the US Fed has done. It should print more euro's. This raises the ugly specter of inflation, but Krugman does not believe that hyper inflation is a threat during a European recession. Prices do not rise when wages are not rising and demand is weak. Core inflation has not increased in the US as the Fed has increased the money supply. It has also been tame in the UK following similar actions taken by its central bank.

Sunday, October 23, 2011

We Have A $500 Billion Wage Gap In The US

This article describes the changes that have reduced labor's share of the economic pie in the US and Europe. In the US the share of income going to wages has fallen by 5%. That means that we have a $500 billion decline in aggregate wages. Some is due to increased productivity, but most of the decline is due to globalization. The world labor supply has expanded and that means falling wages. Attempts to solve the $500 billion gap problem by reforming education is a long term solution that does not address the current problem. There does not seem to be a good solution to the problem short of starting a trade war which is not recommended. Making the tax system more progressive would help but that may not be politically possible.

There is one approach to education reform that might work. We could make higher education available to everyone at no cost. This would provide a private and public good that many would support. It would also provide jobs in a part of the economy that grows GDP more sustainably.

Get Ready For Recession In Europe In 2012

Citigroup economists believe that Europe will go into recession in 2012. The recession will be the result of two factors: European leaders will not be able to resolve the current sovereign debt crisis, and European banks will be forced to reduce lending and focus on restoring their balance sheets. If Europe does go into recession the bank crisis and the sovereign debt crisis will also worsen. Economic growth is one of the important solutions to the problems in Europe. Recession makes everything worse.

Traveling With Tom Friedman

In this op-ed Tom Friedman tells the story of his trip to Wall Street and to the Silicon Valley. Wall Street is "old school" it no longer does anything more worthwhile than what bookies do when they take bets. Silicon Valley is the future of America according to Friedman. He repeats the claims made by those engaged in social networking and cloud computing. These technologies will provide the framework that will empower everyone, and enable us all to become entrepreneurs. He doesn't mention this, but that is the way America can embrace globalization and provide jobs for everyone. He has been selling that vision in his old books and it is repeated in a new book that is being released. We just need to change the education system and turn everyone into technical giants who can compete with the rest of the world in the technology enabled economy of the future. I can't wait to read about what Friedman has learned on his next trip.

Adjustable Rate Mortgages Have Small Affect On Foreclosures

This article (via Mark Thoma) in The Atlantic reports on a study by the Boston Fed on home foreclosures. The adjustable rate mortgage, that has been singled out as the problem by many, had a small impact on the foreclosure rate. Only 6% of foreclosures took place after the rate adjusted upward. Most foreclosures were on fixed rate mortgages or on ARM's that occurred prior to the upward adjustment.

Fixed rate mortgages have higher interest rates because the lender has to factor in the risk of higher interest rates in the future that would reduce the value of the mortgages that they issued. This article makes the point that lenders may not have priced that risk high enough and that could produce the next crisis. Its also a good argument for homeowners to choose fixed rate mortgages since they may be underpriced.

A Short Description Of Government Spending And The Politics of Deficit Reduction

This article provides a good description of where the federal dollars get spent. It also explains how recessions produce federal budget deficits automatically. Tax revenues fall in recession and transfer payments increase. Economists regard the resulting budget deficit as stabilizing because the recession would be even deeper without the automatic stabilizers. When recession hit in 2000 under the Bush administration, the GOP pushed through very large "temporary" tax cuts which added to the budget deficit that occurs automatically in recession. Increasing the federal budget deficit was regarded as a means to stimulate the economy, and fight recession, when George Bush was the president. It also provided the rationale for a change in tax policy that primarily benefited those with high incomes.

This all changed when Obama was elected. The automatic deficit, produced by recession, was turned into a campaign issue by Republicans. They blamed the deficit on Obama and pulled out their favorite sound bite to use against their enemy. The "tax and spend Democrats" will bankrupt the economy unless we throw the bums out.

Since the automatic stabilizers only moderate recession, and because the Great Recession, produced by the financial crisis was very severe, the administration proposed an additional stimulus package. It consisted of tax cuts and increased spending. Much of the spending went to states and localities that would otherwise have been forced to cut back on vital programs because of falling tax revenues. This gave Republicans the opportunity to scream even louder about rising budget deficits even though the stimulus saved many jobs and kept the economy from sinking even further into recession. Expansionary austerity became their message. Reducing budget deficits, and deregulation would restore business confidence and induce business to invest in the economy.

Expansionary austerity has become the weapon of choice to attack the social safety net programs that the new breed of Republican's have begun to attack. We can afford to cut taxes on the super rich, but we can't afford to fund social security and healthcare. These are some of the major areas of government spending but they are also very popular with the majority of Americans, including those in the Tea Party. Therefore, both parties have pushed the task of cutting back on these programs onto "bipartisan" commissions that don't have to run for office.

Since the GOP has based its political campaign on reducing budget deficits, it has turned its attention to cutting back on federal spending for programs that are insignificant in terms of the overall federal budget, but are not popular with its base. Even if all of the programs they have targeted as wasteful were eliminated it would not make a dent in the federal budget. That does not really matter, however, since the whole point of the attacks is to excite its base and enable the GOP to dress itself up as the fiscally responsible party that can be counted upon to get rid of wasteful government spending on "liberal" programs favored by Democrats.

