Wednesday, November 30, 2011

The Global Imbalance In Aggregate Demand Problem

The San Francisco Fed delivered a message on the need to balance aggregate demand in the global economy. The slow US recovery means that the US can not play the role of consumer of last resort. It is time for nations that are running current account surpluses to increase their level of spending to grow global aggregate demand. Some Asian countries, with the exception of China which is heavily investing in infrastructure, can make investments in human resources and infrastructure. Some can shift spending to internal consumption and others can invest in poorer Asian nations. This is also a problem in Europe. Nations running surpluses need to rebalance their economies as well.

The Other European Periphery Is At Risk

Emerging economies in Eastern Europe are at increased risk because of the crisis in the eurozone. European banks are tightening credit that they had been extending to Eastern Europe. The capital flight out of these countries has caused the value of their currencies to fall. That makes imports more expensive and can lead to inflation. Some countries have raised interest rates to deal with inflation and to reduce the flight of capital. That is the worse thing that emerging market countries, with limited foreign currency reserves can do. It will slow down growth and lead to recession. Hungary is facing that problem and Poland is worried about its economy which is closely linked to what happens in the eurozone.

Its Time For Ruthless Truth Telling In Eurozone

This Financial Times article argues that it is time for the IMF to make governments in Europe, particularly Germany face the truth. The truth is that the crisis in the eurozone is not the result of fiscal irresponsibility. Therefore, the fiscal integration proposed by Germany is not the solution. It would only create fiscal rules that can be enforced to prevent fiscal irresponsibility in the future. Politically, it is difficult for the German government to propose anything else because much of its public believes that the problem is due to irresponsible southern european governments.

Prior to the crisis the excess savings of households were absorbed by business and by government. They ran deficits that maintained aggregate demand at full employment levels. After the crisis, business spending fell and the business sector is running surpluses instead of deficits. This placed he burden on government to run deficits to absorb the excess savings of households. The problem in the eurozone is a lack of aggregate demand that can no longer be created by governments in Southern Europe Business and household spending must increase in order for aggregate demand to reach the levels required for full employment. That will have to come from countries that are in better fiscal condition. Austerity in the core countries spells disaster for the eurozone.

The IMF does not have the resources to fix the problems in the eurozone. It can deliver the needed message, however, to the leaders responsible for managing the crisis. The question is whether the leaders continue to defer effective actions because they will be politically unpopular. The consequence of refusing to make the hard decisions will be catastrophic.

The Fed And Other Central Banks Supply Dollars To ECB

The US Fed and other central banks joined together in an effort to provide dollars to the ECB. European banks are facing a liquidity crunch because they depend upon the wholesale market to borrow dollars from money market funds and from other banks. Those markets have tightened because of concerns about the health of many banks in Europe. The ECB is now able to fulfill that role.

The announcement of the assistance form the Fed and other central banks simulated the stock market in Europe and elsewhere.

Local Coverage of Public Employee Strike in UK

The Guardian presents on the ground account of public employee strike in UK.

The Confidence Fairy Has Failed In UK. Strikes Are The Result

Public employee unions in Britain went on strike to protest austerity measures. The government extended its austerity measures because it is falling behind in its debt reductions plan. It is falling behind because economic growth has stalled. The government blames problems in the eurozone for its slow growth. Many economists blame the austerity plan for slow growth. Perhaps the doctrine of expansionary austerity will disappear with the confidence fairy.

Tuesday, November 29, 2011

American Airlines Files For Chapter 11 Bankruptcy Protection

AMR, the parent company of American Airlines filed for Chapter 11 bankruptcy protection today. This graph shows the rise and fall of its stock price. It looks like AMR rode the housing bubble where its stock price peaked at the same time the housing bubble peaked. The price dropped steeply when the housing bubble burst and the financial crisis spooked the markets. It has wandered around since then but it never recovered from the boom and bust.

It filed for Chatter 11 in effort to use bankruptcy protection to cancel its employment contracts and renegotiate at a lower cost structure. This appears to be an all too common way for businesses to get out of contract obligations and use bankruptcy to reduce wages. Apparently, its wage structure was fine with stock investors during the housing boom. The recession is like an ebb tide. It exposes problems that are not visible at high tide.

The Global Economy In a Nutshell With a Focus On Europe

Everything you want to know about the eurozone and the global economy in one article with a graph for every issue.

Chocolate Versus Cocoa Will Reduce Poverty In Africa

This article argues that economic development in Africa must follow the path taken by other poor areas that have seen their economies converge toward those of richer areas. This means moving up the value added chain. Africa must move from selling low value added commodities and transition to higher value added manufacturing products. Its better to be selling chocolate than selling cocoa. It will also require investments in higher productivity, through mechanization of agricultural production, and improved distribution systems in Africa. About half of Sub-Sahara crops rot before reaching market.

Looming Recession In Europe And Slow Recovery In US Will Be Challenge For Asia

Stephen Roach tells us that Asia will have to stimulate consumption internally in order to deal with slow economic growth in the US and the eurozone. The Asian economy has depended upon exports for 44% of its GDP. The US and European markets account for 38% of China's exports. Consumption has slowed down in the US and Europe. The result has been a drop in China's exports from 31% of GDP to 16% between October 2010 and October 2011. China and the rest of Asia will have to bolster internal investment spending along with an increase in consumer spending to compensate for declining exports. This is the only way for Asia to decouple itself from a certain recession in Europe and a long term period of slow growth in the US.

The Director of the Harvard Environmental Economics Program On Success At Durban

Robert Stavins is the Director of the Harvard Environmental Economics Program. He wrote this paper on the prospects for the Durban discussions about future policy agreements. His basic view is that winning the game does not depend upon hitting a home run in Durban. He views the game as success in making a series of commitments that lead to victory in the long haul.

In any case, this article provides a wealth of information on all of the governmental programs and discussions that are taking place around the world. It is a valuable resource that supplements the work being done by climate scientists.

Did The ECB Send The Wrong Message That Triggered The Eurozone Crisis?

This article contrasts the actions of FDR in the early 1930's with that of the ECB in the spring of 2011. FDR sent a message of ending price deflation and returning prices to their pre-depression level. The expectation of inflation helped to stimulate spending and investment. The ECB raised interest rates by a small amount because it was worried about inflation. Although the rate increase was modest, it was sending a message of price deflation. Price deflation is the last thing that debtors want to see because it makes the real cost of their debt even higher. It also discourages spending and investment. Cash becomes king during a deflation because purchasing power increases as prices fall.

Economic Growth Forecasts For Europe and US Are Reduced

This is some of the bad news about the crisis in the eurozone. The stock market ignored this information on rumors that leaders were considering more aggressive actions. The European banks are the weak spot. They have to write down the value of sovereign debt that they hold and they are being forced to increase their capital to asset ratios. This has resulted in credit tightening in Europe and around the globe. Tighter credit means lower economic growth. Slower growth will put even more pressure on the banks and the economy.

Monday, November 28, 2011

Bloomberg Releases Secret Information Regarding The Extent Of The Fed Bailout

This aaricle by Bloomberg (via Manan Shukla) provides information about financial support provided by the Fed to US banks during the financial crisis. This information was kept secret from Congress, the public and even from some Fed bank presidents. If the eurozone had a central bank that operated like the Fed there would be no financial crisis in Europe. The Fed provided loans and guarantees to the banks that amounted to $7 trillion.

There are lots of issues about how this was done and kept secret. Congress would have acted differently if it had all of the facts when it was writing bills that affected the banking system. Investors who purchased stock in the banks without this information have seen their investments drop substantially in value as problems in the banks became more visible due to poor performance. Its pretty clear that we would not have let the larger banks become even larger if Congress had been provided accurate information about the banks. I doubt that the Fed will be empowered to save the too big to fail banks in the next crisis. They are too big to save.

Finding Community In Seattle and NYC OWS Protests

A personal story about an individual who found community and meaning from OWS in Seattle and NYC.

Tax Policy and Spending Cuts To Fix Long Term Deficits

Paul Krugman talks about where to raise taxes. He rebuts claims that raising taxes on those with incomes over $2 million won't help the deficit and he argues for a tax on financial transactions that is being discussed in Europe. He also acknowledges the need for spending cuts to deal with the long term deficit problem.

Equity Investors Boost Global Stock Prices On Hope For Eurozone Solution

The Stock Market reacted positively to news that European leaders are discussing ways to deal with the eurozone crisis. The market ignored warnings from rating agencies and from OECD about the crisis.

