Saturday, March 31, 2012

Is Economics A Science Or Is It Mostly Bull***t?

Sometimes an economist gets into a bad mood and wonders why he is an economist. It starts with the premise that it is a science and then he realizes that it is not like the real sciences that deal with inanimate objects that don't think about how they might behave. Economics has the problem of trying to build a science around the way people behave. Many economists have watched how people behave and they have developed a pretty good understanding of how things might work in particular situations. Keynes, for example, understood that low interest rates would not lead a business person to increase capacity when the business had excess capacity and the business does not have a backlog of orders. This violated one of the rules of microeconomics, however, which assumes that borrowing will increase when the cost of borrowing declines. Business people are very strange. Sometimes they will even borrow when interest rates are very high. They do that when they feel good about the prospects for their business. They really can't be sure that the rate of return on their investment will be greater than the interest, rate, but they will do it anyway in some situations. This puts economists into a difficult situation. They would like to build a mathematical model that describes how businesses will respond to changes in the interest rate, but they have no way of measuring the view that business people have about the future. The only way to handle that situation is to build an investment demand curve that shows the demand for borrowing increasing as interest rates fall, and then to have the investment demand curve shift to the right, or to the left, in response to some other factor that cannot be measured as easily as the interest rate.

Uncertainty about the future is typical of most of the decisions that businesses or individuals are faced with. Its impossible to be certain about the outcomes of an investment under normal circumstances. We are fortunate that people will take risks when the outcomes are seldom certain. Our economic problem is that we sometimes take on too much risk, and sometimes we are hesitant about taking any risk. This is not the kind of situation upon which one can build an science. We can make some educated guesses about what to do when we find ourselves in a particular situation. For example, when businesses are not borrowing the savings made by others, and investing in the future, the economy will fall below the level required to keep everyone working. Keynes argued that government could borrow and spend the excess savings, and that might increase employment. Others argue that government borrowing will crowd out the investments that private industry would otherwise make, and that will drive up interest rates, and make the economy worse. Either of these arguments may be correct, but there is no way to determine which is correct by relying upon economic theories. It turns out that practical experience, and a good understanding of economic history might be helpful. Sometimes economists are good at this and sometimes they are not.

Big Oil Has Big Money And It Speaks Loudly In Congress

Big oil spent $146 million last year on lobbying Congress. They get a great return on that investment. Now they are funding ads that are critical of Obama's energy policy. The have an ad out with 4 lies about how the administration'e energy policies may lead the higher prices. The lobbying and advertising influenced the Senate to defeat an administration proposal to end subsidies to the oil industry which is having record breaking profits. The Senate needed 60 votes to pass the bill without a filibuster by the GOP. All of the GOP senators were opposed the ending the subsidy. I guess the don't view subsidies to big as inconsistent with their free market ideology. It also shows how concerned they are about cutting budget deficits. Eliminating the unnecessary subsidy would have saved the government over $2 billion per year.

Student Loan Debt Keeps Growing

Student loan debt has been on steep upward path since 1999. Tuition and fees are rising faster than income and many young people decided to go back to school to improve their skills. This will have an impact on economic growth. High debt levels will slow down household formation, and every dollar spent on debt repayment is a dollar not spent on something else that would be counted in GDP.

What Inflation?

Krugman points out that the predicted inflation coming from critics of the Fed;s monetary policy has not happened. They have predicted it for the last three years and the results do not deter their predictions. I guess if one keeps predicting a storm, at some point it turn out to be correct.

Friday, March 30, 2012

Spain Announces New Budget And Fiscal Austerity Plan

Spain announced its new budget which cuts government spending substantially and is expected to reduce Spain's budget deficit to an acceptable level. The government hopes that this will please investors. The Spanish stock index rose on the news but its cost of debt service has been rising to levels well above Germany's risk free interest rate.

Spain will provide another test of the belief that fiscal austerity will reduce the deficit to GDP ratio. The ratio may worsen if slow growth leads to lower tax revenues and a larger deficit.

Russia Followed Bad Advice When It Moved To Market Economy

Sociologists explain why mass privatization in former Communist countries led to economic and political problems. The state had received much of its funding from the profits of state owned businesses. It was believed that privatization would stimulate economic growth and that the state would be able to replace lost revenue from state owned businesses with taxes on private profits. That did not work out well for several reasons.