The take away from this story is that our budget deficits are primarily the result of declining tax revenue due to recession and the extension of the Bush tax cuts. The only serious way to reduce budget deficits is to restore economic growth and increase tax revenues, and to focus attention on where the real spending occurs. The military budget and the rising price of healthcare services, should be the focus of our attention. Everything else is political posturing.

Setting aside political posturing, there is one last major area of government spending that should be reduced. The interest paid on the national debt cannot be allowed to grow to the point where it limits spending on other areas or it leads to large tax increases. That can only be done by focusing our attention on the areas of the budget that really matter.

Saturday, October 22, 2011

The Story Of An Offshore Wind Farm Off The German Coast

This article in Der Spiegle tells an interesting story about Germany's decision to increase the use of renewable energy as it replaces its reliance on nuclear energy. One of its investments is in offshore wind turbines. Each turbine generates about the same energy as the first nuclear power plants. The offshore wind farm described in this article has 28 turbines. Each turbine is like an individual power plant. Locating the turbines offshore provides access to stronger and more consistent wind power. On the other hand, it is much more expensive to build and maintain them.

How Iceland Benefitted By Having Its Own Currency

This article shows how Iceland, which endured a catastrophic financial crisis, adjusted to the crisis. Unemployment is lower than in countries in the eurozone which also had a financial crisis, and wages in its domestic currency have risen. Wages priced in the euro, however, have fallen and have made its products less expensive in international trade. In other words, having its own currency allowed Iceland to adjust to its crisis differently. Distressed countries in the eurozone were not able to adjust via currency depreciation.

Friday, October 21, 2011

David Brooks Discovers The New Freud

In this article David Brooks tells us that behavioral economists are showing us that our actions are not always rational. They are correct but I believe that Freud told us that our unconscious mind was pretty important a long time ago. It would be nice to have a job like David Brooks. He reads something that rings a bell to him and then he writes an article about his new discovery. Someone should have told him about Freud. He should also take his own advice and sit down with those who disagree with him so that he can uncover his own biases. He should start with his colleague who knows more about economics than Brooks knows about psychology.

Some Pundits Like The Occupy Wall Street Protests

This article explains why Fox News, and other pundits with a similar agenda, have not convinced American's that Occupy Wall Street is a bad idea. Many American's believe that Wall Street has not done its job. Banks are supposed to allocate capital to its best uses by the private sector. Wall Street has been more intent upon allocating capital to increase the compensation of its executives and traders. Perhaps they are responsible, in part, for the poor performance of the real economy. They have left the job of investing in new businesses to venture capitalists. They make their money by the fees they collect for taking the new businesses public. During the dot com boom, fee generation was more important than doing due diligence on the numerous failed businesses that they sold to investors. The dot com bust was no accident and neither was the real estate boom and bust.

While the focus on Wall Street is justified. There is a related concern about increasing income inequality and the impact that it has had on government. They want to restore democracy so that government represents the interests of ordinary Americans and is not captured by lobbyists who represent the interests of those who can afford to pay their fees. The lobby industry has been one of the fastest growth industries in America for a good reason. They provide an enormous return on investment to their clients.

Why Deficit Reduction Is The Wrong Medicine For Recession

We usually talk about the national debt in relation to national income. This is usually expressed as the debt to GDP ratio. The ratio can be lowered by cutting the debt, by increasing GDP or doing both. This article explains why it is a bad idea to focus on debt reduction in a recession. Government spending is part of GDP. When we cut government spending in a recession it reduces debt but it also reduces GDP unless there is growth in the other components of GDP. Since consumer spending and business investment are not growing during a recession, this causes the debt to GDP ratio to increase. In a growing economy it makes sense to cut the ratio by lowering spending and raising taxes. That is what happened in the Clinton administration. Growth in GDP led to budget surpluses and lowered the debt to GDP ratio.

Some deficit hawks claim that fiscal austerity will increase business confidence and business spending which will cause the economy to grow. There is little evidence to support this concept of expansionary austerity. We are seeing the opposite in those countries where it is being attempted. The success of the deficit hawks in the ongoing debate is more closely related to moral values. We view saving as a virtue and excessive spending as a vice.

What Caused The Economic Problems In Europe?

This article (via Mark Thoma) looks at some economic data in an attempt to determine whether the Southern European countries got into financial trouble because they are lazy and prefer not to work hard. There was no evidence of this in the data that was analyzed. Perhaps its easier to punish them for being lazy than if they were hard working.

We do know, however, that there was a massive cash flow from Northern Europe to Southern Europe. Northern Banks were willing to purchase the government bonds because they were rated AAA and they could use the bonds as collateral to borrow from the wholesale markets. They got a safe return on their investments; they were able to leverage the investments by borrowing, and they did not have to reserve capital against the loans because they were rated AAA. This increased their return on equity which determines executive compensation. This looks pretty much like the what happened in the real estate bubble when banks purchased mortgage backed securities that were rated AAA.

The borrowing by Southern Europe was to some extent the result of trade imbalances. They financed their trade deficits with Northern Europe by borrowing from Northern Banks. Economic growth along with tax revenues was greater in the Northern export based economies. The opposite occurred in Southern European countries.