The Editor of The NYT's Makes An Attempt To Referee Economic Shouting Matches

The Editor of the NYT's wrote this article about the lack of civility in the media between economists. His own op-ed writers create a problem for him. He put his finger on part of the problem. Many media outlets feel a need to be objective. That means that they publish articles that give both sides on the political spectrum an opportunity to sound off. This works as long as there is an honest debate and respect for facts. It is pretty clear that this does not describe our current environment. Its also clear that most of the craziness comes from the far right. The center has disappeared because so much time is spent dealing with misinformation from the far right.

Sunday, November 27, 2011

When Did The GOP Separate From Reality?

The thoughts of a former GOP operative who would like his party to go back to what it was when he was attracted to it. His critique of the current GOP is broader and deeper than most of what I read about its demise.

Reports in Europe Of Political Support For ECB Intervention

The European press is reporting an agreement between Germany and France to enable the ECB to more aggressively support the needs of countries which are being forced to fund their debt at very high market interest rates. In return those countries would be required to get EC approval of their budgets.

Saturday, November 26, 2011

An Analysis of Forecasting Errors Leading Up To Great Recession

This analysis of forecasting by the NY Fed shows how difficult it is to predict the future. Some of the factors that contributed to forecast error are discussed.

Most Of The Time We Are Not Rational And That's OK

One of the founders of behavioral economics tells us that we have two modes of thought. Our most commonly used mode of thought is intuitive. Its far from rational but it is good enough for most of the decisions that we make. Fortunately we are not aware of how little we know when we make decisions. If we knew how little we knew, we would not be able to act as optimistically as we do. This line of reasoning flies in the face of economic theories that assume rationality. One of the conclusions of rational expectations theory is that individuals can predict the consequences of government policies far into the future. For example, if the government runs large budget deficits to stimulate the economy, individuals will conclude that taxes will increase in the future. In order to pay for future taxes they will save more of their income. By increasing their savings, and cutting their current spending, rational individuals will negate the effect of the government's effort to stimulate the economy by running deficits. Its not surprising that economic theories which assume rationality have such weak predictive power. On the other hand, it would be difficult to develop mathematical models of economic behavior if we assumed that many of our economic decisions were made intuitively.

Friday, November 25, 2011

The Top 20 Banks At Risk To Sovereign Debt

This slideshow depicts the exposure of 20 banks to sovereign debt and the common equity behind their exposure. The banks in the worst shape are domestic banks exposed to their own states debt.

Germany Is Behaving Like The US and England During The Great Depression

This article in Foreign Affairs compares the failure of the two economic powerhouses (England and US) to do what was needed to prevent the Great Depression, with the failure of Germany to do what is needed to end the eurozone crisis.

The Tension Between Capitalism and Democracy Is Growing

Milton Friedman was the cold warrior who wrote that democracy was based upon a capitalist system in which everyone was given the right to choose. Democracy and consumer choice were woven together into a compelling story in the ideological war against communism. Democracy was dependent upon a capitalist system that maximized choice. This article describes the growing tension between capitalism and democracy. Nowhere is this more apparent than in Europe. Democratically elected governments have learned that credit rating agencies and technocrats have the power to dictate the conditions that they must accept in order to survive financially. They must accept these conditions even if the imposed austerity worsens the odds for economic growth. The risk that less democratically oriented governments assume power may even be enhanced.

The relationship between capitalism and democracy worked well for thirty years following the end of WW II. It seems strange to even talk about the conditions that are leading to a more estranged relationship between those powerful forces. Perhaps the demise of communism has produced an unhealthy situation in which the lack of competition in the world of economic ideas has encouraged excesses in capitalism. Its also possible that a shifting economic paradigm has forced elected governments into a difficult situation. The choices that they have to consider may not be politically popular choices.

Another GOP Intellectual Can't Take It Anymore

Paul Krugman lets a reformed GOP speech writer describe the alternative cognitive universe in which his party now resides. It has its own wing of the book publishing industry, as well its own economic and social research organization, funded with tax free dollars, that sustains the ideological cocoon that protects them from cognitive dissonance. They are allied with the Christian Right, for political reasons, which also resides in an alternative universe. It is a universe in which Christ has been transformed into Adam Smith, and in which a cognitively gifted president has been reduced to an ignorant socialist who is unable to speak coherently without a teleprompter. Perhaps they prefer a president who is unable to speak coherently even with the aid of a teleprompter. The author of the posted article tried his best to make those speeches coherent without success.

Inequality In Chile Is Due To Unequal Access To Jobs

The former Finance Minister of Chile raises the issue of income inequality in Chile and other developing countries around the world. He points out that Chile has made remarkable progress over the last 25 years. Democracy has been strengthened along with improved social welfare programs. Per capita GDP has tripled in that period but it has not been equally distributed. He calls that a problem of market failure in the labor market. There are not enough jobs available for young workers with limited skills and experience. They don't participate in the labor market and they don't vote. Moreover, labor relations between unions and management are not good in Chile. The problem of inequality is a political problem more than an economic problem.

What's To Be Done With The Superfluous Worker?

A sociologist takes a look at how we increase the number of workers without jobs and explores ways that we might reduce that number. The penalty for not doing so will be social unrest.

The Financial Times Has Some Tough Love Advice For David Cameron

David Cameron is learning that the confidence fairy is not going to rescue the UK's struggling economy. Martin Wolf suggests that he should have listened earlier to those who told him about the "paradox of thrift". If the government has decided to run a budget surplus then some other sector of the economy must run a deficit. The corporate sector is running a surplus by investing less on building future growth than its retained earnings. Perhaps the government needs to take some temporary measures to encourage business investment as long as it insists on reducing its deficit.

Thursday, November 24, 2011

FCC Shoots Down AT&T and T-Mobile Merger

It looks like the proposed merger between AT&T and T-Mobile is history. After the FCC failed to approve the merger, AT&T reserved against a $3 billion cash penalty it will owe to T-Mobile if the merger fails. They are still preparing to fight a decision by the Justice Department to fight the merger on anti-trust grounds.

Its hard to believe that AT&T was willing to bet $3 billion in cash, and $1 billion worth of cell network spectrum, that the merger would be approved. They must have believed that their lobbying would pay off given the recent history of lax government oversight on anti-competitive mergers and acquisitions.

A Washington Lobbyist Repents and Tells All

Jack Abramhoff describes how the revolving door between the congressional staff and lobbyist organizations leads to corruption. Apparently, the 3 years that he spent in prison gave him some time to reflect on his own behavior and its effect on democracy. His buddy Grover Norquist is still forcing GOP politicians to adhere to his tax policy under threat of campaign fund withdrawal and banishment from the good life in DC.

Apocalypse In Europe?

Krugman reflects on a Financial Times article that interprets the weak sale of German treasuries as a very bad sign. The market is pricing in the risks of a very bad economy and deflation for the eurozone, or even its breakup. Investors do not believe that the ECB will act as a central bank and perform a central bank's duty as lender of last resort.

Wednesday, November 23, 2011

Bad Advice For Obama From Tom Friedman

This article takes Tom Friedman over the coals for suggesting that cuts to Social Security and Medicare critical to winning the 2012 elections because they put the economy on the right track. The Friedman op-ed is posted below.

Tom Friedman Offers Political Advice to The President

Tom Friedman urges Obama to take some risks and use his advantage as the president to lead the American public. The GOP has played the obstructionist hand and he has an opportunity to present something that the public is looking for. The public is looking for a vision of an America that can resume its leadership role in addressing our economic problems and point us toward a better future. That requires that we deal with our short term and long term fiscal problems. The president has to determine whether his political staff or folks like Friedman have the better grasp on his options, and how they play into their state by state plan for the 2012 elections. His political staff will be preoccupied with winning the electoral votes from several swing states. Is the Friedman plan the way to win Ohio and Florida?

Hackers Release New Emails By Climate Scientists Prior To Meeting In S. Africa

This article describes the emails of climate scientists that were hacked and released just prior to the negotiations on climate policy to be held in S. Africa. Investigations of the last hacker attack showed that there was little of substance in the released emails to question the integrity of climate scientists. On the other hand, opponents of climate policy were able to distort the information via their friends in the media (Fox, Rush Limbaugh etc.) and politicians are already using the information to their advantage.

National Public Radio Faults US Media For Crying Wolf On Deficits

Paul Solman of NPR believes that the media are crying wolf about US deficits. Krugman posted a positive response to Solman's discovery in his blog posted below. It has taken a while for folks like Solman to catch on to the problems in coverage by the media.

Harry Eichengreen Describes The Eurozone Crisis And Solutions

This is a link to a recent lecture by Harry Eichengreen on the eurozone crisis. He describes the causes of the crisis and then talks about 5 ways to deal with the crisis. He looks at each method and concludes that only one approach has a chance of working and that may come too late. He also describes the catastrophic consequences of failure. He believes that this is understood by politicians and that they have a powerful incentive to do what is needed.

