Tuesday, January 31, 2012

Housing Prices Are Now Where They Were In 2003

This graph of the Case-Shiller 10 City and 20 City price indexes shows that home prices are down to mid-2003 levels. The good news is that prices are flattening out at this level. The bad news is that there is no upward movement in prices. The decline in home prices over this period is reflected in $7 trillion loss of wealth. The wealth existed only on paper but households feel the loss anyway.

Nouriel Roubini Responds To Europe Problem and Global Inequality Problem At Davos

This is a link to a couple of video interviews by CNN of Nouriel Roubini at Davos. One of the videos has a focus on Europe. The other is on the worldwide problem of increasing income inequality.

Roubini argues that Europe needs a $2 trillion bazooka to solve its fiscal problems. They must grow their economies or the debt problems will get worse. Debt to GDP ratios cannot improve as long as GDP is falling. He believes that the euro is overpriced. It will be difficult to grow the european economy with a high priced euro. He also believes that the imposition of austerity only worsens the outlook for all of Europe.

He argues that income inequality has fueled social unrest all over the world. The percent of income going to capital versus labor is at levels that prevailed prior to the Great Depression. This is an economic problem as well as a fairness issue. Lower income households spend most of their income while high income households save a large part of their income. This leads to lower aggregate demand which is the problem that we face in most countries. ( We have tried to fix the problem by making debt more available to households as compensation for slow growth in income. Household debt deleveraging is now a demand reduction problem as well)

Roubini has been one of the few economists who were ahead of the curve on the real estate bubble and pending problems in finance. He is more outspoken than most economists but he has made better calls than most. I tend to agree with his analyses.

Video Clips From Global Leaders At Davos

World leaders are congregating at Davos for their annual meeting. This link is to some sound bites from some of those present.

The Global Economy From IMF's Chief Economist's Perspective

This article explains why the Chief Economist at the IMF has lowered his economic growth forecasts. He argues that we have been trying to grow the global economy while the brakes have been put on in the Western economies. Fiscal contraction has been premature. It takes a long time to deleverage public debt. Banks is Europe may cut lending on the way to meeting capital requirement goals. They should recapitalize instead of cutting back on credit.

The bad news is that the IMF forecast is based upon the assumption that the crisis in Europe does not worsen. All bets are off if the crisis worsens.

Paul Krugman Explains The Eurozone Crisis In Paris

Krugman is giving a speech on the eurozone crisis in Paris. He posted his slideshow. He makes seven points about the crisis in his slideshow:

* The crisis was caused by a rapid rise in household NOT public debt. Household debt rose to Great Depression levels.

* Household debt deleveraging (savings) led to public sector deficit growth. A fall in spending leads to a fall in output and taxes.

* Part of the problem was an increase in capital flow from the North to the South, or from current account surplus countries to those with negative current accounts. Common currency prevented exchange rate adjustments to balance current accounts.

* There has been a large divergence in prices between GIPSi countries and Germany. More price inflation in GIPSi's

* Eurozone strategy has been baced upon internal devaluation via falling wages to make GIPSI's more competitive. Nominal wages are rigid. Wages have not fallen as predicted.

* Greece is the only GIPSI country with an overspending public sector. Average debt/GDP ratios for GIPSI countries not dramatic.

* Fiscal austerity has not worked to lower debt/GDP ratios in GIPSI countries. Cuts in public spending have caused GDP to fall in response.

Monday, January 30, 2012

A Current Overview of The Eurozone Ahead Of Important Meetings This Week

This article provides a current overview of what is happening in the eurozone. After describing recent events and their implications, it argues that there is no real solutions without greater fiscal integration. This would require transfers from the richer countries to those in need of support. That will be a hard sell.

We Can Now Put Austerity And The Confidence Fairy To Bed

Paul Krugman declared victory over those in the US and Europe who argued that fiscal austerity was the best medicine for fighting against recession. The evidence is in and the confidence fairy failed to show up. Fiscal austerity is contractionary in a recession. The international love affair with austerity, primarily by conservative politicians, and conservative economists, flew in the face of the lessons that we learned in the Great Depression. Instead of fixing the economy, politicians decided that they could use budget deficits as the rationale for attacking social programs that they never liked. Economists, especially those connected to the University of Chicago, saw it as another opportunity to win their battle against the use of fiscal policy to moderate the business cycle. Their confidence fairy assumes that the business cycle is self correcting. We have learned a valuable lesson from this disaster. It is very difficult to separate economics from politics. Those who claim that economics is a positive science, devoid of political considerations, have discovered that the most vocal proponents of positive science have been the worst offenders.

Sunday, January 29, 2012

Made In The World Replaces Made In A Nation State

Tom Friedman correctly points out that national boundaries are becoming irrelevant in the global economy. At the same time he argues that there is an important competition underway in which, to borrow a phrase from classical economics, the US has a comparative advantage. He claims that America has a comparative advantage in imagination. We simply need to unleash that advantage and we can win the competition. We will have 300,000,000 designers, inventors, marketers, scientists, engineers etc. etc. In other words, there really are national boundaries after all, and America can win the battle between other irrelevant nation states for the premier position in a world with no boundaries. American corporations will provide the brainpower.

Apple is a good example of the world without national boundaries that Friedman has been promoting. Around 10% of its workforce in engaged in the kind of work in which the US has a comparative advantage (according to Friedman). The remainder of Apples workforce is doing the work that we are happy to export to countries with less imagination and brainpower. This is a totally absurd idea. What jobs will be available for the great majority of the US workforce? Moreover, there is no reason to believe that the nations which perform the labor intensive manufacturing for US multinationals will not gain an advantage from doing that work. The expertise that they gain from building products and developing supply chains will help them to create their own products in the near future. No nation has a comparative advantage in imagination and brainpower.

Tom Friedman is actually a spokesperson for US multinational corporations. He claims that it is a win-win situation. Our multinational corporations should do whatever they can to gain market share and profit share in the global economy. The US workforce will provide the imagination and the brainpower that is less available in the rest of the world. If anyone believes that, I have a bridge that I would like to sell you.

What Friedman actually describes is a world in a state of transition. Multinational corporations are determining the distribution of employment and income by the decisions that they make which are in their best interest. The economy has indeed become a global economy. The nation states, however, have political systems that are intended to serve the needs of their citizens. Do they decide that what is good for General Electric is good for the country, and that their role is to assist their domestically based corporations in the global marketplace? On the other hand, what recourse is available to the nation states when corporations take actions that affect economic and social stability in the nation state? We live in a world in which globalization is proceeding at a faster pace than our current forms of political and social organizations that are bounded by geography. We have an international banking system but we struggle to provide rules and regulations that are needed to make it work in the public interest. Our problems in the eurozone are classic example of the difficulties that we have in dealing with economic integration across national boundaries as well.

Furthermore, we do share a single planet and we are all involved in mankind. We share the problem of providing a livable planet for future generations. We also have a world in which billions of our fellow human beings face a daily battle with starvation, and lives are needlessly lost because of poor sanitation and medical care. We easily speak about a global economy today. Does the concept of globalization only apply to the process by which markets are opened up for labor and capital? Are we capable of managing a world without national boundaries that serves humanity today and in the future?

Tom Friedman does not have the answers to the real questions that we must answer.

Saturday, January 28, 2012

The Battle Over Fiscal Policy Is Not A Battle Over Keynes

This article is about the economic debate between those who believe that fiscal policy is useful in demand creation during recession and those who argue that monetary policy is a sufficient tool. This debate is often described in relation to whether one is a Keynesian or not. The point of this article is to make the case that it is beside the point to bring one's views about Keynes into the debate. The official view today within the UK Treasury, and the IMF, is that expansionary austerity has, in fact, been contractionary. The appropriate response to high unemployment, given current circumstances, is to use fiscal policy to increase demand.

The article is a bit wonkish, but it does a good job of describing the battle between the Chicago School and those who believe that fiscal policy can be used to stimulate demand. The empirical question has been answered positively.

How Is A Private Equity Firm Like A Bank, And What Does That Have To Do With Romney?