The Washington Austerity Class Described

This article helps to explain the power of the "austerity class" over policy discussions in Washington. The short answer is funding. Pete Peterson, a billionaire and former Commerce Secretary under Richard Nixon, has spent $383 million of the $1 billion he promised, to fund a number of organizations that have put deficit reduction ahead of job creation in Washington. These organizations, as well as the prominent individuals in them, are described in the article. They are viewed as the "serious people" in Washington and they are provided many opportunities by the media to sell the public on priority of deficit reduction. The targets of the deficit hawks are the federal entitlement programs.

Job Growth Through Pollution

The latest GOP plan for increasing jobs relies on an energy industry study which claims that limiting industry regulation will enable the industry to employ more people. Moreover, the study claims that every job created in the energy industry will have a multiplied effect on jobs created elsewhere. The GOP had denied the multiplier effect when it was argued that keeping teachers from being fired would have a multiplier effect. The other problem with the GOP plan is that the growth in jobs takes place several years from now. They refused to support the administration plan that would increase jobs next year.

There is a link in this article to a Yale-Middlebury study which measured the costs of pollution associated with a variety of industries. It argues for increased regulation to lower the cost of pollution.

Leading Climate Change Critic Provides Evidence Supporting Global Warming

Richard Muller has been a leading climate change skeptic. Accordingly, he has been funded by climate change deniers like the Koch Brothers to research climate change. He recently reported his findings that are summarized here. His research confirms previous research that shows that the earth is warming at a faster rate than it had in previous centuries and that the rate of increase has accelerated. This should end the controversy about climate gate. Climate change deniers will be forced to defend against the evidence that it is man made.

Thursday, October 20, 2011

Why Are So Many Concerned About Inflation?

This chart shows inflation in the US and the UK is not the big problem that many seem to worried about when they attack Fed policy. There is a blip because of a rise in commodity prices but core inflation, which is what the Fed tracks, is under 2%.

Are Small Businesses The Major Source Of Jobs In The US?

This article shows the distributions of jobs by size of company. Most of the jobs in America exist in firms with greater than 100 employees. Although small businesses are more numerous they are not the greatest source of employment or income. On the other hand, new business formation is important. Some new businesses grow and employment grows with them. Unfortunately, new business formation has slowed in recent years.

Four Charts That Summarize Occupy Wall Street Protest Concerns

Four key charts which help to explain the growing unrest that we are witnessing in America. It would be even worse if we also depicted the regressive changes in tax policy that have primarily benefited those at the top of the income scale. Government policy has rewarded the winners with tax cuts and now the government is being pushed to cut back on programs that benefit the less fortunate by using budget deficits as the weapon of choice.

Is Happiness Maximization The Chief Social Objective

There has been an ongoing debate within economics about the use of GDP growth as the measure of economic success. This article is about a debate on this subject between one who argues for the use of "happiness" as the goal and one who raises questions about the usefulness of such measures. For those interested in this topic, this article provides a good starting point.

To Frack or Not to Frack For Natural Gas

Scientific American published this article on the growth in the volume of natural gas produced by hydraulic drilling in shale (fracking). It has increased from 1% of gas production to 30%. This is good for the environment since the burning of gas releases less CO2 than coal, but there are many unresolved safety issues that are discussed in this article. The major issue is about the impact on underground water pollution.

US Data On 2010 Income Just Released And Its Awful

The data on US pay in 2010 has just been released and it is shows why Occupy Wall Street protests are springing up all over the country. The number of workers earning more than $1 million increased by 20%, but the median paycheck fell by 1.2% to $26,361. The median paycheck is back to where it was in 1999.

The unemployment figures are also awful. The number of unemployed increased by 5.2 million since 2007. If we add the 4.5 million who have entered the workforce since 2007, the number of Americans with zero income is around 10 million.

The GOP gained control of the House by promising to provide jobs. Since taking office the GOP has focused on cutting government spending and deficit reduction. Washington seems to be unconcerned about the unemployment problem.

Some Context on The Crisis In Europe

This article provides background on Europe and the struggle to maintain a common currency. Europe has around 500 million people and its GDP of $17 trillion is larger than that of the US and three times that of China or Japan. It is the largest trading partner of the US by far, and combined with the US they have almost half of the global GDP.

Europe has some general problems unrelated to the current crisis. Its share of global trade has been declining; it has an aging population which will put a burden on its social welfare programs, and there are imbalances between the north and the south. The northern economies are manufacturing and export based, while the southern economies are service based with substantial trade deficits. It is held together by a common currency but there are only a few, rarely enforced rules which bind them together as an integrated economy.

In order to maintain the common currency it may be necessary to move towards greater economic integration. On the other hand, nothing gets done in Europe without Germany, and its current leadership seems to be more concerned with domestic politics than in providing European leadership. This is for a good reason. Popular support for a more integrated Europe is declining. Euro skepticism is found on the right which is becoming more nationalistic and anti-immigrant, but it is also found within the coalition that forms the political leadership in Germany. It remains to be seen how national politics affect the efforts to provide greater economic integration in Europe. What is certain, is that the failure to resolve the crisis in Europe will create a global economic tsunami that will be difficult to predict and contain.