This is a long video but it offers an understandable description of the crisis and the problems of fixing it.

Andrew Haldane Raises Questions About How We Measure Value Added By Banks

This article analyzes the value added by the financial sector and concludes that much of its value added is for bearing risk. Unlike, managing risk which does add value by allocating capital to its most productive uses, bearing risk only adds leverage and increases bank profits. The risk of too to big to fail banks is born by the taxpayer. Bankers have been subsidized by the taxpayer and banker compensation is nothing more than rent seeking behavior.

Paul Solman Now Understands the Obvious

Krugman posts an article by Paul Solman who has come to the same conclusion that he came to a long time ago. The US Treasury can borrow at the lowest rates in its history. This suggests the investors do not fear inflation, since that wold make cause the bonds to lose value, and that they do not worry about the risk of default. It also tells us what they do worry about. They worry that austerity measures will slow down economic growth in the US and make other investments, such as equities less attractive.

This leads Solman to ask the obvious question. How come this is not reflected in the media? Most of what we find in the media is about the risk associated with budget deficits and the risk of inflation because of actions taken by the Fed.

CEO Compensation In UK Is Creating US Type Gap Relative to Labor

This article describes the rapid growth of CEO compensation in the UK. While it is not yet at US levels relative to the average worker, the gap between top executive compensation is expanding at a rapid rate. Some argue that this is necessary in order to attract and retain top talent in the UK. The data argues otherwise. There is very little movement of executive talent into or out of the UK.

It would be interesting to learn more about this dynamic in the UK. Corporate governance is probably as weak in the UK as it is in the US. Compensation in the US is driven by stock price appreciation. I'm not sure how this works in the UK.

Tuesday, November 22, 2011

Why College Grads Are Camping In Parks

A little humor (via Manan Shukla).

The Wages of Economic Ignorance

The impetus for this article by Lord Skidelsky is that politicians in the UK are blaming weak economic performance on the eurozone crisis. He believes that the government's austerity policy is the problem and it should not blame the poor performance of the economy on the eurozone which has its own problems. Skidelsky explains why austerity is not the appropriate response to a decline in private spending. He is critical of governments in the UK and elsewhere for using the recession and resulting budget deficits as the rationale for limiting the role of government in the economy. He turns to the eurozone crisis at the end of the article and concludes that a union is not possible when some countries have persistent current account deficits and there is no political will for greater fiscal and monetary integration.

Can Italy Be Saved?

Michael Spence provides a qualified answer to that question. He takes a look at Italy's debt situation and compares it favorably to that of other countries that have less difficulty funding their debt. Unlike Greece, which does not have the resources to deal with its problems, Italy has the potential to fix its problems. Time is of the essence however. Italy must turn over a large amount of its debt in the next 6 months. It will take time and political will for Italy to achieve the structural reforms that are needed to prevent the selling of Italian debt which raises the interest rate to unaffordable levels, as well as affecting credit availability as banks are forced to write down the value of the debt that they hold.

Since Italy does not have time to complete necessary structural reforms, a circuit breaker is required. Italy needs access to a lender of last resort. Unfortunately, the German government fears that making loans to Italy represents a moral hazard. If Italy is bailed out by the ECB the incentive to make the needed structural reforms may be attenuated.

The risk to the eurozone of an Italian default is the abyss that most be viewed in the context of the moral hazard problem. The abyss seems more dangerous than providing the needed circuit breaker.

How Should Economic Instruction Be Adapted To Deal With Current Economic Issues?

The walkout by 10% if the students in Greg Mankiw's introductory course at Harvard has received much publicity and it raises many questions about the teaching of economics. This article by Robin Wells who has written a textbook, and who teaches introductory economics at Princeton, suggests that it provides a teachable moment. Students are more aware of economic issues as a result of the financial crisis and high levels of unemployment. The profession has also come under attack for its failure to foresee the problems that we face, and also for its complicity in what has happened by extolling the virtues of free markets as the answer to every economic question. She does not recommend a radical overhaul of introductory courses but she argues that economists must show more humility, and admit ignorance on some issues, and seek to engage students by showing the relevance of many economic concepts to current issues such as growing income inequality. This cannot be explained by falling back on market forces and marginal productivity ideas.

The Case For Progressive Tax Policy

This study on the optimization of tax policy by using economic analysis, and social welfare considerations, makes the case for a progressive tax structure. It also provides a critique of research by Mankiw et at that reaches different conclusions. The study is technical but it offers rewards for those who can spare the time to study it carefully.

Are Public Employee Growth and Excessive Compensation The Cause of State Deficits?

This study looks at the state budget deficit problem and attempts to answer questions about the causes. Many states have enacted laws to limit government employee unions by arguing that growth in the number of government employees and excessive compensation of employees is the cause of the budget deficits. The results of the research on this topic are that growth in government employment per state resident has been constant, and that public employee compensation is similar to that of private employees with similar education and experience. The major cause of state budget deficits is linked to the decline in home valuations.

Stock Buybacks Are On The Rise

This article illustrates one of the problems of executive compensation plans that are linked to earnings per share goals. It has led to underinvestment in R&D, which is important for long term growth, but negatively affects current earnings. It also provides an incentive to reduce the number of shares outstanding by purchasing the company's stock. Stock buybacks by major corporations are on the rise. Corporate executives faced with a decision to invest in the future frequently decide to invest in beating the earnings per share goal. That strategy has not paid off for long term shareholders.

Monday, November 21, 2011

One Set Of Graphics That Tell You Everything About Money

This link (via Manan Shukla) tells you everything you need to know about money. Who has it and how it is spent. It may take some time to figure out how to use it.

100 Million Households Ranked Poor or Near Poor By Census Bureau

The Census Bureau added a new category that it calls the "near poor" in its report on household income. The new category adjust for differences in the cost of living such that it includes incomes up to $25,000 in N.Dakota and up to $51,000 in Silicon Valley. The combination of the near poor and the poor includes 100 million Americans or one third of US households. This is not a good result for the richest country in the history of the world.

Supercommittee Is Expected To Announce Failure Today

This article anticipates the failure of the bipartisan supercommittee that was charged with developing a plan to reduce federal budget deficits. Republicans believe that they will have a better chance to get what they want after the 2012 elections. The failure of the supercommittee to reach a compromise will become part of the election campaign. Both parties will blame the other party for the failure. Frankly, it is a failure of our democratic system. Compromise is viewed as a sign of weakness in the GOP. The Democrats on the committee offered cuts in spending that angered many loyal party members but the GOP will stop at nothing to maintain the Bush tax cuts which are a major cause of projected budget deficits.

China Plans To Invest $1.7 Trillion In Its Economy In Response To Global Economic Crisis

This article describes some of the trade issues between the US and China that were discussed in a recent meeting between US and Chinese trade officials. China anticipates chronic problems in the global economy. It plans to protect the Chinese economy from spillover effects by investing $1.7 trillion to stimulate growth in targeted industries. To put that investment in perspective, the Chinese economy, after correcting for price parity, is about the size of Japan's economy. Apparently, there are no conservatives in China demanding austerity and opposing industrial policy.

There Is No Safe Haven In The Global Economy

Paul Krugman surveys the global economy for the Financial Times.

A New Government In Spain Gets An Opportunity To Make Expansionary Austerity Work

The the surprise of nobody, Spain elected a new government. The Socialist government was unable to solve the economic problems in Spain, and now the conservative Popular Party will get a chance to implement the austerity programs that sunk the Socialist party. Its hard to see how Spain can reduce its debt to GDP ratio as long as interest rates on its debt exceed the growth rate of GDP (which is close to negative). Perhaps the "confidence fairy" will come to the rescue and reward the new government with lower interest rates.

The popular party will have the advantage of a majority government that does not depend upon the support of a coalition partner. It will also have support from the conservative Catholic Church. It may have problems, however, in several regions which resist control from Madrid. If the Popular party attempts to recentralize control in Madrid, the government will have a cultural war to fight along with a difficult struggle with the economy. We should hope that the new government can restore economic growth without reverting to Francoism. The worse outcome for Spain would be a return to a culture war by a party unable to fix the economy.

Saturday, November 19, 2011

The Job Of The ECB Is To Prevent Inflation

The new President of the ECB has joined the President of the German central bank in describing the job of a central bank. They both agree that it is to maintain price stability. Krugman argues that the risk of inflation is not on the radar screen in the eurozone. Many believe that the ECB is the best defense against contagion in Europe. It looks like that will not happen.