Corporate Profit Growth May Require A Shift To Revenue Growth Instead Of Cost Cutting

This article provides some data on the record profits that corporations have enjoyed despite slow growth in the US economy. Cost cutting was the path to profit growth, but productivity growth is slowing down. Future profit growth will have to come from revenue growth. Perhaps that will stimulate employment growth.

Thursday, March 29, 2012

Apple's Manufacturer In China Promises Labor Reforms

This article illustrates the positive power that the press can have when it puts a little sunshine on an important issue. A couple of weeks ago the NYT published an article critical of Foxconn, which has 1.2 million employees, and is Apple's manufacturing contractor in China. Apple immediately asked a third party to investigate the allegations about labor practices that are in violation of Chinese law. This article describes some of those practices and Foxconn's willingness to make corrections. Apple's new CEO has also taken a trip to China to in order view things at Foxconn first hand. This is a smart move on Apple's part. It has has established a remarkable record as an innovator of technologies that have been enormously successful in the marketplace. It would be foolish ignore an issue that could tarnish its image and the success of its products.

Social Security Will Be There For The Young But Medicare Costs Are A Big Problem

The graph in this article shows the growth in Social Security spending and Medicare spending as a share of government spending. It is pretty clear that Medicare spending is our real problem. Social Security can be fixed by a change in taxes or by modest changes in benefits. Medicare spending growth is primarily the result of healthcare price inflation. That can't be fixed without restructuring our inefficient healthcare delivery system. That is not politically possible.

I would like to stress another point in this article. Most of the young people in America do not believe that Social Security will be there for them when they retire. It is obviously not true, but it is widely believed by young people because they hear that all the time from the right wing media. That is not an accident. The intent is to weaken support for Social Security so that it can be privatized. The far right would like nothing more than to encourage warfare between the young and the old over Social Security. Its just another version of its divide and conquer strategy that permeates our politics.

Adam Posen Explains Why Recovery In The US Has Been Faster Than In UK

This is a transcript of a speech given by Adam Posen who works for the Bank of England. He attempts to explain the faster recovery in the US versus the UK. Both recoveries have been slower than normal but the US recovery has been more robust. The full text of the speech may be interesting those who are interested in how central banks account for economic activity and analyze their data. The highlights are given below.

The shock to both economy's was similar, and monetary policy was similar. Consumption in the US recovered faster (up 12% versus 0), and so did business investment. The level of credit in both countries was similar but the allocation of credit was different. He offers some reasons for the misallocation of credit in the UK, but there was also an interaction between business investment and the faster growth of consumption in the US. Businesses in the US may have been encouraged by increasing consumer demand in the US.

Consumption in the US did not fall as much in the US and it recovered more rapidly. There was also a difference in unemployment. Unemployment was higher in the US, but it recovered smoothly. In the UK unemployment fell but then it moved upwards. That had an effect on consumer confidence and on consumer spending. Higher energy prices in the UK also affected consumption but fiscal policy accounted for 3% of the difference in GDP between the US and the UK. The VAT was raised in the UK as part of its austerity package. The multiplier was also higher in the UK so that the decrease in disposable income had a large impact on GDP.
The budget deficits in the US were larger and acted as a stimulus to the US economy.

Tom Friedman Tells Us What He Learned From His Trip "Down Under"

Tom Friedman describes politics in Australia and New Zealand in this article. The basic difference between politics down under and in the US is that our Republican party has morphed into a Frankenstein monster. Its populist base is built upon a constant flow of misinformation and hatred. It is funded by the most reactionary business leaders in our country, who only believe in a democracy that serves their individual interests. It feels like the John Birch Society, which had always been a fringe group in the US, has taken over the party. The GOP no longer wants to participate in a government in which it shares power. Its goal is to destroy its political opposition and to capture the government. Its not surprising that this is more visible to the people down under than it is to most Americans. It seems perfectly natural to Americans who are immersed in the process by watching it being played out on TV and on the Internet. We live in a world in which reality TV is the new normal.

Friedman's conclusion at the end of the article is the sad part of the story. The problems that we face in America are global problems. The rest of the world has often looked to America for leadership in providing solutions. When it looks in our direction today it can only shake its head and wonder about the America that it used to know.