Wednesday, October 19, 2011

Unemployment Is Voluntary According To The GOP

A question raised last night at the GOP debate in Las Vegas tells us all we need to know about the values of those who are the most avid supporters of the party. When asked whether he still believed that unemployment is voluntary, and not the result of recession, Herman Cain vigorously defended his belief. The audience cheered loudly. If that is the overwhelming belief in the GOP base, it helps to explain why GOP politicians keep making the same argument. The fact that there are 3 job seekers for every job opening makes no impression on the GOP or its political leadership. The best way to end unemployment would be to end unemployment insurance benefits according to the GOP. Perhaps the low rate of unemployment that we had prior to the recession was due to involuntary employment.

This link to the debate has a video of the question and the response.

Banking Problems In Europe Have Global Repercussions

This short post in The Economist argues that the global banking system is in a position much like it was in 2008. The sovereign debt problem has placed many European banks at risk and national governments do not have the resources to contain the risks. For example, the funds required by the largest bank in Belgium are greater than the GDP of Belgium. The problems in Europe will cause problems in the interconnected global banking system if they cannot be dealt with.

Sovereign Debt Contagion In Eurozone

This article is about the contagion of the sovereign debt crisis in Europe. Initially countries like Greece, Portugal and Ireland had to pay a risk premium to borrow funds to turnover their debt as bonds matured. The risk premium is the spread between the interest rate that Germany pays to turnover its debt compared with the interest rate other countries must pay. Countries at the core of the Euro zone are now paying a risk premium compared with less risky German debt. If these countries need to borrow money to deal with problems in their banks, higher interest rates will limit their ability to deal with the problem.

A good point is also made in this article about the proximate cause of the problems in the peripheral countries. They all ran large trade deficits which had to be funded by borrowing. Cross border borrowing from other banks in the Euro zone to fund the trade deficits was facilitated by the perception that the loans were implicitly guaranteed, and therefore, risk free. Problems in Greece changed this dynamic. The banks that loaned money to Greece are at risk and they are also at risk for their loans to the rest of the Euro zone.

The difficulty of dealing with the crisis in the Euro zone has made it obvious that politically difficult changes will have to made to integrate the Euro zone economically in order to preserve the common currency.

Ben Bernanke Speech On Changes In Central Banking Due To The Financial Crisis

This speech was presented by Ben Bernanke on October 18th at the Federal Reserve Governors meeting at the Boston Federal Reserve Bank. The speech was intended to to summarize the lessons learned from the financial crisis that has caused changes in the policies and procedures of central banks worldwide. Prior to the financial crisis, central banks were focused on maintaining price stability and employment stability. They had been fairly effective at using monetary policy to achieve those goals. Maintaining the stability of the financial system was also a goal but the financial crisis brought it to the forefront. In a sense, maintaining stability of the financial system complements the goals of price stability and employment stability. These goals are dependent upon a stable financial system to provide credit and other services that impact economy in multiple ways.

Part of his presentation was on the operation of central banks when short term interest rates have been lowered to almost zero, and can't be lowered further. Central banks have used their balance sheets to keep long term interest rates low and they have accepted non-traditional assets as collateral in order to provide liquidity and the flow of credit in the banking system.

Another part of his speech was on the role of central banks to anticipate asset bubbles and other risks to the financial system. Central banks have a micro and macro prudential duty to monitor and prevent the recurrence of financial crises like the ones that we recently experienced and like those that are being dealt with in Europe.

A Critique Of Some Evangelical Christians by Evangelical Christians

Not all evangelical Christians are brain dead. This article criticizes those in the evangelical movement who hold views that are incompatible with reason and empirical reality. The list of things that the brain dead segment wrongly believe is very thorough.

Herman Cain's Tax Proposal Is Great For the Super Rich

Herman Cain has made the biggest gains in the polls among the GOP candidates for the presidency. His popularity is largely due to his 9-9-9 plan to radically change US tax policy. He has a gift for making it sound simple but upon examination it is the most regressive tax policy change that we have ever seen. It is Reagan on steroids. The plan shifts the tax burden such that taxes increase for all but those in the top 1% income bracket. It is regressive even within that income group. Most of the gains go to the top 0.1%.

Tuesday, October 18, 2011

The Never Ending Story From The GOP

We are in a very slow recovery from a very deep recession that was triggered by deregulation of the financial industry, which enabled the housing bubble, and the collapse of the banking system. This article examines the proposals for fixing the economy that are being made by the GOP presidential candidates. They have different slants on the solution, but there is a common theme. We need to get rid of the regulations that were put in place to reduce the chances of another financial crisis. Government regulation is what is keeping the economy from growing. They never tire of that theme. Markets work perfectly, and private industry always does the right thing, we just need to get government off of our backs. Since Halloween is approaching they should all put on Ronald Reagan wigs at the next debate and compete in a Reagan look-alike contest. The nomination should go to the victor.

A Funny Cartoon Tells a Serious Story

Much truth is said in jest. This cartoon (via Manan Shukla)does just that.

Senate Has Plan to Restore Lost Funding For Education

This post provides some background on the funding issues in education. Its hard to understand the focus on reform when the real problem is funding. State and local funding for education has fallen by $24 billion. The Senate is considering a plan to provide $30 billion to the states for education. It will be interesting to see if it can pass the Senate.

Sometimes Tom Friedman Is Terrible

This is classic Tom Friedman. He runs around the world interviewing people and then he distills what he has heard into the message that he wants to deliver. In this case his message is that we can pursue a progressive agenda without increasing spending or raising taxes. All we have to do is cut non-essential government spending and spend the savings on the progressive agenda. America should do what the mayor of Chicago is doing. Friedman made no attempt to learn more about how the folks in Chicago feel about the mayor's reforms. Nor did he attempt to determine how they are really working. It was enough for him to use his notes from the interview to make the points that he wanted to make.