A Framework For Diagnosing Our Economic Problems

This article reminds of what many of us do when we, or someone we know, has a health problem. We search the appropriate web sites that contain information about the health problem. Even if what we learn is not encouraging, we often feel better because we understand it. In this article we learn that the global economy has health problems and we are provided with a way to better understand the symptoms. A better framework for understanding the tremors that we experience may even provide opportunities to gain from the understanding. (The author is an investor who looks for ways to profit from change.)

Yes, Inequality is Growing But It Doesn't Matter

This article (via Manan Shukla) is by a leading conservative economist. Its a long article but it may be interesting to those who want to understand the ways in which the conservative mind works. I suggest that you read the last paragraph which concludes that we should not be concerned about the rising incomes among the top 1%. If you have the time and patience you can then list all of the reasons provided in the article why is should not be a concern. Unlike many conservatives who attempt to deny that inequality is growing, Tyler Cowen agrees with the data in support of rising inequality and he turns his attention to all of the reasons why it does not matter. I would like to give a name to this tactic. Lets call it the rat hole tactic. Each of the points that Cowen raises is a rat hole. Some of the points might be interesting to explore and dispute, but each one sends us into a rat hole that distracts us from what we are attempting to deal with. This often happens in meetings when a group is trying to solve a particular problem. Someone in the group will raise another question that drives us down a rat hole and distracts us from our job. We never get around to fixing the problem,

Elections In Spain May Be A Harbinger Of Bad Things For The US in 2012

The coming elections in Spain look similar to what the US might experience in 2012. The incumbent socialist government has lost the support of the young people who are experiencing high unemployment. They were not pleased with the austerity programs that have been implemented by the government that they elected. Polls show that there is less enthusiasm for Obama among the young that helped him to win the presidency. Unemployment is high among the young and many recent graduates have not found the kinds of jobs that they anticipated. The president has been campaigning on reforms to the education system and a commitment to join the GOP in deficit reduction. There is no wonder that his base is less excited about the 2012 election than it needs to be. The elections in Spain will make matters worse when conservative parties align to form a new government. That is the price that will be paid for the uninspiring performance of the party that they elected. We will pay an even worse price in the US if that happens in 2012. Unleashing the GOP will be a disaster for the US and for the world. Enthusiasm for progressive government is a valuable commodity that may have been wasted. The democratic base may have been left with the choice of voting the keep the GOP out of office rather than the opportunity to elect a leader that inspires them.

Paul Ryan Gets Blasted Again For Just Doing His Job

Paul Ryan has responded to the growing concern about growing income inequality by publishing a report that debunks the idea that it is growing. Ryan also argued that the top 1% is paying more in taxes than they paid in the past, as evidence for the progressiveness of the income tax system. This article presents some of the abuses of statistics that Ryan used to support his claims. Its hard to read anything written by Paul Ryan without reaching the conclusion that he is not as smart as his supporters claim him to be. One then wonders why Ryan's conclusions are found everywhere in the media. Frankly, it does not matter whether Ryan is smart or stupid. He is just doing his job. His job is to put his name on the research he is provided by conservative "think tanks" like the Heritage Foundation and a host of other organizations funded by the the super rich that they serve. For example, much of the data in Ryan's famous Road Map was provided by researchers at Heritage. That plan was also shown to be full of faulty claims based upon a poor analysis of data. That did not stop the House from passing a bill based upon Ryan's "Road Map" that was defeated in the Senate. If the GOP takes over the Senate in 2012 Ryan's bill will become the law of the land despite its flawed arguments. Paul Ryan is just a soldier in the battle to produce the "Austerity Society". He will be provided with a high rank in that army if the GOP sweeps the 2012 elections. One might say that Ryan's kind of intelligence, and disregard for truth, has been very useful to him and to his supporters.

God Bless Income Inequality

This article contains a post that makes the case for income inequality. It is a variation on a common theme that argues that without inequality there would be no motivation to work hard. Everyone agrees that perfect inequality would not work. The question then becomes one of drawing a line, and whether a progressive tax system should be used to prevent the development of an oligarchy that has the potential to undermine the democratic state that provides the infrastructure for success and mobility. I have often wondered how the military has been so successful with its compensation system. There are rewards throughout the system to encourage effort and support for the missions of the organization. The pay system also provides financial reward for moving up in rank. The system produces income inequality but it does not compare with the inequality that one finds in the private economy. It would seem that organizations can be successful without the degree of inequality that some argue for. Its also possible that the kind of people that are motivated entirely by the chance to become a billionaire are not the kind of people that are best for the organization that spawns them. We have seen lots of recent examples where such individuals put their own success above that of the organization that made their success possible. It seems to me that America worked very well for 40 years after WW II when there was greater equality than there was in the periods leading up to the Great Depression and the Great Recession.

The Age Of Austerity May Be Introduced in America After 2012 Elections

Many liberals have suggested that the failure of the supercommittee may be a good thing. If it fails the Bush tax cuts expire and there is a an automatic cut in the defense budget. This article looks at the situation that might occur if the supercommittee fails and the GOP sweeps the 2012 elections. Polls show that the GOP is favored to win the House, Senate and the Presidency. The odds of a sweep are less that 50/50 but the GOP would be in a strong position to implement their game plan. The method that they might use is outlined in this article. The author of the article has written a book on the Age of Austerity which would be the consequence of a GOP sweep.

Friday, November 18, 2011

IPCC Panel Warns About Extreme Weather Events And Unprepardness

The latest report from the IPCC meeting in Africa warned that the frequency, intensity and duration of extreme weather events is increasing and that governments need to be prepared to deal with these events. For example, heat waves that occurred once in 20 years will happen once every five years and then every other year.

Who Are The Members Of the Top 0.1%?

This article by Bill Clinton's top economic advisor does a good job of describing the sources of growing income inequality. Stock ownership in the US is concentrated in the top 0.1% and capital gains from the sale of stock is the biggest contributor to income inequality. Tax policy has become less progressive as well. The tax on capital gains from stock has been reduced to its lowest level in recent history. Changes in the way corporate executives are compensated and weak corporate governance have caused the executive class to move into an income area that was once reserved for founders of businesses.

The debate on growing income inequality usually turns into a debate about market forces versus policy decisions as sources of income inequality. Conservatives like to argue that rare skills have become more important as corporations have become larger and more complex and those skills are worth the premium that the market is paying for executive skills. Therefore, its simply a matter of supply and demand. That argument is hard to sustain. Are executive skills many times more valuable than they were in the recent past? Are American executives an order of magnitude more valuable than executives elsewhere in the world? This list could go on and on. Its much easier to connect growth in executive compensation to changes in the compensation system and to weak corporate governance.

Thursday, November 17, 2011

When The Ideas Are Not On Your Side Invoke The Culture War

Krugman tells us the attack by the right on OWS protests, and the attack on Elizabeth Warren are typical of its approach to politics. The OWS protesters are described as dirty hippies who are not like hard working Americans, and Elizabeth Warren is an elitist Harvard Professor who is also not like ordinary Americans (It would be better if she had a beard). The GOP, which has always defended the plutocracy, does so by invoking the culture war. They have been successful by running as ordinary folks who care about hard working people and the small business person. Voters should ignore the real concerns expressed by the protestors, and the real concerns for the middle class that Elizabeth Warren's campaign is about. Instead they should vote for ordinary folks like them in the GOP. This enables the GOP to serve the plutocrats with whom they identify.

The Best Way to Cut Deficits Is To Have The Super Committee Fail

This article explains why the best way to cut budget deficits in the moderate term is to do nothing. If we do nothing, the Bush tax cuts expire under law. That makes a big dent in the budget outlook. If the Super Committee fails to produce a plan the military budget will also be automatically cut. That would also go a long way to reduce budget deficits. Unfortunately, conservatives who oppose government spending on social programs, have no interest in cutting the budget of the Defense Department which defends us against imaginary enemies without an army that would dare to attack us. They argue that cuts in this kind of government spending would lead to the loss of jobs.

The Washington Post Continues Its Campaign For Contractionary Fiscal Policy

This article explains why fiscal austerity should not be the focus to the Washington Post which is in love with cutting government spending while consumers and business are also cutting spending. This is a contractionary policy during a period of high unemployment. The Washington Post has little concern about high unemployment. The market for lobbyists in Washington is doing very well.

We are also told by the Post unless the Supercommittee, which is charged with cutting budget deficits, does its job, consumers will not have enough confidence to continue spending the dollars that they don't have. Apparently, consumer spending is dependent upon cuts in Social Security and Medicare.

We live in a bizzaro world. Democracy depends upon a well informed public which receives most of its information from media like the Washington Post. Its no wonder that leaders are afraid to lead the public. The public is full of misinformation. The media, like Fox News, claims that it is fair and balanced. This means that misinformation designed for the Tea Party crowd should receive equal treatment with the purportedly liberal media like the Washington Post. Somehow that scale does not balance.