Since Mitt Romney may become our next president, and because he made his fortune in private equity, a lot of people want to learn more about the private equity business. This article succinctly describes the basic elements of the business. Private equity firms can add value, or they can subtract value. A description of each outcome is provided. Consequently, it is only possible to understand whether Romney's firm added or subtracted value by looking at the details of each deal that it made. There is nothing inherently good or bad about making a fortune in private equity. Therefore, we should evaluate Romney as a presidential candidate based upon his current political positions, but also by the fact that he changed most of the positions that he held as the effective Governor of Massachusetts to those more acceptable to the current GOP base. That basically describes my reaction to Romney as well. He lacks personal integrity, and if he is elected, he will be constrained to appease a GOP base that has been transformed into the most politically reactionary element in America. His connection with a private equity firm, and the fortune that he made, is less relevant to the issue of how he would govern.

Friday, January 27, 2012

Another Reason Why Its Nice To Become A CEO

This article (via Manan Shukla) lists the golden parachutes awards of over $100 million that went to 21 CEO's upon departure from their firms. At the top of the list is Jack Welch who received $400 million upon his retirement from GE. Almost every CEO contract contains similar golden parachutes.

How Public Goods Have Evolved And Why They May Be Difficult To Provide By The Nation State

This is a big article by a big thinker. Perhaps David Brooks should read it. He seems to like big ideas but he does not understand what they are. He thinks that his political party understands what they are but they happen to be ideas that have outlived whatever usefulness they might have had 200 years ago.

Matin Wolf begins the article with a discussion of public goods. He provides some history of how public goods have evolved over time and he comes to the conclusion that we have a scarcity of public goods. Moreover, it will be hard to satisfy the need for public goods. For example, economic stability is a public good. In a global economy it is difficult for a nation state to provide economic stability. A global financial crisis was started in the US and it created problems in the rest of the world. Now we have a crisis in the eurozone and it will trigger problems elsewhere if it is not resolved. Fixing the problems inherent in our financial systems will not be possible without a degree of cooperation between nation states that is uncommon. Similarly, climate change is a major problem. Climate stability is a public good that will require cooperation between nation states that has not been forthcoming. Each state is primarily concerned about its economy and vested interests in each nation state attempt to influence government decisions on how to respond to the problem.

The bottom line is that the need for public goods is expanding and that the nature of public goods is changing. Our ability to provide the needed public goods may have surpassed the ability of nation states to provide them.

David Brooks Wants The President To Promote Big Ideas Like The Small Ideas Favored By Conservatives

I keep posting op-eds by David Brooks because he is an opinion maker. His job is to bring the better educated readers of the NYT into the conservative camp. They are too smart for Fox News or Rush Limbaugh. This article is another example of how he works his magic.

Brooks begins by accusing the president of ignoring the "big" ideas that came from the Simpson-Bowles committee that attempted to reduce federal budget deficits. A lot of people believe that it is important to deal with our long term budget outlook, and I agree. On the other hand I did not see many big ideas in the Simpson-Bowles plan. It was top heavy on non-defense spending cuts and weak on ways to increase tax revenues. It had little to say about how to deal with the number one problem in the growth in federal spending. That is, arresting the rising price of healthcare services.

Brooks then paints a picture of a country that is in deep trouble and he accuses the president of attacking a big problem with small ideas. He gave some examples of big ideas, like simplifying the tax code, that would have made him happy. That is a small idea that has been a theme of the GOP for a long time. The basic problem with the tax code is not that it is too complicated. The problem is that it has been made less progressive over time. The president chose that problem to address for a good reason. I can't imagine a more boring topic for a State of the Union speech than focusing on the details of the federal tax code. Moreover, a large portion of those details were put there by the GOP as favors to their special interest groups. They only use tax code simplification as a euphemism for a flat tax.

If we grant Brooks his complaint that the president's speech did not contain enough big ideas, what can we conclude from his final paragraph? He lists a view of the traditional GOP ideas that have become very stale and which are not very big. They just happen to be the ideas that he likes. He assumes that we have a welfare state that the GOP should and can address with big ideas. He also mentions tax policy changes without telling us what they are. Perhaps he should write a boring article on changes in the tax code that reduce its complexity. He is much smarter than that. There would be few readers for such an article.

Hero Worship As The Philosophical Basis For Plutocracy

Paul Krugman, and many other pundits, have finally come to understand what Intel's founder Andy Grove told us last year. America's computer industry grows revenue faster than it grows jobs. They scale up their business outside of the US for a variety of reasons. Krugman was able to connect this phenomenon to the work that he has done around the value of clustering. He made an important philosophical point as well. The GOP responder to the president's State of the Union speech based his attack on the president on a couple of GOP themes. Economic stimulus is a waste of money. It does not create jobs. He used Steve Jobs to illustrate the other part of the theme. Heroes like Steve Jobs are the job creators. Government has nothing to do with job creation. He apparently did not read the NYT article about the 700,000 jobs created by Apple outside of the US. More importantly, however, he identified Apple's success with the work of one person, out of the hundreds of thousands of contributors to Apple's success. Steve Jobs was a remarkable CEO, and he probably contributed much more to Apple's success than the typical CEO. It takes a village, however to build a successful business. We give too much credit (along with too much compensation), and too much blame to those who climb up the ladder to the CEO position. Hero worship is part of the GOP philosophy. The team does not matter. That is the philosophical underpinning for plutocracy.

Thursday, January 26, 2012

Executive Compensation Systems Are Bad For Shareholders

This study by researchers at Michigan State University raises questions about the accounting methods used by US auto companies. The managements in these companies did exactly what their incentive systems told them to do. They kept production higher than demand to keep the production cost per car down. This inflated profits and had a positive impact on executive compensation. Inventories, of course, increased, but they were on the balance sheet and not on the income statement. Prices had to be cut in order to move the inventory and this had a negative affect on the brand image of US automobiles. The decline in brand image has a long term affect on the firms but the managers are paid for meeting short-term profit goals. The average tenure of a CEO is 7 years. They have an incentive to maximize short term gains at the expense of the long term. This kind of thinking produced terrible results for shareholders. They are not well served by the incentive systems in most firms that are based upon short term financial performance.

US Federal Reserve Plans To Keep Interest Rates Low Through 2014

The Fed announced that it plans to keep short term interest rates near zero through 2014. It believes that its inflation target of 2% will be satisfied and the unemployment will gradually fall over this period. The growth rate that it forecasts will keep the employment to population rate at a higher than normal level since the number of new jobs created will not be sufficient to absorb the entry of new workers in the labor market.

Low interest rates will be good for the stock market since bonds and bank accounts will not provide much yield. It should also be good for banks. They will be able to borrow at low rates from the Fed and purchase treasuries at a profit. The low rates are not expected to do much for business investment. Loan standards for small businesses remain high.

Externalities That Are Not Calculated In The Cost Of Apple Products

This article describes some of the costs that manufacturing in China imposes on its workforce when it meets Apple's quick response to change goals. Consumers love Apple products and they are confused about how and where they are produced. Labor conditions in China are a lot like they were in the early stages of industrialization in many other countries. At present, however, they make it possible for companies like Apple to satisfy consumers with excellent products that can be sold at lower prices than if they were made in developed countries with higher labor standards. Poor labor standards are an externality imposed upon workers that are not calculated in Apple's production costs.

Wednesday, January 25, 2012

A Data Dump On The Global Economy

One of my colleagues asked me for a source data that might be used to assess the global economy. This report provides lots of information and it is good reference to sources that might be useful.

Analysis of Obama's State Of The Union Speech

This is the NYT editorial on the president's State Of The Union speech. The editorial is mostly favorable but Fox News and other propaganda sources devoted to shrinking the role of government will call it class warfare. The president has decided to run for reelection on this agenda. Perhaps if he can win the 2012 election, and the public supports his agenda enough to shed some the GOP advocates supported by the Tea Party, he will be able to make some progress with the agenda. It took the GOP 30 years to develop the public opinion and infrastructure necessary to serve the interests of the plutocracy. It will take a long time to build a more progressive America. We learned that lesson in the 2008 election. The democrats won a majority in Congress but it was unable to implement a progressive agenda.

Problems With Tom Friedman's Love Affair With Globalization

This article is Tom Friedman's latest op-ed on the theme that he developed in The Earth Is Flat. He spices it up with the introduction of a couple of new technologies, to show that he is hip, and he reaches the same conclusion that he did in The Earth is Flat. New technologies and globalization are reducing the need for unskilled workers in developed countries. His solution to this problem is that everyone needs to be better educated to compete in the global economy. He provides data which shows that the unemployment rate in the US falls as the education level rises. The implication is that the US labor force will require higher education in order to compete with the rest of the world. Access to higher education, which is restricted by the growing cost and declining public funding, should be made more available.