Let's grant him his catchy phrase that we should assume the Tea Party's plea against tax increases and smaller government, and somehow manage to invest in the future. What is his progressive agenda? Well he learned from his interview that the GOP is correct about the reasons for high unemployment. He was told that some CEO's complained that they want to hire new workers, but they can't find employees with the necessary skills. Our unemployment problem is not due to inadequate demand. It is because we do not have the right labor force. Either they are not properly educated or they would rather collect unemployment than take low paying jobs. That doesn't sound very progressive but his secret weapon for maintaining his progressive image is his concern for a better education. He never talks about how to pay for it, but he knows from his globe trotting, that they are better educated in China and India and that our only way to compete on a "flat earth" that assumes hyper-globalization, is to reform the education system. The education system is our problem. We can ignore trade policy and all other considerations and focus on educational reform. And by the way, what did the mayor of Chicago do to reform education. Well he extended the school day. It was successful because parents approved the reform. We don't know whether it will turn out the workers that businesses can't find, but at least it extends the use of the schools as a day care center. This is typical Friedman drivel that has made him the highest paid journalist in America and enables him to demand $75,000 for speaking engagements where he can repeat everything that he wrote in "The Earth Is Flat".

My last point is that Friedman wants us to cut non-essential spending, and to invest the savings in the future, but he has been one of the strongest advocates for US military intervention in the mid-east. He campaigned for the invasion of Iraq and I have never heard him complain about the cost of our unproductive military ventures in the mid-east. Imagine what we could do to improve education if the trillions that were wasted in the mid-east were spent on education.

The Bush Tax Cuts For The Top 5% And The National Debt

This is link to a site the provides the running cost of the Bush tax cuts that have gone to the top 5% since 2001. Since the national debt is the difference between government revenues and spending, the national debt was increased by over $1 trillion that went to the top 5% by last Friday. Over 70% of that went to the top 1%. Although it is not shown, most of the benefit within the 1% went to the top .01%. Republicans who claim to be concerned about the national debt, have fought hard to prevent these tax cuts from expiring. The tax cuts were made temporary in the bill when it was passed because of their impact on the national debt. It was sold as a Keynesian stimulus for an economy in recession by the GOP which argues today that Keynesian economics is defunct.

Monday, October 17, 2011

Is There A Science Of Management?

This article challenges the practices of corporate boards that pay a premium to lure CEO's from companies in which they have been successful. Several reasons are given for concluding that they end up overpaying for bad performance at the new company. The interesting point that the article raises, however, is about the "science" of management. It would make sense to pay a premium to attract a CEO from a successful company if there were generic skills in management, like those taught in business schools, that would easily transfer from one company to the next. Its likely that what made a manager successful in one company may not transfer to the next company because management skill may not be the reason for the success in the prior company. Steve Jobs is used an example. His success at Apple had more to do with his passion for the products that Apple produced than his conformity to the traditional practices of management which he often violated.

Sunday, October 16, 2011

A Critique of Rational Expectations That Does Not Go Far Enough

This article is critical of an attempt to demean the macroeconomics that has been dominant in Chicago and elsewhere in the "freshwater" economics departments. It argues that too much credit is given to the freshwater crowd by comparing the Copernican revolution that was a step forward but also an inadequate description of reality.

I think that the first comment to this article provides an even better critique of rational expectations theory and the failed attempts to quantify human behavior and the complex sets of interactions that define the real economy. Inanimate objects do not have intentions. They just do what they have programed by nature to do. It isn't always easy to figure out the laws that they follow, but it would be impossible if they could change their minds and follow their own laws. Economics which depends upon understanding human behavior and the behavior of evolving institutions will never be like the physical sciences. It is probably a mistake to use the physical sciences as a model, especially when there is such resistance to the use of evidence to disconfirm accepted theories.

What Happens To The Losers From Globalization?

This article reluctantly informs us that globalization has winners and losers. It also tells us why many American's are concerned for their future. Median household income in the US is substantially lower than it was eleven years ago. Much of that loss has occurred due to the loss of jobs and the erosion of wages in manufacturing.

While the loss of manufacturing jobs and the decline in middle class wages is well described. The solution that is offered seems less than adequate. Its hard to see how government tax cuts to encourage entrepreneurship is the answer. Most of the successful companies that he used as examples do not employ large numbers of workers. His focus on education as a source of jobs is also a good idea. Education is a public good that ought to be supported. Its hard to see how that can happen however, in our current situation. The price of higher education is rising fast while wages in the middle class are falling. This coupled with the declining tax support for higher education is making higher education less available to the middle class. He did not make a case for the needed tax support as he did for the use of tax cuts to encourage employment. Middle class families have taken on huge debt in order to gain access to higher education. Debt from college loans now exceeds credit card debt in the US. This may not be sustainable as large numbers of recent college graduates have difficulty finding jobs and end up taking jobs that do not require a college degree or provide wages that enable them to form households as they pay down their debt.