Wednesday, March 28, 2012

Housing Prices In Spain Continue To Fall And A Need For A Rescue Is Predicted

This graph shows that housing prices have decreased by 27% from their peak and are at the level that they were in 2004. This report on Spain predicts that prices will continue to fall by around 30% based on the 50% decline in the prices of housing in Ireland after the bust. The report suggests that Spanish banks which have been funding Spain's sovereign debt by borrowing from the ECB, will be put under pressure as housing continues its decline. The Spanish government will not be able to bailout the banks on its own accord. The conclusion of the report is that Spain will need a rescue plan soon.

An Analysis of The Growth In Eurozone Debt And A Prognosis

This graph appeared in this article on the causes of the crisis in the eurozone. It shows the high spreads between the risk free German bonds and riskier countries in Europe. The creation of the eurozone created the false sense that all of the sovereign debt was risk free. The spread between German debt and other sovereign debt diminished after the creation of the eurozone. The ability to borrow at low interest rates encouraged high levels of public and private debt in the eurozone. The debt spreads have gone back to where they were prior to the development of the eurozone. However, the eurozone has been left with a weaker banking sector, and heavily indebted public and private sectors as a result of recession. Some of the problems of recovering from the eurozone crisis are discussed in the article. Weaknesses in the structure of the eurozone have been made apparent by the crisis, and they limit the ability to respond to the crisis. The prognosis is for an extended period of low growth in the eurozone.

The Celtic Tiger Slipped Into Recession

Ireland slipped into recession in the last quarter. Government spending is down and consumer spending has been affected by the 14% unemployment rate. Given depressed internal demand, the Irish economy depends upon growth in exports. 70% of its exports are produced by foreign firms that manufacture in Ireland and export their products to Europe. Exports fell in Q4, however, due to slow growth in the eurozone.

Ireland's economy was once referred to as the Celtic Tiger because of its high growth rate. Ireland attracted US multinationals with low tax rates, and a skilled english speaking labor force. They export products to the eurozone from Ireland without having to deal with foreign currency issues, and their profits are taxed at a low rate. Export led growth, and employment, contributed to the housing bubble in Ireland. The bursting of the housing bubble led to a banking bailout that is being financed by the taxpayers. The high cost of the bailout has limited the ability of government to use fiscal policy to stimulate the economy. The combination of fiscal austerity and a decline in exports has ended the era of the Celtic Tiger.

Tuesday, March 27, 2012

Housing Prices Back to 2003 Level

This graph shows that housing prices are back to where they were in 2003. It looks like the steep drop is over but it would be nice to see them turn upwards.

The Conflict Between Belief In Free Markets And What Really Happens In Business

This article should be read in every business school. It describes the conflict between our belief in free markets, and the belief that the primary goal of the corporation is to increase shareholder value. The best way to increase profits and shareholder value is to have imperfect markets without price competition. Oligopoly is the primary form of imperfect competition in most industries. Sometimes the barriers to competition erode, or new products emerge to create competition, and competition is restored. However, businesses usually spend large sums on lobbying government to maintain barriers to competition. Most corporate executives will tell you that they believe in the market economy but their business strategies are based upon limiting competition which is at the heart of free market ideology.

I used to host meetings in which investors interviewed entrepreneurs who requested financial support in return for a share of the equity. The conversations always included discussions of barriers to entry. The investors were only interested in financing new ventures that had patent protection, or other barriers that would support high margins. Of course, every business strategy course is also about the use of methods that reduce the impact of competition. The goals of most businesses are in conflict with the ideology of perfectly competitive markets.

Robert Reich On GOP Jujitsu

Robert Reich does a good job in this article of describing the legal issues being debated in the Supreme Court about the use of mandates requiring everyone to have insurance in the ACA. Medicare for all would have been a superior alternative to the reform bill that was politically achievable. He suggests that if the mandates prove to be unconstitutional, the bill requires insurance companies to do what they will not want to do. It requires them to provide coverage for those with preexisting conditions. Obama could use that get their support for making Medicare available for everyone. (LOL)

Obama Is Getting Paid Back For Pretending To Superman

This article makes fun of Obama by claiming that his energy policies, which advocate the use of alternative energy sources, have landed him in a jam. He is now being blamed for rising gasoline prices by the GOP, and he defending himself by arguing that the high prices are due to market forces. The author jokes that even superman cannot repeal the law of supply and demand.