The Inequality Within the Top 1%

This article tells us how the share of income going to the top 1% is accomplished. It is due to a marriage between Wall Street and Corporate America. The top executives in corporate America receive most of their compensation in stock options. (This shift in compensation happened in the 1980's.) The value of the stock options grows by pleasing Wall Street. Pleasing Wall Street is very simple. They want to see revenue and profit growth. Corporations can do that by cutting costs and by purchasing other companies. Wall Street especially likes it when they can arrange the sale of one company to another. Wall Street also has an influence on CEO selection that is not well understood. Corporate boards, which also benefit from stock appreciation, hope that their selection of a new CEO will please Wall Street and boost the stock price.

This article also points out that the income gap between those in lower regions of the top 1% and those at the very top is by far the widest inequality gap in America. Those at the top of the pile have also benefited from changes in tax policy. Taxes on gains from capital gains and dividends have been cut in addition to a reduction in the top marginal tax rate. Those at the bottom of the top 1% are in the same tax bracket as those at the top, and the tax rate for the top 1% is not much higher than it is for the middle class. That is why Warren Buffet complained that his secretary had a higher tax rate than he did. Most of his income comes from capital gains and dividends.

If we wanted to reduce income inequality in the US, the easiest way to do it would be to eliminate the use of stock options in executive compensation and to tax capital gains and dividends at the same rate as earned income. In other words, we need to eliminate the changes in policies that began in the Reagan era.

Financialization And Globalization May Work Together

We have witnessed the growth and influence of the financial sector in developed economies. This article looks at a couple of explanations for the financialization of the economy. One hypothesis is the effect of globalization on the tradable goods sector. Countries that keep their currencies low relative to the dollar gain an advantage, and build their manufacturing industries at the expense of US manufacturing. That is why China and other developing countries continue to purchase US treasuries in order to keep their currencies low versus the dollar. The related hypothesis is that investors are willing to pay a premium for services which help them to find new opportunities for yield on their investments due to low interest rates. Low interest rates also create opportunities for leverage.

There does not seem to a single best answer that explains the growth of financialization during the "roaring 20's" in the US as well as the current period. The growth of profits in the financial sector does explain the growth in compensation in that sector. A relatively small number of employees share a large pool of profits.

The Newt Gingrich Success Story

This story about Newt Gingrich's $1.6 million lobbying fee from Freddie Mac has made the headlines but it is an old story in Washington. Politicians don't get rich in office. They get their payoff by selling their influence after they leave office. This also the path to riches for their top aides. Influence in Washington is worth a lot of money because the return on investment is very high. One might say that the influence market works well. Both parties benefit from the transactions. Gingrich is unusual because he makes money by selling influence and he also accumulates influence by keeping his name before the public by criticizing Washington politicians who sell influence. He is assisted in influence accumulation by his friends in the media who peddle his stories to their base. The business model of Fox News is based upon creating stars like Gingrich who they can bring on board to build their audience. Their ought to be an MBA case study on building and selling influence.

Wednesday, November 16, 2011

Warren Buffet On Class Warfare

Warren Buffet agrees that class warfare has been going on and that his class has won. Of course, that means that he is a traitor to his class.

There have been lots of books written about Warren Buffets approach to investment. He provides a reference to two chapters in a book by Ben Graham and to Chapter 12 in Keynes's General Theory and states that an investor doesn't need to know much more than that. The good news is that you can also turn your TV off. There is not much to learn about investing on CNBC.

The Eurozone Crisis Comes Down To A Single Decision

Paul Krugman reports on an analysis of the eurozone crisis and how it unravels, and he basically agrees with the dire forecast of what will happen if the ECB does not step in to purchase sovereign debt. We will have a different world for the next decade. It is not a pretty picture. The German central bank is opposed to ECB acting as the lender of last resort. Unless that changes, the ECB will not be able to do what is needed.

The Bank of England Reports on The UK Economic Outlook

This Inflation Report from the Bank of England provides the outlook for the UK economy going forward. It is a lengthy report but the summary is useful for those who want the big picture. The bank believes that inflation will move to its target rate of 2%, but that growth will be slow due to declining real household income. The risk to the UK economy from problems in the eurozone are substantial but the bank is unable to quantify the level of risk.

San Francisco Fed Raises US Recession Risk to .50 Due To Risk In Europe

This research report by the San Francisco Fed looks at the probability of recession in the US. Looking at the US by itself, the picture is one of some economic growth, but not enough to lower the unemployment rate. The risk of recession increases to .50, however, if the risk of recession in Europe is factored into the equation. If the US gets through the first half of 2012 without recession the risk declines.

The Housing Bubble Was An International Event

This graph shows that few countries escaped the housing bubble that led to the financial crisis. Those who want to blame government policy in the US for the housing bubble would have a hard time explaining this phenomenon. Easy credit from the banking sector is the more likely explanation.

Tuesday, November 15, 2011

Paul Krugman Versus Larry Summers In Debate

This is a reporters description of a heavy weight fight between two prominent economists over the outlook for North America's economy. The interesting part of the debate is that was not between two economists on opposite sides of the political spectrum. We were spared the usual repetition of political talking points. The debate was really about whether the US would continue to be locked in political gridlock well into the future. Krugman argued that we know what to do but we are unable to do it because of politics. Summers was more optimistic. He argued that the administration did more than people realize despite political gridlock and he believed that our politicians will eventually decide to do the right things after they have tried everything else.

The Fed Needs To Create An Expectation of Inflation To Stimulate The Economy

This article explains what happens when we are in a liquidity trap. In a sense, a liquidity trap is like being in a black hole in which the laws of physics no longer apply. Ordinarily, central bankers do what they can to convince the world that they will provide price stability. When we are in black hole, like we are now in a liquidity trap, central bankers must show that they will be irresponsible and use monetary policy to create an expectation of inflation. If everyone believes that prices will rise they will begin spending to avoid purchases at higher prices. That will help to stimulate economic growth. Unfortunately, the Fed has such a strong reputation for responsibility that its expansion of the money supply has not created an expectation of inflation.

What's Wrong With Austrian Attacks on Monetary Policy

Paul Krugman explains the problems with the attack of those influenced by Austrian economics on the use of monetary policy to combat recession.

Recession In A Baby Sitting Coop

Paul Krugman uses this story of a baby sitting coop to illustrate what happens in a recession and how monetary policy can be used to manage a recession as long as there is no liquidity trap. He refers to this story in the previous post in order to show the flaws in the ideas of the Austrian economists who do not believe in the use of monetary policy to deal with recession.

The Eurozone Works Fine As Long As There Is No Recession

This article argues that the eurozone was created during the optimistic period that some call "The Great Moderation". During this period downturns in the business cycle were moderate and economies quickly recovered. The magic of the market worked so well that the need for monetary policy, fiscal policy and exchange rate policy were no longer necessary. In other words, the eurozone would work very well as long as there were no recession. The absence of these macroeconomic tools for sovereign states in the eurozone makes recovery from recession more difficult and this exacerbates the debt to GDP ratios that have made it more difficult many states to fund their debt at affordable rates.

What Next For The New Progressive Movement?

Jeff Sachs wrote about OWS as the harbinger of a new progressive moment. He argued that our society moves in cycles between progressive and regressive eras. His brief history of these cycles suggests that we are ready for a progressive moment. Unfortunately, the NYC police just closed down OWS at Zuccotti Park. The reaction to the closing down of OWS protests will determine the next phase of the progressive moment. It provided the energy. Now we need something more permanent and concrete.

How The Problems in Europe Can Affect The US

This article describes how America would be affected by an economic collapse in Europe. The biggest concern is the risk of another credit crunch due to the interconnection of the American and European banks.

Italy Looks Bad But It Had Been There Before

This articlelooks at Italy's current debt problems and compares it with recent history. It concludes that the situation is bad but that Italy has been there before and did default on its debt.

Is North America The Next Japan?

This article looks at the Japanese economy in order to determine whether its economic slowdown is what is in store for North America. There are a couple of crucial differences between the US and Japan. Demographics matter a lot. The aging of Japan's population caused much of the growth difference between the US and Japan. Luck matters as well. Japan has an export based economy. The crisis in Asia triggered by Thailand's devaluation, hurt its exports at a bad time. That might its fiscal tightening turn out worse than otherwise.

Sunday, November 13, 2011

Why We Should Stop Talking About Raising Taxes On The Rich

This article tells us that we can't solve all our revenue shortfall by raising taxes on the rich or on corporations. In other words the OWS protesters are wrong about raising taxes on the rich or on corporations. I don't think that many suggest that we can fix the tax system by exclusive focus on the rich or on corporations. The problem is that the tax system has been made less progressive at the same time that most of the growth in income has gone to the super rich. The tax and income system has become less fair, and it has led to distortions in our democratic system. This problem needs to be fixed even if it does not solve all of our revenue shortfall problems.