I support Friedman's suggestion that higher education is a public good and that access should not be dependent upon the good fortune of being born into a family that can provide the nurturance and financial support that are required for access to higher education. A simple thought experiment will show that this will not solve the unemployment problem. Lets suppose that the US finds a way to enable everyone to obtain a college degree. That would only affect the unemployment rate in the US if jobs that are being lost to higher productivity and globalization would be filled by a work force that has achieved Friedman's criterion of being "better than average". Productivity has reduced the number of manufacturing jobs that are required to satisfy the demand for manufactured products in the US. What new jobs will be created to provide employment for the surplus workers? We could ask the same question about all jobs that are reduced by advances in productivity. Replacement jobs will only be available if increased demand for other products or services is generated. Most of the new jobs being created are in low paying service jobs that do not require a college education.

Globalization presents a different problem. The industrialized economies of the "old world" provided a high standard of living because they were very productive. They had a better educated workforce which was made more productive by the use of capital equipment. That enabled them to export products to the less developed countries. That advantage is disappearing today. Developing countries have made progress in educating their workforces, and capital has been made available to them. Much of the capital has been provided by multinational corporations that are able to get similar productivity at lower cost. The workers in developing countries accept lower wages than workers in developed countries because the wages improve their standard of living. Over time their wages will approach those in developed countries, but today corporations can purchase productive labor at much lower cost in developing countries. They also get better access to rapidly growing markets in developing countries as they develop a middle class that can afford their products. IBM does not employ thousands of information technology workers in India because they cannot be found in the US. They are able to get the same work done at lower cost. This make it possible for IBM and Accenture to sell information services to their customers at a lower cost than if their customers hired similar workers in the US to do the same work. The Internet makes it possible to perform these services anywhere in the world. It would only make sense to educate more Americans in information technology if the same work could not be performed elsewhere in the world at lower cost. This will be the case for a number of high skill jobs that can be performed elsewhere at lower cost by taking advantage of the Internet.

The world is indeed flatter today than it was in the past. The problems that this poses from developed countries cannot be solved by winning an education race with the rest of the world. China produces more college graduates than the US today, and it will produce even more college graduates in the future as its economy grows. India produces more highly educated information technology workers than the US today and this advantage will grow as the demand for these workers in India leads to an increase in programs to provide the training. The problem for the US and other developed countries is not an education problem. It is a problem of how to deal with globalization. The encouragement of globalization that is directed by the policies of multinational corporations is an unsolved problem for the nation states. It won't be solved by winning an education race with the developing countries.

Global Oil Demand Is Growing Faster In The New World

This graph tells an interesting picture. It breaks down oil demand into a group that includes the US, Europe and Japan. The other group consists of the rest of the world. It shows that demand in the rest of the world is higher than it is in the "Old World". It also shows that it has been growing faster than demand in the old world. Demand actually declined in the old world. It is at the level it was in 2009.

Tuesday, January 24, 2012

The IMF Reduces Its Forecast For Global Economic Growth

The IMF paints a picture of the economic issues in every part of the world and it reduced its estimate of global economic growth. It argues that the eurozone may need twice as much funding than it has allocated to dealing with its crisis. It also believes that politics in the US will prematurely impose austerity on an economy that is currently self sustaining. It is also concerned that US banks may have more risk than it believes from spillovers from Europe.

Convergence In India And China Takes Different Paths

This article describes the different paths that have been taken by India and China to develop their economies. India has a productivity advantage in services and its economy has expanded by exporting high skill intensive service like information technology. China has a productivity advantage in manufacturing and it has grown its economy by exporting manufacturing services. Future growth will require India to develop its manufacturing sector and for China to move into high skill services beyond manufacturing.

An Overview Of the Romney Budget Proposal

This article provides an overview of the policy initiatives advocated by one of the three people that might be elected to the US presidency. Romney's budget proposal would make drastic cuts in non-defense federal spending. The focus is on bringing the budget in balance by cuts in social program spending so that he and his friends will not have to pay higher taxes.

More Sage Advice From David Brooks On Maintaining the Status Quo By Advocating Change

David Brooks tells us how to fix the US economy. He tells us a story about a young woman who is disadvantaged. She came from a bad family situation and she lacks the skills required to compete in a global labor market. There are millions like this young woman, and we have to create government programs to help her and others like her. He refers to this as socialism. He advocates combining socialism with policies that will help corporations to be more profitable. He calls that capitalism. Some would call that corporate socialism. The application of the policies that he advocates is what contributed to the financial crisis and our current economic malaise.

This is classic David Brooks. He shows that he is fair and balanced by demonstrating his compassion for the unfortunate. He advocates economic policies, however, that have contributed to an increase in the number of the disadvantaged. There are millions of Americans without jobs who have the skills to perform those jobs. Those jobs are going elsewhere and cutting taxes for corporations and easing regulations will not keep them here. Moreover, the political party that he supports is doing whatever it can to eliminate government programs that might help the disadvantaged. He fails to remind us of that. Instead he puts the onus on the president to advocate policies that his party will not support.

A Snapshot of Newt Gingrich's Tax Return

The NYT has provided us with a glimpse from the tax returns of Mitt Romney and Newt Gingrich. The article on Gingrich's return tells a story that illustrates the difference between Romney and Gingrich's sources of income and about tax policy as well. Romney receives most of his income from wealth that is taxed at a lower rate of income. Gingrich received most of his income by selling his human capital. His human capital consists of his personal contacts with politicians, and his knowledge about the operation of the political system in Washington. Corporations are willing to pay a lot for the services that can be derived from Gingrich's human capital because they get an excellent return on investment. Gingrich claims that he is not a lobbyist on a technicality. He never registered as a lobbyist, therefore performing the services of lobbyist does not make him a lobbyist. There are a lot of women who earn a similar living who have not registered as prostitutes

One of these two individuals will be running for the presidency of the most powerful country in the world. If we have a skill shortage in the US, it is not a shortage of skilled workers, it is a shortage of politicians who have personal integrity that is equal to their political ambition.

A First Glimpse At Romney's Tax Returns

This article in the NYT on Romney's tax returns for 2010 and 2011 is work in progress. It has not been edited yet but it does tell a story about tax policy and how the super rich can use a variety of devices to reduce their taxes. It also tells a story about their source of income. The great majority of Romney's income came from assets that he owns and from an arrangement with the company that he founded. He continues to share in the profits of Bain Capital without providing any value added. Basically, Romney is a rentier. His income comes from accumulated wealth. Since wealth is less evenly distributed than earned income, and it is a major source of income to the super rich, it exacerbates income inequality. That is why the super rich fund politicians who support lower taxes on accumulated wealth and why they support the elimination of estate taxes. That would make it easier for the super rich to pass on their wealth to future generations who could live off of the earnings on wealth that was created in the past. That puts them into a better position than the landed aristocracies in Europe. It is easier to live off of income generating wealth than it is to live off of land that has a high cost of maintenance.

What Is The Role Of The Nation State In A Global Economy?

Robert Reich and I have come to same conclusion about the employment problem in the US, and many other industrial economies. The multinational corporations do what they are supposed to do according to the current consensus. They maximize shareholder value, and executive compensation, which is linked to that objective. The facts speak for themselves.

The problem for the nation states is that there is no easy remedy available to them. I disagree with Robert Reich , Tom Friedman and with President Obama as well, that the basic problem is a shortage of skilled labor in the US. Moreover, if that were the problem it would be hard to explain the economic growth, and low level of unemployment, during the dot. com boom. The skill level of the US workforce could not have deteriorated enough over the last decade to create a skill shortage. Its always a good idea to improve the quality of the education system, but making it better, and more available, won't change the incentive system of corporate executives. Moreover, its much easier for politicians, and public policy advocates, to focus on education because many would agree that it could be improved and that it is a public good. Its much harder to address the fundamental conflict between the nation state and an economic system without national borders. Some have done a better job than others, but the states that have done well have less antagonistic relationships between labor and capital than the US. Labor flexibility, is defined differently across national borders. For the GOP it means eliminating labor unions and giving total control over labor policy to corporations. The Democratic party is more sympathetic to labor, but the waning influence of labor unions in the US requires it to compete with the GOP for corporate campaign contributions. In other countries it means a closer arrangement between labor and management to achieve common goals, but that arrangement may become more difficult as globalization progresses.