The Race For Campaign Contributions Heats Up Prior To Next November's Election

This article describes the contest that precedes the electoral contest for the presidency that takes place next November. The headline is about the loss of financial support for Obama on Wall Street. They have been betting on Romney. Of course they will also cover their long bets with short selling in order to minimize their loses should Obama prevail in November. The bets on Wall Street also reflect the odds that Romney will be the GOP nominee. The other candidates have raised less money and their inelectability has become more apparent with each GOP debate. Romney is running against a very weak field.

Obama's campaign is not happy about the loss of Wall Street support and it is rather ironic that the president is perceived by many former supporters as a tool of Wall Street. They seem to have purchased a tool that has not served its purpose as well they had hoped. In any case, this leaves the field open for Obama to align his campaign with the majority of the population which views Wall Street with well deserved contempt.

Occuppy Wall Street Goes Viral

This article describes some of the protests that have been encouraged by the Occupy Wall Street protests. While the protests contain a mixed bag of grievances, there are some common themes. People are concerned about the future and they don't see government as their friend.

Its hard to predict what might happen as the protests gain momentum but it is gratifying to see the concerns of the more progressive forces getting some media attention instead of the Tea Party which has been coopted by the GOP.

Why Is Global Warming Viewed As An Opportunity Outside of Anglo America?

This article raises question about the different responses that we see around to world to the threat of global warming and climate change. The scientific evidence for global warming is stronger today than it was several years ago but support for responses to global warming in the US has declined. The question is raised about why it is seen as an opportunity elsewhere in the world,and it is viewed as a problem to be resisted in the US (and also in the UK). Perhaps there are things common to the Anglo American culture that produce similar responses. We both have powerful energy companies and we both have Robert Murdoch to distribute their propaganda.

The Great Recession Looks Like The Great Depression In Many Ways

This article describes a book about the Great Depression in the 1930's. It sounds all too familiar. Hoover trusted that the economy would recover by letting the basic laws of supply and demand do their magic. He made some weak attempts to stimulate the economy, but his heart was not in it. He lost the election to Roosevelt who promised to balance the budget which was driven into deficit by the loss of tax revenue due to high unemployment. When the budget went into a deeper deficit under his presidency he cut government spending and sent the economy back into depression. Large corporations did well in the Depression. They introduced technology to increase productivity and they laid off workers to increase profits. Small businesses, many of which provided goods and services to large corporations, did less well. The New Deal was a mixed bag of programs that were introduced to deal with the problems in the economy that were made manifest by the Depression, but they were vigorously opposed by the Republicans, and some were overturned by the Supreme Court. It took World War ll, and the huge increase in government spending on the military to reduce unemployment. Preparation for military conflict accomplished what the political system was unable to do on its own.

History does repeat itself, but it does so for a reason. There is always a conflict between interest groups that have an interest in maintaining things as they are, and interest groups that might benefit from change. There is also the problem of dealing with the conflicting value systems that separate the various interest groups. Its often the case that the dominant values better serve the interests of the most powerful interest groups in a society. Change never happens easily and without political struggle. In many ways the ebbing economic tide that we are experiencing today has exposed problems in our social order that are the result of a resurgence in the power of the forces that produced the Great Depression. It has taken decades for these interest groups to make progress against the value system that enabled the New Deal and The Great Society. It is not surprising, therefore, that the issues today are similar to those from the past. The struggle is still going on and our political system has not been able to resolve the underlying conflicts of interest. Today government has the opportunity to borrow at very low interest rates and invest in an infrastructure that will benefit the private economy of the future. By doing so, it may also be able to develop technologies and resources that prepare us better for dealing with climate change and the affects of globalization. Hopefully, it will not take a catastrophe to enable the needed response to our current economic and social problems.

Saturday, October 15, 2011

A Great Description of The Global Crisis and a Plan For Restoring Global Economy

This is the best analysis of the global economic malaise that I have read. It also proposes a plan for recovery that is better than what has been proposed by the Obama administration, because it is based upon a better analysis of the causes. This is not a typical cyclical downturn in the economy.

This recession is different in at least three important ways. The bursting of the housing bubble has created a problem of debt deflation. Households are forced to pay down their debt, or defaulting their debt. This limits consumption and it puts stress on the banks that hold their debt. Banks have responded by limiting credit to households and to small businesses.

Secondly, technology has increased productivity and encouraged the globalization of supply chains. This has resulted in an excess supply of labor, capital and productive capacity relative to demand. It has undermined the role of the US as the consumer and borrower of last resort for the products and capital from emerging market economies that are export based and net savers.

This has shifted the relative power of labor and capital in the developed world. The results have been stagnant wage growth, and an increase in income inequality to the levels that prevailed prior to the Great Depression. The use of government transfer payments has helped to limit the decline in spending but it is not sustainable. The problem is that incomes are not likely to grow under current circumstances with the global glut in labor and capital that exceeds global demand.

They propose a tripartite recovery plan that will take 5-7 years to achieve the needed results. The US government has fallen behind in infrastructure that is needed to compete in the global economy. It can also borrow at very low interest rates. It makes sense to take advantage of the low interest rates to invest in infrastructure that will benefit the private sector. This is better than cutting taxes or increasing transfer payments because the return is not equal to the investment on this kind of stimulus.

Secondly, they recommend a program of debt restructuring. Households and the banking system need to be financially repaired and the only way to accomplish that is to take steps that can reduce the debt overhang and deleveraging that is limiting economic growth.