The Promise of Smart Grid Technology and Roll Out Problems

This article does a good job of describing the benefits of smart grid technology. It also describes many of the problems that utilities have had in rolling out the technology.

Why Some Countries Have A Flat Tax

This article was written is response to the revival of proposals from the GOP for a flat tax system. Russia is one of the few large countries that has a flat tax system. The flat tax is more often found in smaller countries with a powerful oligarchy in control of government. If the US moves to a flat tax, it will be a signal that its government has ceded control to a powerful oligarchy and a sign of incompetence in government.

Europe, China and the US Are Given Report Cards On Their Economies

This article provides a snapshot of the largest economies in the world. Europe is given the worst report card. China is given a "needs improvement" and the US is given an F during an election year. The US, however, has better demographics than the others, as well as a technological edge. After the elections we should expect a less dysfunctional US government. There seems to be a problem with democracy in the US. Politicians can only do what is right for the country when they don't have to run for election.

Saturday, November 12, 2011

Why GSE's Did Not Cause The Financial Crisis

This article helps to debunk one of the common explanations of the financial crisis that I hear from my acquaintances. The article makes many good points but I like the one that shows what conservative think tanks were claiming prior to the crisis. They were arguing that the GSE's were not providing enough mortgages to low income applicants. The reason for their position is not provided in this article but conservatives wanted to open up the securitization market for Wall Street. They argued that private banks would be more efficient. They had to change their tune post crisis in order to be consistent with their position that private industry is more efficient than public providers of services.

The Eurozone Is History

This article offers a description of the eurozone crisis and some of the possible remedies. After examining all of the potential solutions, as well as their acceptability, the conclusion is that the eurozone is history. Moreover, the collapse of the eurozone will be worse than the Lehman Brothers bankruptcy which brought the credit market to its knees. I hope that this is wrong.

Simon Johnson Worries About Depression Versus Inflation In Europe

Simon Johnson, a former Chief Economist at the IMF, offers his views on the euro zone crisis. He believes that a collapse in Europe would go well beyond Europe since sovereign debt in Europe is widely held by international investors. Even Germany would have to pay higher interest rates. The ECB could print enough money to rescue Italy but this leads to moral hazard like we had in the last financial crisis precipitated by Wall Street. It could also lead to inflation which nobody likes, especially Germany.

Robert Reich Believes That Romney Versus Obama Will Lack Passion

Robert Reich explains why the likely 2012 presidential race between Romney and Obama will be unexciting to both sides. Romney is not liked by the Tea Party crowd and Obama has disappointed progressive democrats. Reich may be correct but there are things that will stir passion on both sides. Obama is hated by conservatives. Many still believe that he is not a citizen, and others can't decide whether he is a socialist, a fascist, or both. Progressives understand what it would mean to have a Republican president. Romney would have an opportunity to make the Supreme Court more conservative (if that is possible). He would also continue the attack on everything that progressives find worth fighting for in America. It will not be a contest inspired by love, but the passions will be strong on both sides.

Adam Smith's Invisible Hand and Globalization

This article was written in praise of Noam Chomsky for correctly interpreting Adam Smith's concept of "the invisible hand" in a speech he delivered to the OWS protesters. Adam Smith's reference to the IH has been used by free market economists to justify selfishness or self interest, and to negate the need for the state. Since each individual acting in self interest unknowingly enlarges the public good, selfishness or self interest is good. This leads us to an atomistic concept of social welfare. Social welfare is the sum of countless individual economic decisions made to benefit the individual. There is no need for an entity beyond the individual to increase social welfare.

Unlike most economists who have not studied Adam Smith, Noam Chomsky has actually read him. He referred to Smith's use of the invisible hand to explain why merchants who prefer to do business domestically for their own gain, enlarge the economy to everyone's benefit. Chomsky argues that Smith was against globalization. His purpose was to hoist the free marketers, who benefit from globalization at the expense of domestic labor, upon their own petard of Smith's invisible hand.

Smith was actually a moral philosopher. He felt a need to go beyond self interest as the means to the good society. He used the concept of sympathy for others as a guide that should be followed to enhance the moral society. Our individual actions would be informed by the impact that our actions might have on others. Empathy or sympathy for others was the mitigating factor that he added to the idea of self interest. We might call this enlightened self interest.

Friday, November 11, 2011

David Brooks Trivializes Income Inequality

This article by David Brooks has only one purpose. The column has one meaningless paragraph on income inequality. The rest of the article is about social conventions that have nothing to do with the real problem of growing income inequality in America. That of course is the point of the article. Income inequality in America is no more important than a bunch of other things that are unequally distributed and not worth talking about. David Brooks is a master of obfuscation. A course on rhetoric could be build upon his op-ed pages. The trick is to read his last paragraph and then read the article to see how he got you there

A Moral Perspective On OWS And An Amoral Society

This article (via Darren Becker) is by a graduate of Harvard's Divinity School. He views the OWS protests from a profound moral perspective that goes much deeper into the direction that we are taking as a society than I have read elsewhere. Perhaps we are becoming an amoral society in which economic gain is the holy grail that everyone is seeking at great cost. The French have a saying that warns us to be careful about what we wish for because we may get it. Moral indifference and blind compliance is a reflection a society that has lost its soul.

Rolling Stone Reflects On Occupy Wall Street

This article by Matt Taibbi (via Manan Shukla) responds to some of the critics of the protests but it also reflects Matt Taibbi's ideas of what the protest is about. He also compares the massive use of police at the OWS sites and compares that with the lack of supervision on Wall Street that permitted it to get away with massive fraud.

Australia Passes Carbon Tax Bill

This is a link to a Bloomberg video in which an Australian Minister in charge of climate change policy defends the carbon tax, and the cap and trade program that was just passed by the Australian Parliament. The lovely woman who interviewed the Minister is typical of what we see in TV journalism. She knew little about the issue and had to review her notes to respond to his answers. Her first question had to do with a poll that showed that 60% of Australians were opposed to the tax. He responded by saying that it was the right thing to do, and that there would be long term benefits to the economy through investments in climate friendly sources of energy. She mentioned that political opponents intended to run against the plan. His response was that this would have no effect on the bill that has been passed by Parliament and is widely supported within government. Sometimes democracy works best when popular opinion polls are not used to make decisions.

James Galbraith Reports On A Conference Of European Economists About The Crisis

James Galbraith summarizes the discussions about the euro zone crisis at the University of Texas. The conference included 20 economists from Europe to discuss the problems in the euro zone. The first problem that he mentioned was the imbalance in competitiveness between Germany and nearby nations. Over time the imbalance in competitiveness was bound to create trade surpluses in Germany relative to the South. The problem is not in the imbalances, per se, it has been in the way that the imbalances have been treated. The US has similar imbalances between the North and the South. The federal government has dealt with this problem by channeling military spending to the South and by funding infrastructure projects in the South. This has reduced the competitiveness gap and it has encouraged private business to locate in the South. In other words, the North has transferred wealth to the less competitive South.

The other problem in Europe is that its banking system, like that in the US, is organized for the benefit of bankers and many of its "innovations" have created problems. Attempting to grow an economy by the use of debt will always lead to booms and busts. He also points out that making the banks take haircuts on Greek debt will not help Greece. It primarily helps countries that want to lessen the burden of the state in dealing with the problems. Greek banks and pension funds will bear the burden of the loss. He is not a fan of using the private credit markets to fund government debt. He fears that the super rich in Greece have their money in safe storage elsewhere. They will not suffer as much from the crisis as the ordinary citizen.

He was asked what the consensus in America was on the euro zone crisis. He said that he was not aware of any consensus, and if there were a consensus he would not pay any attention to it. Galbraith is a maverick among American economists. We need more mavericks like Galbraith.

The Economist Offers A Plan For Europe

The Economist argues that the ECB should protect the good guy (Spain) that has made progress in structural reform. That might encourage the bad guy (Italy) to do the same. Some examples of structural reform are given but austerity programs which worsen aggregate demand are ruled out.

What Has Not Caused The Crisis In Europe

Krugman describes what we have learned from the euro crisis. It is not what the seven dwarfs on the GOP campaign trail are telling its faithful. They are still selling American exceptionalism. The eurozone is in trouble because of its social welfare programs. We don't want to be like them do we? That is a line that brings the house down. The only problem with that line is that it is wrong. Krugman points to the thing the faithful cannot The states in europe with the largest social spending programs are doing quite well. The problem is europe is that some economies are more competitive than others and individual states are deprived of monetary and fiscal policy to deal with the business cycle.