Monday, January 23, 2012

Romney's Fame Brings Attention To How Private Equity Firms Make Money

This article provides some insight into how private equity firms operate. Mitt Romney's private equity firm provided an 88% return to its investors. They did not get above market rate returns like that by growing companies and creating jobs. They get a lot of help from government tax policy. They also found a way to get the money that they invested back quickly. The acquired firm borrows money and it is used to pay dividends to the investors. Loading the acquired firms up with debt, in order to get their invested funds back quickly, also made it more difficult for the acquired firms to survive market downturns. That didn't bother Romney's firm. They received millions in management fees even when the firms eventually went under. Of course, some of the firm's survived and they could be taken public or sold to other investors for another payout.

Why Economic Concepts Are Difficult To Use In Politics

Mitt Romney has two highly regarded conservative economists as his advisors. One of them wrote an op-ed in the NYT that he has to ignore. He suggested a tax on gasoline because it would help to mitigate global warming. Romney lost the election in South Carolina because the GOP does not believe that he is a real conservative. If he followed the recommendations of his economic advisors he would lose all hope of winning the GOP nomination. The GOP leadership has a real conundrum. They cannot possibly give their base what it wants and govern in the national interest.

Obama's Jobs Committee Makes Recommendations Saluted By GOP Leader

This article raises questions about the recent recommendations from the committee that Obama created. The committee has 15 corporate executives and 2 representatives from labor. Not surprisingly, the recommendations from the committee are more like a corporate wish list than anything else. The recommendations were praised by the GOP Majority Leader in the House of Representatives. High on the wish list is the recommendation to cut corporate taxes, and to allow multinational corporations to avoid taxes on international income. The report from the committee also suggests that the lack of job skills is a primary reason for the lack of hiring in the US. It ignores the fact that if all of the job openings in the US were filled, we would still have 10 million unemployed workers.

The more I look into this subject the closer I get to an unfortunate conclusion. Most US multinational corporations are what their name implies. They have no nationality. The executives have a single goal. Their incentive system is based upon increasing shareholder value, and they are indifferent to the source of their profits. It is naive to believe that they have an incentive to create jobs in any particular location unless it serves that purpose. The role of the US government is to help them to achieve that objective. The US government plays key roles in protecting intellectual property rights, opening up markets, providing access to critical resources, and in establishing beneficial trade relationships. The government is also an important customer for products and services. These considerations are directly related to increasing shareholder value. Most other considerations are secondary.

Sunday, January 22, 2012

How Asia Has Become The Consumer Electronics Manufacturer For The World

I posted an article a few months ago by Andy Grove, the founder of Intel, who wrote about the problems that high tech company's had scaling up employment in the US. This article tells the story in detail. It explains why Asia has become the consumer electronics capital of the world. Asia provides a large and flexible supply chain that cannot be easily duplicated in the US. It is also a very large market for consumer electronic products like the iPhone and iPad. It takes a relatively small number of US employees to do the jobs that remain in the US. The labor intensive work is done in Asia. According to this article, low wages in Asia are not the only reason why the jobs are in Asia. Foxconn, which does the assembly for Apple, and many other US high tech firms, has over one million employees.

Apples stock price has increased by a factor of ten since it struck gold with mobile products. The executives in the US, as well as investors in Apple stock, have prospered from Apple's success. Its profit per employee is over $400,000. Other companies, that hope to compete with Apple for shareholders, are driven to reach Apple's profit per employee.

There are no easy solutions that will enable the US to bring the lost jobs in consumer electronics to the US. The article suggests that the scarcity of skilled technicians in the US is part of the problem. The level of training that would be required to increase the supply in the US is at the community college level. However, there is no reason to believe that increasing the supply of skilled technicians would solve the problem. The organization of work, and access to a complex supply chain, would not be easy to duplicate. Given the enormous market for consumer electronic products in Asia, it also makes sense to locate manufacturing close to the market.

Saturday, January 21, 2012

Fracking May Increase The Release Of Large Quantities Of Methane

Scientists have raised questions about the use of fracking to extract natural gas. Some are concerned about drinking water contamination, others are concerned about the potential to trigger earthquakes. This article is about the release of methane into the atmosphere. This could accelerate our problems with global warming and climate change.

An Opinion On The Crisis In Capitalism

A top executive from the world's largest bond fund writes in the Financial Times about the crisis in capitalism. Certain problems are intrinsic to capitalism. It is difficult provide sustained economic growth and unemployment and it often leads to inequalities than raise fundamental questions about the fair operation of the system. More recently, finance has been misused in ways that have created a global recession. We will have to live with the aftermath of this crisis for some time. We are also seeing problems in emerging economies. They have done a good job of lifting millions out of poverty but the policies employed to do so have led to global imbalances that are a source of problems. Lastly, private and government entities that supposed to prevent economic problems suffer from weak governance. We understand the problems with the system of capitalism. The question raised is whether the poor operation of the system will lead to distrust of the system itself.

Why Economic Concepts Are Difficult To Use In Politics

The paradox of thrift is an idea that is universally accepted by economists. On the other hand, it is not easily understood by the general public. They find it hard to believe that is a bad idea for everyone to increase savings at the same. Economists realize that it would reduce demand and slow down economic growth. This would have the counter-intuitive outcome of reducing gross savings. This article does a nice job on the problems faced by politicians when they attempt to use economic ideas to make decisions. It is sometimes better to go with public opinion than to base decisions on abstract economic ideas. It is especially difficult to do so when there is not a consensus among economists on the idea. The press will exploit the disagreement among economists to take advantage of controversy. That builds an audience. Moreover, whenever an economic concept has practical implications, the economists that work for "think tanks" funded by political interest groups will flood the media with information that favors the interests of their sponsors. The misuse of economics by those who oppose climate change policies is a classic example.

The Top 0.1% On Wall Street Do Much Better Than Middle Managers

Wall Street bonuses this year are expected to be lower for most employees. The top executives are an exception. They are expected to receive large bonuses, primarily in stock. Most of the banks have seen their stock prices fall by 40% this year. The CEO of Citigroup will receive a $16.7 retention bonus this year. That is one way to get around pay for performance.

Good News On Healthcare Costs

Ewe Reinhardt is one of our leading healthcare economists and he has good news. Spending on healthcare in the US has been growing at around 7% per year. The growth rate slowed to 3.9% in 2010. Hopefully, this will continue. Healthcare price inflation is the greatest threat to government budget deficits in the long run. He also provides data on the trend in healthcare spending. Spending prior to 1970 was negligible compared to current spending. Payments made by various sources to healthcare providers has made it one of the fastest growing industries in the US. His graphs also show the contribution by each source to healthcare providers. The government share includes Medicare, Medicaid and other sources such as military spending.

We still have a way to go, however, healthcare spending per capita in the US is twice as much as any other nation in the world. It is not an efficient system, but it would be painful to healthcare providers if it were made more efficient. That is one of the reasons why reform is so difficult in the US.

The ECB Borrows An Idea From The US Fed

This article describes the actions taken by the European Central Bank (ECB) that have enabled its debt burdened states to lower their borrowing costs. The ECB has has provided low cost loans to domestic banks at almost zero interest. The domestic banks then purchase sovereign bonds at higher rates for a nice profit, but at a below market rate. This is much like the US Federal Reserve has done by enabling banks to borrow from the Fed at almost zero interest. The banks have earned a nice profit by purchasing US debt that pays a higher rate of interest. In a sense, the government is paying domestic banks to borrow money from the government. That has helped banks to recover from their loses in the financial crisis, and it has helped to restore lending.

It also appears that Greece has reached an agreement with its creditors. They may agree to swap the bonds they now hold for 30 year bonds with lower interest rates. That will give the Greek government some breathing room as its short term bonds come due and require refinancing.