I don't agree with the premise of this article that Obama played superman and he is now paying the price politically for rising gasoline prices. He understood that his energy policies would only have a long term impact on prices. He also understood that it would political suicide to increase gasoline taxes in recession. In fact, one of Romney's economic advisors has been an advocate of using gasoline taxes to reduce demand for fossil fuels. HIs position is clearly stated in this article. Romney, of course, is not going to commit suicide either.

So what is the point of this article? Neither candidate is going to take the risk of using the most efficient method of reducing gasoline consumption. It is simply an effort by a conservative journalist to make fun of the president.

We Have A Problem Of Rising Income Inequality So Lets Fix Another Problem

This article in the liberal NYT, by a former Wall Street executive who was in the Obama administration, provides us with data on growing income inequality in the US. It goes down hill after that by ignoring the problem that it described and proposing a solution for a different problem. It turns out to be a rationale for a solution to problems that the Obama administration is willing to deal with.

The data on income inequality is stunning and difficult to deny. The top 1% received 93% of the growth in national income from 2009 to 2010. The top .01%, representing 15,000 households with an average income of $23.8 million received 37% of the gain in income. The super-rich saw their income grow by 21.5% in a period of high unemployment. The growth in income going to super rich is our real problem. We need to understand why that is happening and we need to deal with the problem of political inequality that results from growing income inequality.

Unfortunately, after describing this problem, the author turns to a problem that he is more comfortable with. He tells us that the income of college grads has grown by 15.7% over the last 32 years, and that the income of those without a high school diploma has dropped by 25.7% in that period. The problem has shifted from where the growth in income has gone, to where it has not gone. A 15.7% growth in the incomes of college graduates over 32 years is about one half a percent per year. That is nothing to be proud about. It is well below the growth in productivity over that period. We should be wondering why our highly skilled workers with college educations are doing so poorly relative to a handful of the college educated in the top 01% But that does not concern him because it does not square with his solutions for growing inequality.

He turns away from the real problem, and tells us that we need to address problems in the education system which have nothing to do with the fact that a small segment of the college educated are benefiting from the growth in national income. Moreover, we should not cut government spending on programs that help those with very low incomes. That is a good recommendation but it has nothing to do with the fixing the maldistribution of income problem that he raised.

He then turns his attention to the tax code which was made less progressive in the Bush administration and we should let some of those tax cuts expire. This would bring the tax system back to where it was under Clinton, when most of gains in income also went to the top 1%. That does not fix the problem of growing pre-tax inequality, but it would make a small dent in the problem of post-tax income inequality. If we want to use the tax system to fix the problem of income inequality we should be trying to make it much more progressive. The researchers whose data he reported on rising income inequality found that a top marginal tax rate of 73% would reduce post-tax inequality and would not have a negative effect on economic growth. The US economy grew fast when rates were at that level prior to the Reagan administration when they dramatically reduced.

The author alludes to globalization, which may be part of the problem of growing income inequality, but he assumes that government can do nothing about that problem. I was rather surprised to learn that governments have nothing to do with trade policy. Of course, if government policy is to whatever multinational corporations want it to do, I can understand his reasoning.

Monday, March 26, 2012

Business Economists Don't Agree About Most Issues

In case you're interested in what business economists think about fiscal and monetary policy, as well as regulation and alternative energy subsidies, this survey provides the answers. They don't agree on very many questions, and they tend to lean in a conservative direction on most issues. I wouldn't want to spend much time discussing issues with them.

Free Trade Blinders

Most economists are strong supporters of free trade. They believe in the principle of comparative advantage which suggests that free trade enlarges the global economic pie. Some may be harmed by free trade, but enlarging the economic pie takes precedence over adverse outcomes to some. Dani Rodrik reminds us that free trade has distributional outcomes that must be considered when we make trade policy. If the public believes that the distributional outcomes are unfair, or undeserved, they will oppose free trade. He provides some examples of unfairness in this article.

Obama's Healthcare Bill Is An Ego Trip That is Bad For America

Robert Samuelson tells us that Obama's healthcare reform bill (ACA) was motivated by his ego and that it is bad for America. He argues that it will cost us jobs and increase our budget deficits. Moreover, its not really a good idea to increase access to healthcare because it does not make us healthier.