Thursday, November 10, 2011

The Eurozone Crisis Is not Due to Social Spending

This article shows that the debt burdened eurozone states actually spent less than than most of the other OECD states on social welfare. The US is one of the lowest spenders despite being the richest country in history. Much of is social spending is done by businesses which provide health insurance that reduces wage compensation.

The Good Old Days Were Really Better For The Middle Class In The US

This graph shows how the period following WW II was good for middle class income growth relative to the top 1%. That picture changed dramatically beginning with the Reagan administration. It is no wonder that he has achieved sainthood among the top 1%. It is a marvel of effective propaganda that he is also worshiped by the segment of the population that has lost ground. Jesus has been transfigured from a God who was concerned about the welfare of the poor, to a God who is worshipped because he cut taxes for the rich.

We Are All Greeks Now

Jim Hoagland reminds us that we share something in common with the Greeks. We all like to get something without having to pay for it. Politicians take advantage of this by giving us things that we like and promising us tax cuts. George Bush worked this to perfection. He cut taxes and paid for the tax cuts and his increases in federal spending by borrowing. Our recession has exacerbated this legacy by cutting tax receipts and making budget deficits more visible. Now we have to figure out how to respond to unsustainable deficits. Our basic problem is that government is all about values. We have to decide whose taxes we will raise and what spending programs we will cut. The easy way out for some politicians is to oppose tax increases and to force a nonpartisan committee to cut popular programs. We call that party the GOP. They can then run election campaigns by promising not to raise taxes. This puts the other party into the position of alienating those whose taxes they propose to increase, and finding ways to cut programs that are popular. They don't like to be put into a situation that leads to lost elections so they agree to turn the difficult decisions over to a non-partisan committee. We have a political system in which politicians do their best to avoid dealing with our tough problems. Leadership has risks that few are prepared to accept.

The Moral Crisis Of Modern Capitalism

This article is about the moment of silence that the OWS protesters gave in response to the news that Steve Jobs had passed away. Conservatives had a hard time understanding this because they did not understand that the protest was not about envy of the rich. It is really about fairness. In fact, William Buckley, who was a leader among conservatives, was irate about the rise in CEO compensation. He claimed that it was not based upon an equivalent rise in performance. Therefore, it was not consistent with his model of capitalism. The protesters may not share Buckley's desire for a purer form of capitalism but they sense that the system is rigged. They believe that Jobs earned his money and that many with similar wealth have taken advantage of a system that they have shaped to their advantage. Warren Buffet has been on many corporate boards and he claimed that they never let him on the compensation committee. He expected CEO's to earn their income by providing value to long term shareholders. Most corporate boards operate as if they were members of the CEO's family. Moreover, CEO contracts are pretty similar. Most have been developed and blessed by a small number of compensation consulting companies working in consort with lawyers that represent CEO's. Everyone would like to have similar employment contracts blessed by members of their family who fill in the numbers.

Europe's Next Nightmare

Dani Rodrik looks at the crisis in Europe from an historical and political perspective. He describes the tensions in Europe between nationalism and internationalism and argues that the centrist approach to internationalism has not worked. He believes that Europe has to choose the lesser of two bad options.

France and Germany Discussing New Europe

The news in this article is that France and Germany are discussing a new Europe that would be more fiscally integrated. They even discussed the need for a new treaty. Chances are that some countries would have to leave the new Europe.

Wednesday, November 9, 2011

Bad News For The GOP and Good News For American Politics

This article describes the loses experienced by far-right conservatives in the ballot boxes in several states. The GOP reacted to its success in the 2010 elections by over-reaching in many areas. Public support for their actions since the 2010 elections suggest that the GOP had misread public support for their far-right agenda. They will not do well in 2012 riding on the back of the Tea Party which has become increasingly unpopular.

The Stock Market Has Finally Responded To The Risks In Europe

This article reports on the stock market sell-off. Many were wondering why the problems in the eurozone were not being discounted by equity investors. Uncertainty about the ability of the political systems in Italy and Greece to deal with their problems led to a spike in interest rates and this triggered the sell off. The ECB has purchased Italian bonds but it has been a drop in the bucket. The ECB does not have the capital or the political support needed to halt the decline in the price of Italian debt. The risk of default by Italy will also affect the banks that hold Italian debt,

IEA Believes That We Have Five Years To Prevent Irreversible Climate Change

A recent analysis by the IEA indicates that we may be reaching the point of no return in combating climate change. The planned deployment of carbon producing facilities has a "lock in" effect. Once it is put into service it will generate carbon for the 20 year life cycle of infrastructure. The US and China are the biggest problems. The GOP will defeat any plan to limit the deployment of fossil consuming infrastructure. China is moving forward with the development of renewable energy sources but it plans to develop coal burning plants in parallel to meet current power requirements. Plans to eliminate nuclear power plants also present a problem. It would be equivalent to adding the total carbon emissions of France and Germany to the atmosphere,

Tuesday, November 8, 2011

Why Capitalism Without Owners Has Failed

This article raises an interesting argument that needs to be further explored. It questions the role that investors play as the owners of corporations. It argues that professional investors are motivated to produce short term gains. On Wall Street today those gains can be measured in highly leveraged nano seconds. This produces a gap between investor interests and the public interest. It also leads to asset bubbles and volatility which leads many investors to seek safer assets such as gold which has no intrinsic value and may be more dangerous. The question turns to the problem of funneling capital to owner operated businesses that produce jobs and have a longer time horizon.

The Nordic States Have The Highest Tax Rates and The Lowest Debt to GDP Ratios In Europe

This article in The Guardian, provides some information on the Italian economy. I linked to the article, however, because it contains an excellent graph that shows the debt to GDP ratios for all of the countries in Europe. Not surprisingly, Greece and Italy have the highest ratios of debt to GDP. What may be surprising to many is that the Nordic countries, which invest heavily in public safety nets, have the lowest debt to GDP ratios in Europe. They are substantially below the European average. These countries have high tax rates, strong public welfare programs and strong economies. They do so without incurring unaffordable public debt. The US and Europe should be looking at the Nordic states for examples of good governance and a more broadly shared prosperity. That is unlikely in the US. We are told that high tax rates and social welfare programs retard economic growth.

Trade Imbalances Within The Eurozone And The Debt Problems

This article by Paul Krugman provides some additional data on the problem at the heart of the eurozone crisis. Trade imbalances within the eurozone produced current account deficits that totaled $183 billion in Italy, Spain, Portugal and Greece. Germany, on the other hand, has a $182 billion current account surplus which represents 5% of its GDP. Most of the debt in the four deficit states is public debt that is partially caused by trade deficits which reduced their economic growth. A union of economically competitive states like Germany, with economically weaker states was bound to lead to problems. The trade imbalance would have been corrected by currency depreciation relative to the mark, if each state had its own currency.

How Are the Debt Problems In Europe and The US Different?

The question raised in this article is whether the US or Europe screwed up their fiscal situation the most. The answer is that what Europe has attempted to create, with its union of sovereign states, was a noble but more difficult effort. Its not surprising that it ran into problems. The US fiscal problem, however, was self inflicted. We ran budget surpluses in the late 1990's. A political decision was made to cut taxes, increase spending on the military, and to add an expensive drug benefit to Medicare. This produced budget deficits that were manageable as long as the economy grew. When the housing bubble burst and the financial crisis produced recession, the deficits mushroomed out of control as tax revenue fell and government transfer payments automatically increased. The US is fortunate that it can still fund its debt at low interest rates. On the other hand, it has a dysfunctional political system that prevents it from solving its problems.

Monday, November 7, 2011

The US Is A Great Place For Business

This article was written is response to the claims that business is not investing in the US because of over-regulation. Data are provided that show that the US is one of the best places in the world to locate a business and that the US is one of the least regulated countries in the world. China and India, which have become centers for multinational offshoring, rank much lower than the US on the ease of doing business. US companies have not moved operations to China and India to escape regulation. This is just another of the big lies that get repeated so often that people believe it. Unfortunately, most of these folks don't like to change their minds just because the available evidence does not support what they have been told to believe.

The Big Lie Goe's Viral

I first heard about the big lie when I was in high school. I was told that Hitler's propaganda machine depended upon the use of the big lie. An absurd idea, if repeated often enough, becomes believable. Hitler's propaganda minister also boasted that the battle between fascism and socialism was won because of his superior propaganda operation. This article tells us that the big lie is alive and well in the US. The public questions whether global warming is real, and many believe that government policies forced banks to sink the financial system and send us into recession. We are also told that the best way to end the downturn is to prevent government from doing things that might stimulate the economy. In fact, we are being told that actions which will prolong recession are the best way to deal with recession.