Since the US and Europe, with the exception of Germany, are running current account deficits, and are deleveraging, the countries that are running current account surpluses need to raise the levels of their spending to compensate. This is not a good time for governments to increase savings and to impose austerity. There needs to be a global rebalancing, particularly in the export based emerging market economies. They need to increase their levels of domestic spending.

This is a short summary of the article which I strongly recommend. It makes a lot of sense to me, but it requires a rational approach to a problem that is much more complex than many are willing to admit. It is also a long term solution that will take several years to produce results. This is one time that I wish that the assumptions made by rational expectation theory would actually apply to reality. We understand the problem and there are solutions, the question is whether we have the capacity to act upon the understanding.

Ricardian Equivalence Does Not Show That Fiscal Policy Can't Work

Conservative economists, like Robert Borro at Harvard, have gone back in time to raise the concept of Ricardian Equivalence to argue that fiscal policy cannot be effective in stimulating the economy. Its one of the ways that the rational expectation idea is used to argue against government intervention into the "free market". Krugman explains why they are wrong. They are not only wrong but they don't even understand Ricardian Equivalence. They assume a perpetual increase in government spending to make their case against stimulus. When the stimulus, like the one used in the US, is a one time event the argument falls apart. Borro, of course, is a smart guy and he understands this. On the other hand, he is also a Fellow at one of the top conservative think tanks. He knows on which side his bread is buttered.

Its also important to understand that rational expectation theories are loaded with assumptions that simplify reality by a wide measure. They have not been very good at predicting what will happen in the real world for that reason. Krugman grants the assumptions in the model in order to show that its an improper use of Ricardian Equivalence itself and not just the assumptions behind the model. This has not stopped folks like Borro from using it, however, to support their ideological opposition to fiscal policy.

Austerity In UK Is Ideology Masking as Economic Policy

This editorial is pretty harsh on the attempt at expansive austerity in the UK. The confidence fairy concept behind the government's policy has been shown to be a myth. Ideology is no substitute for economic reality. The debt to GDP ratio only grows as GDP falls in response to cuts in spending. The UK is not alone in preferring mythology to economic reality. The ideology behind the strategy has support where it counts in many countries. Its really part of the attack on the welfare state.

Retail Sales Are At 1999 level

This graph shows real retail sales adjusted for population. There was rapid growth starting in the 90's and a sharp drop when the recession hit. It looks like retail sales have stalled, after a short spurt, at the 1999 level.

Pimco Sees Economic Trouble on the Horizon

Bill Gross, the founder of the world's largest bond fund, made a huge bet on US treasuries. The implication is that Pimco believes that yields on treasuries will increase. That happens when investors are seeking a safe haven for their money. He also bet on the long end of the curve which implies a low risk of inflation. Pimco is betting that the global economy is in trouble. He lost a lot of money last year by shorting the US treasury. He was betting on recovery and he lost big time.

Friday, October 14, 2011

Soviet Union Style Historical Revisionism In GOP

This article reminds us how we got into the financial crisis and the Great Recession. One would think that this would loom large in our memory and that we would want to avoid a repeat of this disaster. That has not happened. The GOP has put this entire episode into its memory hole and its candidates for the presidency are telling us that we have to return to the same policies that produced the Great Recession. Conservatives used to criticize the old Soviet Union for historical revisionism. Apparently, they have taken some lessons from it. Since Reagan was elevated to sainthood by winning two terms, by telling us that government is the cause of all of our problems, they are sticking to that message. The financial crisis, the Great Recession and our slow recovery were caused by government. The best way to get out of our crisis is to do the things that caused it in the first place. We have to get government off of the back of the free market.

The amazing thing is that they get away with this. It would not be possible to revise history without a lot of help from their propaganda machine which reinforces their message. They also get help from "mainstream media" which feigns objectivity by pretending that their lies must get equal time in their coverage of the news.

Thursday, October 13, 2011

15 Charts That Describe the New Gilded Age

There are 15 charts in this post (via Manan Shukla). They help to explain the despair that is being expressed by the Occupy Wall Street group and others.
The slides tell the story that has made the US rank #93 on the rankings of nations on the most commonly used measure of inequality. They also provide ammunition that counters the claims that the super rich pay most of the taxes. The answer is simple they have most of the income. If we taxed debt instead of income the bottom 90% would be paying most of the taxes.

The post that follows comes from an economist who is concerned about the social implications.

Everyone Benefits From Greater Equality

This article explains how the balance of power between markets and government has shifted over time in most areas of the world. This has led to the spread of inequality. The argument then turns to the reasons why everyone benefits from less inequality. The problems and approaches will differ by country and region.

One of the motivations for reducing inequality was to contain the spread of socialism and communism. The weakening of these threats has reduced the level of competition between economic systems. The lack of competition in world of ideas may be partially responsible for the excesses that we are seeing, particularly in anglo american economies. The excesses are destroying popular support for these economies which will reach a tipping point at some time.

Something Positive From A Republican Economist

This plan for dealing with the decline in home prices comes from a Republican economist. Its the best plan that I have seen thus far. It helps homeowners who are under water and unable to refinance their mortgages at the lower rates. It would keep many homes from going into foreclosure and help to stop the decline in real estate values. The loss of household wealth will also be staunched. This would help to restore spending and employment.

The plan will not be popular despite the impact that it would have on the economy and employment. It calls for government to fund some of the burden along with the banks that write down the principal. Those who are not underwater will resent those who get help, and some will not like to see the banks bailed out of another jam.