Americans are equally divided about ACA. Republicans hate it and many democrats believe that it did not go far enough. Its easy to understand why the public is confused about ACA when reporters like Robert Samuelson are given a platform by the Washington Post to make things up about the bill. I was going to criticize this article but Dean Baker beat me to it. Fox News and Rush Limbaugh are only part of our media problem in the US. Even decent news outlets like the Post misinform the public.

Larry Summers Is Concerned About Shutting Down Support For The Economy Too Soon

Larry Summers reminds us that economic forecasting is far from perfect. We usually don't know what is likely to happen in the economy until it has already happened. He reviews some the things that we should worry about, and he points out that there is a lot of latent demand in the economy because of slow household formation and deleveraging. At some point that demand will be realized and the economy will head upward. His major worry is that government will turn of the fiscal and monetary policies that prevented the economy from moving into depression too early. We are not yet out of the woods. (He must remember 1937 when government policies reignited the depression)

Corporatism In America And Crony Capitalism's Paid Guns

This article shines some light on another lobbyist group funded by corporate interests to write the laws that increase their control over society. The lobbyist group is called ALEC and at the top of the list of its sponsors are the usual suspects: the Koch brothers and Exxon Mobile. One its goals is to siphon off tax dollars to private industry. The privatization of prisons and public education are high on its list and the beneficiaries are among its funders. ALEC wrote the law that makes it legal for an officer to shoot a suspect if he perceives a threat. That law is behind the scene in the highly publicized case in Florida in which an officer shot and killed an unarmed teen.

ALEC has been most active at the state level. The prison system and the public schools are primarily a state responsibility. It has been particularly active in Virginia where the Koch brothers have an academic resource at the Mercatus Center, which is housed at George Mason University. This is ostensibly a libertarian think tank but it is really a vehicle that supports an anti-democratic agenda. Government capture is the primary goal of the conservative movement.

Saturday, March 24, 2012

Economic Growth Via Stimulus Is The Best Solution When Monetary Policy Is Constrained by Zero Bound

This article from an analyst at Goldman supports the analysis made by Larry Summers and Brad DeLong which argues that fiscal stimulus is necessary when monetary policy is limited, as it is today, by the zero bound. Their analysis shows that economic growth, generated by stimulus, will increase tax revenues and reduce government debt without the need for tax increases. It also argues that long term growth is impeded by letting an economy stagnate. It leads to a human capital shortfall and capital shortfall that reduce potential GDP. They also reject the hypothesis that the use of austerity, to increase investor confidence, is the best path for growth when monetary policy is constrained by the zero bound.

This link is to the full article posted on the DeLong blog.

Nations Fail When Institutions Are Not Inclusive

This is a brief overview in MIT News, of book published by two MIT professors. The book Why Nations Fail, takes an historical approach to answer a perennial question. It argues that social institutions determine the incentives in a society. Nations fail when they provide the wrong incentives. North and South Korea provide one of their examples. South Korea is ten times more prosperous than North Korea primarily because it extends property rights to a broad class of citizens and its government is more inclusive. That is, it has not been captured by elites. The extension of property rights encourages innovation that is the basis for economic growth and innovation is amplified when those rights are inclusive. The book also argues that the pattern for failure is not based upon the ignorance of government leaders. The decisions that they make are designed to solidify their power and the power of elites with whom they are allied. Together they block innovations that promote economic growth.

Economics has tended to focus on the behavior of individual agents, rather than on the role of institutions that provide the incentives that shape behavior. Since individuals, acting to maximize their utility, are pretty similar across the globe, we would not expect the differences in wealth that we observe between nations. A state of perfect freedom would be the best way to generate wealth. It makes more sense to me to take the institutional approach that was taken in this book. Good institutions are essential and they are not universal. Moreover, they are subject to change over time. They can become better or worse. We should become concerned when governments and elites provide the wrong incentives.

Friday, March 23, 2012

A Poll Of GOP Primary Voters Show Less Support For Cutting Most Government Programs Than Expected

This article provides polling data which shows how republican primary voters and others desire to cut spending on specific government programs. There were only four areas of spending in which the majority of republicans would like to cut spending. They were more favorable to spending cuts than others but the results were somewhat surprising. Perhaps the GOP platform is in response to those in the GOP base who have very strong feelings about government spending on social programs.