Friday, January 20, 2012

David Brooks Tells Us That We Should Vote For Romney's Great Grandparents

David Brooks describes the struggles that Mitt Romney's great grandparents went through, and tells us that this was a more important factor in his developing his character than growing up in very wealthy and powerful family. He compares the struggles of Romney's great grandparents with the the Jewish Exodus (which will help with the Jewish vote). Personally, I agree with him that great wealth should not exclude Romney from the presidency. I also agree with him that Romney's character is marked by great drive and ambition. I doubt, however, that it had anything to do with the struggles that his great grandparents endured. My concern is that his ambition to become the president, might have affected his character. In order to win the GOP nomination he has had to lie about his greatest achievement as Governor of Massachusetts, which he once believed would help his candidacy. He did so because the plan was a model for the healthcare policy of the Obama administration that the GOP base was taught to hate. He also lies about the president. Obama is not a socialist engaged in class warfare. He believes that the Bush tax cuts should expire according to the law passed by Congress. The tax cuts were made temporary in the law because they were sold as a needed stimulus to an economy in recession. (The GOP supported Keynesian stimulus under Bush). They were also made temporary because the tax cuts would have created large budget deficits in the future if they were permanent. The GOP, apparently, is no longer concerned about the impact of tax cuts on budget deficits. Looming deficits are the excuse for cutting government spending on programs that they do not like.

I recognize that politicians are not always truthful. On the other hand, the Mitt Romney that is running for the GOP nomination has been trying to sell himself to the GOP as another person. Methinks perhaps that Caesar is too ambitious.

If Obama were a Republican, I expect that David Brooks would make up a beautiful story about how his father's family grew up in Kenya and overcame hardships. Those experiences would have shaped Obama's character and made him a good candidate for the presidency. Brooks is very good at making up human interest stories.

Federal Reserve Study On Factors Affecting Hiring

This graph displays data collected by the Philadelphia Fed on Factors influencing hiring. It is not uncertainty about the Obama administration's policies. Its all about keeping costs down in an environment of weak demand. Of course, demand is weak because employment and household income are low. The loss of household wealth from the bursting of the housing bubble is also a factor. This is a vicious cycle that is not easy to remedy without government taking some actions to stimulate demand.

Thursday, January 19, 2012

How State and Local Employment Is Related To Tax Revenues

This graph shows that state and local tax collections are correlated with state and local employment levels. There are two messages in the graph. It depicts the huge fall in state and local employment following the recession. it also suggests that increasing state and local tax revenues might provide the basis for an increase in state and local employment.

Tax Policy In The US and Propaganda

This article provides data that argues against the propaganda being distributed by the folks who cut taxes for the super rich. They point out that the wealthy are paying more in taxes, and that the share of the tax burden paid for by the poor has decreased. What they don't tell you is why the wealthy are paying more in taxes. The answer is very simple. They have increased their share of national income so they pay more in taxes. Their share of income has grown more than their tax burden since the tax system has been made less progressive. Therefore, their share of after tax income has increased.

Comments by the uniformed that circulate around the Internet about tax policy are also full of misinformation about the large percent of Americans that don't pay any income taxes. All of their income is subject to the social security tax which is effectively around 15% because the employer share is passed on to them in the form of lower wages. The tax revenue from the social security tax is not segregated from revenues from the income tax. It goes into the same pot, and it is spent on current operations just like income tax dollars. The only difference is that the Treasury issues an IOU to the social security trust fund for the money that was "borrowed" to fund current spending. The poor also pay a larger share of their income on sales taxes. Outside of the income tax, which has become less progressive over time, most of the other taxes are regressive. That is, the share of income going to tax payments falls as income increases.

A Brief History of The Tax Rate On Capital Gains

This article provides a graph which shows that the US has had a long history of taxing capital gains at higher rates than exist today. The real cut in the capital gains and dividend taxes were part of the Bush tax cuts in 2003. That policy shifted the tax burden from capital income to earned income. The beneficiaries of that policy are the same as those who argue that restoring those taxes is class warfare. Apparently, class warfare is one-directional.

Freedom Under God And Evangelical Capitalism

I've often wondered why evangelical christians tend to have libertarian views of capitalism. This article describes the history in which christianity and libertarian capitalism were joined at the hip. It started with a campaign by business leaders against FDR and the "New Deal". They reasoned that the clergy would be a good instrument for selling their ideas to its congregations. The concepts of "freedom under God" and " one nation under God" became a rallying cry against the New Deal. It was reinvented during the cold war. God and libertarian capitalism were united to fight against communism and atheism. That is still going on today. Communism has collapsed, without the help of evangelicals, but liberalism has been substituted in the minds of the faithful for communism. Libertarian christianity and libertarian capitalism are at war with non-believers who flaunt "family values" and are not militant enough in their defense of the American way of life. This is a good way to describe the GOP nomination campaign speeches that are being delivered by the aspirants for the presidency of the "Real America". Mitt Romney has been claiming that we are one nation under God and that those, like our liberal president, who want to end tax breaks for the super rich are engaged in class warfare. Apparently ending tax breaks for the super rich is class warfare, and changing tax policy to benefit the super rich, by shifting the tax burden to ordinary Americans, is not class warfare. He continues with a long tradition that began in reaction to the New Deal, and has been reinvented to fight against the great society, and a progressive view of capitalism and government.

Kodak Files For Bankruptcy

After 131 years one of the most famous brands in business has filed for bankruptcy. The Eastman Kodak company dominated the market for film for most of its 131 years. It was unable to make the transition to the world of digital photography.

Why Hedge Funds Are Underperforming In A Bad Market

This article reports on the recent performance of hedge funds. This has been a bad market for most forms of investment but hedge funds lost enough money in 2008 to wipe out their gains prior to the crash. On average they continue to do poorly but the fee structure has made many of them very rich. Investors, on average, would have done better investing in risk free treasuries.

Wednesday, January 18, 2012

Progress Report on Saving Lives in African Villages

Jeff Sachs reports on breakthroughs in making healthcare more available in African villages. Major pharmaceutical companies have been involved in the effort.

Mitt Romney Announces HIs Candidacy For the Top 0.1%

“No man of spirit will consent to remain poor if he believes his superiors to have gained their goods by lucky gambling. To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The economic doctrine of normal profits, vaguely apprehended by everyone, is a necessary condition for the justification of capitalism. The business man is tolerable so long as his gains can be said to bear some relation to what, roughly and in some sense, his activities have contributed to society.”

That quote is from John Maynard Keynes. It was taken from a recent post on another site.
It was posted in response to this article on Mitt Romney. He was pressed by his opponents for the Republican nomination to reveal his tax returns. Instead he stated that his tax rate was around 15%. Most Americans pay a higher tax rate because unearned income from capital gains and dividends is taxed at 15%, while income on wages are subject to a rate of 35% in the top income bracket. Moreover, the first $105,000 of wage income is subject to an effective tax rate of 15% on social security. Unearned income is not subject to the social security tax. Most of the super rich get most of their income from capital gains and dividends. That is why their tax rate is much lower than the effective tax rate for most Americans. They pay a large absolute amount in taxes because their earnings are very large, but most middle income Americans pay a larger share of their income in federal taxes when the social security tax and the income tax are combined. Some economists view the recent changes in tax policy on capital gains and dividends as reverse class warfare. Romney has been accusing Obama of class warfare on the campaign trial because he wants to increase taxes on capital gains and dividends.

Romney also showed how out of touch he is with most Americans when he stated that he earned only a modest amount from speeches last year. He received over $374,000 in income from this source. This amount would put most households into the top 1%.

Tuesday, January 17, 2012

Is National Public Radio Worse Than Fox News?

I posted an article in the NYT by the co-founder of Planet Money on National Public Radio that was so ridiculous that I did not bother to explain how bad it was. This article does what I did not think was necessary. Perhaps it was necessary. The comments to the article are also worth reading.

How To Create A Depression In Europe

Martin Feldstein explains why economic policies in the eurozone are a blueprint for a depression by choice. He is particularly concerned by a statement from a member of the ECB that austerity is not being implemented fast enough.

To make his point, he uses France as an example. He illustrates the mechanisms that were available to France to deal with recession before it moved to the common currency union. It was able to depreciate the franc to increase exports and reduce imports; it was able to lower interest rates to stimulate investment and consumption, and it could lower taxes and increase government spending to expand demand. None of those options are available today to Greece, Italy, Spain and Portugal. Even worse, they are being pressured to raise taxes and cut government spending in order to qualify for financial assistance.