George Soros Explains Why This Is Not A Good Time To Recapitalize Banks

George Soros explains why it is not a good idea for Europe to recapitalize banks now. He thinks that it is not a good time for governments to put up funds to recapitalize banks when the added risk to governments is driving up their cost of debt. Furthermore it is not a good time for banks to recapitalize when their shares are selling below book value. This will give them an incentive to reduce their balance sheets by withdrawing credit lines and shrinking loan portfolios. That would be damaging to economic growth which is needed to service sovereign debt.

Soros suggests that it would be better to guarantee the bank debt first and to recapitalize the banks after the crisis has abated and government bonds prices and banks shares return to normal. He proposes a plan for doing this that does not require a renegotiation of the treaty.

Fools Rule The World And US Has No Monopoly On Fools

This post comments on David Cameron's boast that the low cost of borrowing in the UK is proof that his program of fiscal austerity is working. The implication is that investors are willing to purchase UK debt because they have confidence in the directions taken by his government. In other words, the "confidence fairy" is at work in the UK.

One can't blame a politician for putting a positive slant on economic data. After all, the unemployment data and GDP growth data are not supportive of his austerity plan. The public may find low interest rates encouraging, but they may not understand that the low interest rates have a more complex meaning. Investors will purchase government debt under two conditions: They trust that it will be paid back, and they don't anticipate inflation. The good news is that investors trust the UK will make good on its debt. The bad news is that investors do not fear inflation because prices are not likely to rise when unemployment is high and GDP growth is low as it is in the UK. This also explains why interest rates are low for US debt. The major difference in the market for government debt in the UK and the US, versus the market for Greek debt, is that investors do not believe that the Greek economy can generate sufficient tax revenue to service its debt.

The Essential Ideas Of Keynes, Via Robert Solow, That Apply to Recession

“what Keynes really meant.” I want to emphasize two of its themes, because they seem to be central to his place in the story of economic genius, and because they point directly to the reason why Keynesian economics, born in the 1930s, has become dramatically relevant again today. Back then, serious thinking about the general state of the economy was dominated by the notion that prices moved, market by market, to make supply equal to demand. Every act of production, anywhere, generates income and potential demand somewhere, and the price system would sort it all out so that supply and demand for every good would balance. Make no mistake: this is a very deep and valuable idea. Many excellent minds have worked to refine it. Much of the time it gives a good account of economic life. But Keynes saw that there would be occasions, in a complicated industrial capitalist economy, when this account of how things work would break down.

The breakdown might come merely because prices in some important markets are too inflexible to do their job adequately; that thought had already occurred to others. It seemed a little implausible that the Great Depression of the 1930s should be explicable along those lines. Or the reason might be more fundamental, and apparently less fixable. To take the most important example: we all know that families (and other institutions) set aside part of their incomes as saving. They do not buy any currently produced goods or services with that part. Something, then, has to replace that missing demand. There is in fact a natural counterpart: saving today presumably implies some intention to spend in the future, so the “missing” demand should come from real capital investment, the building of new productive capacity to satisfy that future spending. But Keynes pointed out that there is no market or other mechanism to express when that future spending will come or what form it will take. Perhaps God has not yet even decided. The prospect of uncertain demand at some unknown time may not be an adequately powerful incentive for businesses to make risky investments today. It is asking too much of the skittery capital market. Keynes was quite aware that occasionally a wave of unbridled optimism might actually be too powerful an incentive, but anyone in 1936 would take the opposite case to be more likely.

So a modern economy can find itself in a situation in which it is held back from full employment and prosperity not by its limited capacity to produce, but by a lack of willing buyers for what it could in fact produce. The result is unemployment and idle factories. Falling prices may not help, because falling prices mean falling incomes and still weaker demand, which is not an atmosphere likely to revive private investment. There are some forces tending to push the economy back to full utilization, but they may sometimes be too weak to do the job in a tolerable interval of time. But if the shortfall of aggregate private demand persists, the government can replace it through direct public spending, or can try to stimulate additional private spending through tax reduction or lower interest rates. (The recipe can be reversed if private demand is excessive, as in wartime.) This was Keynes’s case for conscious corrective fiscal and monetary policy. Its relevance for today should be obvious. It is a vulgar error to characterize Keynes as an advocate of “big government” and a chronic budget deficit. His goal was to stabilize the private economy at a generally prosperous level of activity.

A second characteristically Keynesian theme meshes very well with the first. In a complex economy, many business decisions have to be made in a fog of uncertainty. This is especially true of investment decisions, as already discussed: a lot of money has to be placed at risk today in an enterprise whose future success can only be guessed. (Much the same can be said of consumer purchases of expensive durable goods.) The standard practice is to focus on the uncertainty and think about it in terms of probabilities, which at least allow for an orderly analysis and orderly decision-making. Keynes preferred to focus on the fog. He thought that some of the important uncertainties were essentially incalculable. They would end up being dealt with in practice by a mixture of apprehensiveness, rules of thumb, herd behavior, and what he called “animal spirits.” The point of this distinction is not merely philosophical: it suggests that long-term investment behavior will sometimes be irregular, unstable, and given to doldrums and stampedes. Expectations can be volatile, and transmit their volatility widely. Passive or perverse policy can be dangerous to the economy’s health.