Krugman Loves Solar Energy

Krugman tells us that solar energy has less expensive that the use of coal. Falling prices for solar panels has made this possible. In fact, that is what led to the bankruptcy of a US subsidized solar panel company. He also comes out against fracking. He explains that it would be too expensive if the external costs related to fracking were internalized.

The problems that we have moving to renewable energy are political. The fossil fuel industry owns the Republican party and its propaganda machine. We have a problem in the US is that is similar to those in many third world countries. An oligarchy with political power is heavily invested in keeping things the way that they are. If we let markets work properly, by internalizing costs passed on to society, we would be using more renewable sources of energy.

Saturday, November 5, 2011

Manufacturing Productivity and The Convergence Gap

This is a summary of a paper delivered by Dani Rodrik at a Jackson Hole conference. He argues that the convergence gap between developed and developing countries depends upon closing the manufacturing productivity gap. Developing countries that reach a certain point in manufacturing, for example production of autos, productivity increases rapidly. Continued increases in productivity depend upon absorbing technologies that are on the technology frontier. Only a few developing countries have closed the convergence/productivity gap. He argues that China's export based strategy helps it to absorb new technologies by manufacturing advanced products for advanced economies. It would be a mistake for China to move towards more domestic consumption and services. Most countries will not increase their productivity at a rate that closes the productivity gap. Many are not focused on manufacturing which has the potential for growth in productivity. Governance is also important. Some countries have done a better job of governing which has enabled them to avoid the mistakes that have tended to retard the growth in some emerging market economies. Countries that have focused on manufacturing productivity do well despite low governance quality.

When to Outsource and When to Manufacture Domestically

More than half of US manufacturing companies have outsourcing strategies. It is also a common strategy in Europe. This article reviews research which illustrates the conditions which favor outsourcing and those which are causing some firms to return to domestic manufacture.

A Proposal For Reducing Mortgage Defaults By Principal Reduction

This article provides some data on housing that leads to the conclusion that mortgage principal reduction is the only way to deal with our housing crisis. Currently 10 million out of 55million mortgages exceed the value of the home. This is the leading cause of mortgage defaults. Banks hate the idea of writing down the principal to reduce defaults but it may be less costly than trying to prevent defaults by reducing monthly payments by refinancing at lower interest rates. That only reduces the monthly payment. It does not reduce the number of underwater mortgages.

If one looks at supply and demand for homes, housing prices are likely to continue a downward trend. That will increase the number of mortgages that are underwater and increase the number of defaults. Demand for homes has been affected by a decrease of 20% in the number of households that qualify for mortgages using the tighter standards that are in place. New household formation is also low because of the large number of young people out of work or with low paying jobs. This leads to an estimate of 6.2 million excess home inventory. Prices will continue to fall and lead to "death spiral" in which the number of underwater mortgages continues to rise. Principal reduction is the only way to reduce growth in underwater mortgages.

This is a scary analysis. There is another factor that might contain the "death spiral". The Boston Fed studied this problem and concluded that the owners of homes that are underwater continue to make payments as long as they remain employed. Government should do whatever is necessary to stimulate job growth in order to contain mortgage defaults. As long as unemployment remains high, the death spiral will continue.

Is It Time For The Endgame In Europe?

Der Spiegle provides a perspective on the common currency endgame from several papers in Germany. There is a view that the ECB could purchase sovereign debt from at risk countries to fix the problems but that is not a politically acceptable solution. One of France's largest banks sold its Italian debt and wrote off a big loss. The Italian political situation is a mess that suffers from weak leadership. It is regarded as a too big to save state by many.

Friday, November 4, 2011

The Globalization of Protest

Joe Siglitz is an expert on globalization. In this article he describes the globalization of protest as a battle for a democracy that works for everyone, not just for those at the top.

Why The Tea Party Will Never Be Dominant Political Force In America

This article (via Manan Shukla) explains why the Tea Party will never become a national movement. It is essentially confined to the Dixie bloc which is described in this article. The article is about the 11 Americas that are based in various regions of the country. Its a very interesting description of the values in each region.

A Majority of China's Top 1% Wants to Leave China

This article describes a real problem for China. More than half of China's top 1% would like to leave the country. Canada, primarily Vancouver, is the top choice. That is driving up asset values in Vancouver and some worry about a bubble. It also presents a problem for China's government. It will be difficult for China to deal with a large flight of capital out of the country and also maintain its strong foreign currency reserve position.

Some Harvard Students Are Protesting Mankiw's View of Economics

Students at Harvard have begun to protest against the neo-classical economics that they are being taught by Greg Mankiw. This surprises me because Mankiw is more subtle than most conservative economists. He usually does not give them the conservative answer for questions. Instead he frames the problems that they are given to solve so that a conservative answer pops out. In any case, this is only happening at Harvard because some of the students are following the economic debates and they are reading some of the criticisms of Mankiw's op-eds in the NYT. Some students have jumped to the defense of Mankiw. He is a prominent economist and they are using the textbook that he wrote. Moreover, Harvard has its share of conservative students whose view of the American dream is making it to the top 1% even if it is at the expense of the bottom 99%.

Ken Rogoff Tries to Understand Why The Euro Has Not Depreciated

The euro is selling at a 40% premium to the dollar. Given the crisis in the eurozone, Rogoff examines possible explanations. He concludes that the premium is bound to erode.

Where Has The Growth In Income Gone?

Sometimes a picture helps us to understand a lot of data. This picture tells the story, via the CBO and Paul Krugman, of where the income has gone. Essentially the bottom 80% gave it to the top 1%. Not much of the growth went to college educated upper middle class that David Brooks views as the beneficiaries of income growth. The level of inequality within the top 1% is a major part of the story as well. Around two thirds of the growth went to the top 0.01%. The distance between the bottom of the top 1% and those at the top dwarfs the difference between the bottom of the top 1% and the bottom 80%

Thursday, November 3, 2011

The Eurozone Crisis Is Related To Trade Imbalances and Financial Flows From North to South

This article (via Manan Shukla) helps to explain the source of the debt problems in Greece and other eurozone countries. Greece has a current account deficit with Germany (Germany is the only surplus country in the eurozone). Countries that have current account deficits will also have lower GDP (negative net exports reduce GDP) and lower tax revenues which produce budget deficits. If Greece had its own currency it would decrease in value relative to the German currency and German cars would become more expensive in Greece. That would reduce its current account deficit by reducing German imports and increasing Greek exports.

Since Greece and Germany share the same currency, German exports remain cheap and Greek exports do not become less expensive. Greece must continue to borrow to fund its deficit. It can do so at low interest rates when investors believe that Greek debt is guaranteed. When this guarantee was lost, Greek interest rates exceeded the rate of GDP growth. This is the path to insolvency and default.

What is The Proper Mix Between Markets And Government?

This article is about the mixed economy. All of the world's economy's are a mixture of markets and governments that make economic decisions and produce goods and services. Some believe that the mixture should consist primarily of markets with a small dose of government. That would be like making lemonade with lots of lemons and only a little bit of water. Conservatives like Milton Friedman, like their lemonade strong but they would have a hard time explaining the dominance of China in several markets. Sometimes more water helps to make good lemonade.

If Demographics Is Destiny, The Future Looks Difficult For Many Industrialized Economy's

This article quotes August Compte who stated that "Demography is destiny". It is certainly a better predictor of the future than economic models which exist to make weather forecasters look good in comparison. The implications of fertility rates below replacement rates, coupled with low immigration rates, has profound implications for most of Europe and several Asian countries. Fertility rates in the US are above the replacement rate and immigration (legal or illegal) is also positive. The age dependency rates in many of the largest industrial country's will have a huge impact on economic development and government spending programs.

Protesters In Oakland Shut Down Port And Police Express Sympathy With Their Goals

This article proclaims that the OWS protestors succeeded beyond expectations when it closed down Oakland's port with a strike. It points out that the Financial Times reported favorably on the strike and states that this is proof of success.

It also makes the important point that the majority of OWS protestors are not anti-capitalists or envious of those who got rich by successful competition on a level playing field. They oppose crony capitalism and government policies which have enabled many to get rich by looting their stockholders and the taxpayer. The recent bankruptcy of MF Global is a case in point. Stockholders were big losers as well as creditors by the actions of management which made highly leveraged bets on risky investments in financial products. The incentive system is set up to reward those who take these kinds of risks. Winning the bet produces huge payouts for management with little downside risk to management. Moreover, this use of scarce capital does nothing to enhance the well being of others. It would be better used by investments in capital that would provide valuable new products or superior capital that would promote efficiency and sustainable growth.