Liberal economists have been making this argument for some time. Martin Feldstein is a conservative economist who worked in the Reagan administration.

Monday, January 16, 2012

Planet Money Co-Founder Tells Us That We Should Love Wall Street

Adam Davidson is one of the co-founders of National Public Radio's show Planet Money. This article makes one wonder whether NPR serves the public interest. He argues that without the functions provided by Wall Street, the poor would remain poor, there would be no middle class and businesses would not provide innovations. It OK to hate Wall Street, but we should hate it for the right reasons. It has made us hate an indispensable system for the wrong reasons.

S&P Downgraded Eurozone Sovereign Debt Because Of Austerity Plans, But Germany Ignores Warning

Paul Krugman goes beyond the headlines which tell us that S&P has downgraded the sovereign debt on many eurozone nations. S&P downgraded the sovereign debt because it believes that the problems in the eurozone are deeper than many believe. Trade imbalances between core nations and the periphery are a big part of the problem, and the focus on fiscal austerity as the remedy is misplaced. It will increase budget deficits rather than improving them because GDP and state income will fall as a result of austerity measures.

Krugman reinforces the message from S&P by contrasting it with the response from Angela Markel. She proclaimed that they should speed up the austerity plans in the periphery in response to the warning from S&P. Either she is uninformed about S&P's rationale for the downgrade, or she has chosen to ignore it for other reasons.

Michael Spence Is Revising The Wealth of Nations

Michael Spence is a Nobel Laureate in economics who believes that we need to reconsider the relationship between markets and the state. He argues that markets and competition are good at achieving efficiency despite imperfections that are recognized within economics. We acknowledge the problems of externalities, information gaps, asymmetries and coordination problems but markets have more fundamental weaknesses. Societies have important economic and social objectives that markets and competition are not designed to achieve. We need to provide stability, distributional equity and sustainability. These objectives require an enlightened relationship between private enterprise and the state. He outlines some of the things that must be done to provide greater stability and equity. He will deal with sustainability in his next article which expands economics beyond Adam Smith. This is a welcome effort from a conservative economist who is a Senior Fellow at the conservative Hoover Institute.

Jeff Sachs Warns Us About Politicians Who Peddle Liberty To The Exclusion of Other Values

The French revolution was inspired by the phrase: "Liberty, Equality and Fraternity". Jeff Sachs tells us that one of the problems in America is that liberty is extolled as the supreme value. All other values are subordinate to personal liberty. He argues that we would all be better off, and we would have a better society, if we also valued civic responsibility and compassion for others. He believes that we should have a government based upon all three of these values instead of an exclusive value of liberty.

The French monarchy was overthrown because it had a government based upon the liberty of the aristocracy to do what it pleased. The revolution was about adding equality and fraternity to the value system. Today we have politicians who defend the liberty of the plutocracy to do what it pleases. Civic responsibility and compassion for others are subordinate to liberty. They propose a government based upon liberty, because a government concerned about civic responsibility and compassion for others is a threat to the liberty of the plutocracy. Government is the only agency with the power to interfere with the liberty of the plutocracy. That is why they attempt to limit the power of government to serve the public interest. The politicians, and academics who serve the plutocracy, broadcast the virtue of liberty above all other values because it protects the interests of the plutocracy. Their goal is to align the values of the electorate with the values that sustain the plutocracy. The underclasses in America are told that freedom from a government concerned about civic responsibility and compassion is in their best interest. They should reflect on the line from a once popular song: " Freedom is just another word for nothing left to lose". A government that places liberty above all other values does not serve their interests. It is a government that preserves the authority of the plutocracy to do what it pleases. Perhaps that is why Margaret Thatcher proclaimed that there is no such thing as society. We are all atoms who should avoid joining together to form a molecule called society.

Sunday, January 15, 2012

Is The Rise in Executive Pay A Market Failure?

This graph was taken from an article on the growth in executive pay by an economist from Oxford. He was pleased to hear the conservative Prime Minister declare that the growth in executive pay was due to market failure. There was no good explanation, however, regarding the source of the market failure.

One can't derive the sources of market failure from the graph, but we can make an effort to point in the right directions. Its pretty clear from the graph that the top 0.1% share of income reached a peak in every country just prior to the Great Depression. This was a period of rapid economic growth and also a period of rising stock prices. Those who benefited from the asset bubble in stock prices were also those who were in the top 0.1%. Their share of income dropped dramatically after the stock market crash and the start of WW II. It remained at that level for some time and then something happened. The income share of the top 0.1% remained flat for France and Japan, while it grew rapidly in the US and the UK until it reached the peak of the "Gilded Age" prior to the Great Depression. The problem is to explain why the US and the UK had such a different experience. I can't speak for the UK but there were several things going on the US that might be related to the boom. The cultural climate shifted in the US in a couple of ways. Corporate executives somehow were elevated in the public mind to super star status that was once reserved for movie stars and sports stars. It was also a period of transformation in the US. The movement from an industrial economy to a services economy also led to a decline in union membership, and the countervailing influence of unions on public opinion and legislation rapidly declined. There was also a change in the incentive system for corporate executives. Their compensation was increasingly based upon the award of stock options. This enabled them to benefit from the rise in stock prices. Executives were compensated much like the industrialists who founded industries in the Gilded Age. It didn't take long for a pattern to emerge in executive contracts, and how corporate boards determined executive compensation. Top executive hired lawyers to negotiate their contracts, and corporate boards hired executive compensation firms to assist them in setting compensation policy. This set the stage for the "Lake Wobegon Effect". Everyone's CEO was regarded as above average and compensation was set accordingly. This led to a ratcheting up effect in which each firms CEO would receive a higher raise each year than a CEO in a similar capacity. The financialization of the US (and the UK) economy also had an impact. Top performers on Wall Street receive a substantial share of top 0.1% income. That too was quite common in the Gilded Age. Perhaps we should call this the the return of the Gilded Age, but this time it is different. The Great Recession has had little impact on executive compensation and Wall Street executives are still a significant percent of the top 0.1%.

Per Capita Income Has Grown Faster In the US Than Median Household Income

This article by Krugman is based on a study of growth in real per capita GDP compared to growth in median household income. The study shows one of the problems with using growth in real per capita GDP as a measure of well being. It uses the average as the measure of central tendency. If you were in a bar and Bill Gates walked into the bar, the average income per capita would skyrocket. That is one reason for using the median as the measure of central tendency. It would not be greatly affected by an outlier number such as Bill Gates's income. The graph shows that there has been a steady rise in real per capita GDP in the US. That is something that countries like to brag about. Median household income tended to rise along with per capita GDP until the mid 1970's. That suggests that the growth in income was evenly distributed. After the mid 1970's, however, the growth in per capita GDP continued its upward trend while growth in median household income flattened out. Average income was increasing because there were more folks like Bill Gates in the US with very high incomes. Median household income did not rise as fast because the median is not affected by the growth in income by very high income individuals like Bill Gates.

This was not the point of Krugman's article. He was making the point that there has been a dramatic shift in the distribution of income in the US and that we should be concerned about it. It is not simply envy of the rich that has inspired the OWS protests. His point is well taken. I felt that it was important to understand how statistics can be used to mislead the public. Conservatives use per capita GDP to show how well the US economy has done versus other countries. If median per capita income were used instead, the US would not look as good in comparison with countries with less income inequality. The US and France, for example, look pretty similar when median per capita GDP is used because it has lower income inequality than the US.

Saturday, January 14, 2012

What Happens When Greed Is Unleashed On Wall Street

This article (via Manan Shukla) reminds us of what happened when government unleashed the animal spirits on Wall Street that led to the financial crisis. Human beings have a potential for being greedy. That is why laws and regulations are needed to protect us from greedy behavior. One of our human weaknesses is that we want other people to appreciate how successful we have been. It takes a lot of successful greedy behavior to display one's wealth in the fashion described in this article. Unfortunately, Wall Street attracts lots of people with this affliction, and its culture encourages it. It can take on other forms as well that are not as distasteful. Some give large sums to charitable organizations and others purchase works of art, and a variety of other things that establish their position within the Wall Street culture. As wealth increases on Wall Street the standards for gaining status escalate. That is why there is no limit on the amount of wealth that needs to be accumulated. It can't all be spent, but it is necessary to maintain social status in a culture that is defined by money.

Corporate Profits Are Growing But Unemployment Remains High

This article (via Alison Becker) contrasts the growth in corporate profits with the lack of growth in employment. Unemployment is a bit lower today, but the dynamics are the same.

Has Expansion Of Finance Been Good For The Economy?

The financial services industry has doubled its share of GDP since 1950. This article asks whether the value added by the financial industry has contributed to the growth of the economy. We know that it has benefited the financial services industry, however. Its share of corporate profits has grown from 10% in 1950, to as high as 40% prior to the financial crisis. In other words, profits have grown twice as fast as its share of value added to the economy.

The financial sector's purported mission is to allocate scarce resources to their most productive use. It appears that it has expanded its share of national income without allocating resources to their most productive use. We had a stock market bubble in the 1990's in which Wall Street funneled billions of dollars into technology firms that failed not long after they were brought public. Early investors made fortunes by purchasing IPO shares and selling them to less privileged investors after the share prices had doubled or tripled. Wall Street then found a way to turn sub-prime mortgages into AAA securities by the use of mathematical magic and the help of rating agencies. These securities were sold to "sophisticated" investors. Some used them as collateral to borrow money in wholesale markets at low interest rates. This method of liquidity provision turned hedge funds into unregulated banks.

In theory, the financial sector might also contribute to corporate governance. Wall Street can hold corporate CEO's accountable for performance by holding managers accountable for increasing the value of stocks. It is questionable as to whether this has improved corporate governance. It is certainly clear, however, that it has given Wall Street more influence over the internal operations of corporations. Corporation managers set expectations for meeting quarterly objectives and they are held accountable for meeting those objectives. The most valued CEO's are those that are best at playing that game. It may not be the game that is best for long term shareholders.

The New International Economic Disorder And Convergence

This article describes the difference between the way convergence was supposed to happen and how it is actually happening. The West, and its multilateral development agencies, was supposed to help poor countries close the economic gap that existed between the West and emerging market economies. The emerging market economies were forced to figure it out by themselves. They responded to financial crises by exporting their way out of debt. They became the creditor nations and the West became the debtor nations. We have convergence but it did not happen in accordance with Western policy prescriptions. We now see Western nations appealing to emerging market countries for financial assistance.

We have a scarcity of international leadership today. The West is floundering in its efforts to restore fiscal balance. The methods that were imposed on emerging market countries are now being imposed on Western nations and they are not working. To address the scarcity of leadership, it is argued that we need to make the emerging economy nations full partners in international organizations.

What's Working In Poor Countries To Improve Well Being?

The Gates Foundation has been funding economic and social development in poor countries as part of its mission. Melinda Gates answers some questions on where progress has been made and how it has happened.

S&P Downgrades European Debt

S&P downgrades European Debt citing lack of progress among politicians to strengthen the monetary union. France lost its AAA rating which will some banks to sell French bonds and replace them with AAA bonds. The shortage of AAA bonds will also make it more difficult for financial entities to borrow funds in the wholesale repo market. AAA bonds are used as collateral in that market. Problems also emerged in Greece. Its discussions with lenders which had voluntarily agreed to write down its debt have broken down. It is feared that this could trigger the use of credit default swaps which might have a powerful affect on financial markets.

Friday, January 13, 2012

The Financialization of The US Economy

I have taken a few graphs from this article in the Naked Capitalism blog. The article attempts to explain the rise in US corporate profits despite the bad economy. It argues that the profits of non-financial corporations have been bolstered by their use of capital to speculate in commodity markets. Moreover, the bulk of corporate profits have been produced by the financial industry which is also related to speculation in commodity markets. In particular, it argues that Wall Street has hedged against inflation by investing in oil futures, and that has maintained high oil prices during a period of weak economic growth and low demand for oil. If the oil bubble bursts, this would create another financial crisis according to the author of the article.

I am not sure about the basic thesis in this article but the graphs tell an interesting story. One story is the rise in the share of corporate profits that has gone to the financial industry. Fifty years ago the bulk of corporate profits went to manufacturing companies. The financial industry captured only 10% of corporate profits. Today the financial industry has over 30% of corporate profits. The other story is the relationship between corporate profits and the share of national income going to wages. Profits have grown as the share of national income going to wages has fallen. This may be the result of the shift from a manufacturing economy to a financial economy. Manufacturing is more labor intensive than the finance industry. That would explain the decline in wages in relation to profits and it would also explain the increase in wages in the finance sector. The profits are shared by a relatively small number of employees in the finance sector.

The graphs can be enlarged by clicking on them.

Household Deleveraging and Government Deleveraging Means Slow Economic Growth

Nouriel Roubini joins Joe Stiglitz in forecasting weak economic growth. He argues that we are in the process of deleveraging. Around 40% of US mortgages will have negative equity. The combination of negative equity and any economic hardship leads to foreclosure. Most foreclosures occur when a household with negative equity suffer job loss or large medical expenses. The problems in the rest of the world are not helpful either.

The US Fed and the press do their best to look on the bright side. They believe that it is important to restore confidence. They are correct, but that is not Roubini's job, nor is it the job of Joe Stiglitz. If the problems in Europe escalate that will make things worse. There is also little hope that governments will have the will to deal with the issues that might arise. Politicians are more likely to make things worse as they try to deal with the problems of slow economic growth and rising fiscal deficits simultaneously. Efforts to reduce deficits will slow growth further and lead to higher deficits.

Apple Forced To Close Down Its Retail Stores in China Because of Excess Demand

Apple was forced to shut down its five retail stores in China. Demand for its iPhone has far exceeded supply. Scalpers have been purchasing iPhones at the stores and reselling them. This has created a safety problem for employees and customers as those hired by the scalpers cannot be managed.

Thursday, January 12, 2012

The US Fed Had A Cloudy Chrystal Ball In 2006 Before The Crash

This article raises many questions about the ability of the US Federal Reserve to foresee problems in the economy prior to the crash. This transcript of Alan Greenspan's last meeting as the head of the Fed is filled with praise for Greenspan and they believed that the housing market had no problems that they could not deal with. Many of the members that fawned over Greenspan's record are still with the Fed. Bernanke who heads the Fed today was blind to the housing bubble and its potential to derail the economy. Tim Geithner, who is now the US Secretary of the Treasury, displayed some of the skill that has helped him to get ahead in government. His praise of Greenspan was so gushing that it should have been an embarrassment. He was the head of the NY Fed at that time and most of our problems were well underway on Wall Street at that time.

This transcript does little to restore confidence in the ability of the Fed to manage problems before they surface.

Joe Stiglitz Reviews The Global Economy

This article is less positive about 2012 than some of the recent news on unemployment in the US suggests. Politics in the US and in Europe are making things worse rather than better according to Stiglitz. He reviews some of the things that we might do to deal with problems, such as global warming, but he believes that ideology stands in the way of doing the right things.

Wednesday, January 11, 2012

Is Refinancing Mortgages The Solution To Foreclosure Reduction?

We have a progressive economist advocating a solution to the crisis proposed by a conservative economist. The idea is to enable refinancing of mortgages with high rates of interest. ( Refinancing has been made harder by the use of higher standards for refinancing by Fannie Mae and Freddie Mac which hold most of the mortgages.) This is a reasonable idea that might help some who are in trouble. In my view, it won't do much to reduce foreclosures. Shaving a few dollars off of the monthly payment won't do much for the unemployed or those who have taken lower paying jobs. Those are the folks who are foreclosure risks. Principle reduction or large temporary reductions in payments is a better solution.

What Is the Best Way To Enable Markets To Achieve Their Potential?

This article sums up the differences between conservative and progressive approaches to political economy.

German Economy Stalled in Q4 2011

The German economy declined 0.25% from the growth in the first 3 quarters in 2011 in Q4 2011. Economists predict another contraction in Q1 2012. That meets the formal definition of recession. The outlook in 2012 depends upon events in the eurozone. The forecast is for 0.4% growth in 2012.

Investors are not worried about the risk of investing in government debt. The yield on 5 year bonds was under 1% for the first time in history. The German deficit is only 1% of GDP. This contrasts sharply with other countries in the eurozone.

Small Business Concern That Drives Hiring

This graph shows the percent of small businesses that rate sales expectations as their primary concern and their intention to hire new employees. The relationship between sales demand and new hiring intentions is almost perfect. There are not many correlations as strong as this in the social sciences. This does not stop one of our political parties from blaming high unemployment on the administration. They claim that small businesses are worried about excessive government regulation.

Tuesday, January 10, 2012

How to Reduce Poverty in Poor Countries

This is a review of three books that look at the problem of poverty reduction from a micro level. They build on developments in behavioral economics which show that individual decisions are not always rational. They give numerous  examples of the irrational decisions that are made by poor people in poor countries. They focus on ways in which the poor can be trained to make better decisions that will enable development to take place.

The criticism of this approach it that it underplays the importance of political economy. The US and most Western economies benefited from strong partnerships between industry and government. Industry flourished to the extent that government provided the necessary infrastructure and educated the labor force. China provides another example of how governments can reduce poverty by focusing resources on public goods which provide the basis for development.

The problem is that many poor countries also have corrupt governments which impede development. Both approaches may be needed to reduce poverty in poor nations.

The US And Germany Have The Advantage Of Funding Government Debt at Negative Interest Rates

This article was based upon a presentation at an economics conference. The presentation was an historical review of how negative real interest rates helped the US and the UK to recover from government debts that financed WW II. In a sense, negative interest rates are like an increase in government income. It enables governments to borrow money below its real cost. Some of that is due to unanticipated inflation, and some is due to government policies.

Germany and the US are able to borrow money today at negative interest rates. This is helping them to finance their debt. Other countries have the the opposite problem. Italy, Spain, Ireland and Greece have to fund their debt at high interest rates. There is a demand for safe assets and investors are using German and US debt as a place to store their their wealth.

Krugman Argues That Japan Really Did Have A Lost Decade

Paul Krugman used Japan's lost decade to argue that government could have responded more strongly to the collapse of the economy when the real estate bubble deflated. He then argued that the US did the same thing in the aftermath of the financial crisis. In this article he defends his assumption that Japan really had a lost decade that a stronger response by government could have altered. He ignores some of the arguments made by his critic that the use of GDP as a measure of happiness may be misplaced, and attempts to show that japan really did have a lost decade. He compares output per worker in the lost decade with more recent decades to make his point.

It seems to me that Japan's economy crashed when the real estate bubble burst, and that government might have done a better job of dealing with the crisis. One could make a similar case for our response to the financial crisis. The loss of household wealth in Japan and in the US from deflating real estate bubbles was so severe, however, that any government response via fiscal policy would have been futile. In both cases we had economies in which aggregate demand was predicated on inflated wealth. Trillions of dollars of lost wealth is not an easy problem to fix when spending is fueled by credit instead of income, and the source of credit evaporates. We do a pretty good job responding to the normal swings in the business cycle with fiscal policy and monetary policy. It is more difficult to deal with a dramatic collapse of wealth and a collapse of the banking system. It has taken Japan a long time to recover from its problems and it will take a long time in the US as well. The problems in Japan were probably more severe than those in the US because their banks were not only stuck with bad mortgages, they had invested heavily in zombie businesses that were unable to pay down debt. This has not been the case in the US. We still have healthy corporations that have the funds to invest in the economy. Our major problems are how to deal with the housing crisis, and how to figure out how to grow an economy in the absence of asset bubbles which supported growth in the absence of rising household income.

David Brooks Argues That Government Has Been Captured by Special Interests

David Brooks argues that Americans like liberal ideas but they don't trust government as the instrument. He admits that republicans are venal and embarrassing. They make government look bad and then they run their elections against government. He calls on democrats to fix government so that the public will trust government to implement liberal ideals.

It looks like Brooks, and his conservative colleague George Will, have found a new weapon. George Stigler at the University of Chicago made a similar argument against government regulation. Stigler correctly pointed out that government regulators were often captured by the industries that they were supposed to regulate. We saw this in the financial crisis. Government regulators failed to do their job and we saw what happened. It does not follow, however, that the solution is to end any attempt to regulate industry. We need to take actions that will enable regulators to do their job.

Brooks and Will accurately describe some of the factors that have led many to believe that government has been captured by special interests. If government has been captured, it makes no sense to depend upon government to remedy our problems. A state captured by special interests is worse than no state at all. That raises the question of where we would be if there were no government to defend the public interest. We would be worse off than we are now. There would be no way to control the rent seeking activities of special interests.

Brooks proposes that the democrats should take the responsibility for cleansing government and restoring the public trust in government. He realizes, however, that the democrats would need republicans to cooperate with them in order to make government work. In other words, he has given them an impossible task. Republicans have opposed all democratic initiatives to make government work. One of their leaders, John McCain, co-sponsored a bill with a democrat to limit the influence of special interests in the funding of election campaigns. He was nominated by his party to run against Obama in the last election, but he had to overcome strong resistance within the party due to his sponsorship of campaign finance reform. The republican party is totally opposed to campaign finance reform that would limit the role of special interests.

David Brooks and George Will are perfectly happy to see that the public believes that government has been captured by special interests. They are unwilling, however, to deal with the role of their party in assuring that special interests can proceed with the capture of government. They are happy to place the burden on the democrats, and to blame them for not cleaning it up. David Brooks, for example, has been one of the leaders in the Charter School movement. The movement is predicated on the premise that for-profit private industry can do a better job than the public schools. Shrinking the role of government and expanding the influence of profit seeking industries is the primary objective of conservatives. David Brooks and George Will have the responsibility for convincing better educated Americans to support conservative causes. Fox News, Rush Limbaugh and countless others, have the job of selling conservative dogma to those who are unfamiliar with big words.

Monday, January 9, 2012

The Instability of Inequality

This article attributes the rise in global protest movements to increasing inequality. It also looks at some of the reasons for rising inequality which take different forms across the globe. It argues that we have an aggregate demand problem that is a partial consequence of growing inequality. The segments of society that have a high propensity to consume don't have the money and the segments with the money consume a lower share of their income. In english speaking countries financial liberalization was used to enable consumption to expand by the use of household debt. In Europe government provided public goods such as education and healthcare that was funded by public debt. A solution these problems requires movement to a new economic model. The laissez faire economic model of Anglo-American states has not worked and the welfare models of Western Europe is unraveling.

Conservatives Want Paul Krugman To Be Less Polemical

Some people don't like Paul Krugman's polemical style of blogging. Conservative economists like Tyler Cowen, who works at a College whose economic department is supported by the Koch brothers, is especially displeased. He advices Krugman to tone things done in order that his commentary might be more effective. This article explains why Krugman does what he does, and it gives examples of where his commentary has been effective.

I think that Krugman has been doing just what an intellectual should be doing in this intellectual climate. There is no way that macroeconomics can be separated from politics. Therefore, it is bound to be polemical if it is done right. Conservative economists have had a monopoly on political economy for too long. Krugman, and a handful of other economists, are doing just what they should be doing to expose the other side.

In conclusion, I think that Tyler Cowen's criticism of Krugman's polemical style proves that Krugman has been effective. Conservatives don't bother attacking those who have not been effective. We can use criticisms of Krugman as a measure of how effective he really has become. There is no middle ground in American intellectual debate anymore. The dialogue has been between the far right and the center right. Most of what Krugman advocates is a restoration of intellectual debate to where it was in previous generations. His positions would have been regarded as moderately liberal in the 1960's and early 1970's. The far right was not part of the debate. It has invested a lot of resources to shift the balance in its direction. We need more Paul Krugman's and fewer academics and intellectuals who curry the favor of those in a position to reward them.

What Will The Fed Do To Simulate Employment?

Since the use of fiscal policy to lower the unemployment rate is not possible, the use of monetary policy by the Fed is the only game in town. This article reviews the state of the economy and argues that the Fed is encouraged by the drop in the unemployment rate and that it will not make an effort to return the employment to population ratio to pre-recession levels. The Fed may have determined that the economy should move to a lower growth and employment trend.

Given that household wealth has declined by 100% following the bursting of the housing bubble, and that economic growth has been the result of asset bubbles, rather than growth in earned income, we have to ask whether another asset bubble might be used to stimulate growth. That does not seem possible. Therefore, economic growth will be constrained by the absence of asset bubbles that have supported economic growth in the absence of employment and income growth.