Wage Growth Is Slower Than Productivity Growth Independent Of Education Level

This graph, which was taken from a report on the factors contributing to unemployment, tells an important story. The graph shows that productivity has been growing at a faster rate than wage growth. Moreover, wage growth has been slower than productivity growth for college graduates as well as those without a college degree. The benefits from rising productivity have gone primarily to profits during this period. This is inconsistent with past periods since WW ll when labor and capital shared the gains from rising productivity. it also raises questions about the claim that unemployment is primarily a structural problem in the US. That is, we do not have an adequate supply of college educated workers. If demand for the college educated exceeded supply, we would expect to see wages rising for those with college degrees. It also suggests that increasing the supply of those with college degrees would contribute to the slow growth in wages for the college educated. It would not provide a solution for high unemployment. This report provides a large amount of data which indicates that the unemployment problem is primarily due to a decline in the demand for labor.

The report also provides data which show that rising inequality is not related to education level. Most of the increase in income has gone to the top .01% of the labor force. Their incomes have grown substantially faster than other college graduates that comprise the bulk of those in the top 10%. Educational inequality is a factor in social mobility, however. There is a wage premium for those with a college degree. Improving access to higher education would make a positive contribution to social mobility but it is not the solution for our current unemployment problem.

I strongly recommend this report to those who are interested in understanding our unemployment problem as well as the relationship between education and the labor market.

Thursday, March 22, 2012

The Ryan Budget Is Not Just About Medicare Cuts

Ezra Klein shows us that the Ryan budget plan is primarily about cutting Medicaid (which is increased in the ACA that he repeals) and other non-defense discretionary spending, such as the food stamp program which primarily benefit the poor. This is consistent with conservative ideology which holds that government welfare programs go to people who prefer to live off of government programs instead of going to work.

The Ryan Budget And The Revival of The Flim Flam Man

Paul Krugman looks at the Ryan budget proposal and he asks whether Ryan will continue to admired by the pundits for being the only serious politician because of his willingness to cut popular social programs. His answer is here in the NYT. His conservative op-ed colleague does exactly that. The NYT has to give equal time to the flat earth society. After all it does look rather flat to most of us.

If We Don't Understand The Causes Of Inequality We Can't Fix It

This article in The Financial Times, by an American, argues that it is time to do something about rising inequality in the US. It supports Obama's plan to make the income tax more progressive by letting parts of the Bush tax cuts expire. That is good idea, and it is not surprising that a member of the Clinton administration would approve of tax policies that were introduced in the Clinton administration. It is very weak on the causes of growing income inequality, however, and its other recommendations for reducing income inequality are, consequently, off- target.

He argues that income inequality is the result of the growing role of information technology in the economy and that the US labor force has not acquired the necessary skills. He also suggests, following some conservative economists, that growing income inequality is a global problem. These are conservative viewpoints and they lead to conservative solutions.

We had a booming economy in the Clinton administration that was fueled by the boom in technology. It was a full-employment economy as well. Employers had no problem finding the skilled workers that they needed. Its hard to believe that over a short period of time the skilled workers have disappeared and that unemployment is due to the poor quality of the US labor force. Since that premise is false, it does not make sense to argue that we can fix the unemployment problem, and the inequality problem, by improving the quality of our education system. We have a high quality education system. Our biggest education problem is that access to a quality education is unequally distributed. Wealthy school districts have good schools, and poor school districts have to deal with the problems of income inequality and broken families that interfere with the process of education. Access to higher education has also been limited by the lack of funding for state and locally supported higher education, and by rising tuition costs both public and private colleges. Access to a quality education is our problem. We take our eye off the ball when we focus on the problem of educational quality in the US. Moreover, it takes a long time to make changes to the education system. Education reform does nothing to reduce unemployment and inequality today.

The following post argues that growing income inequality in the UK and the US is related to conservative economic policies which reflect the ability of the wealthy to purchase favorable policies from government. In fact, many of the changes made in the Clinton administration contributed to the financial crisis in the Bush administration. They were purchased by Wall Street banks by making contributions to an administration that was intent on demonstrating that it was not anti-business. The only effective way to reduce income inequality is to limit the ability of the wealthy to purchase political influence. Even the modest changes to tax policy and healthcare reform by the Obama administration have been limited by the ability of the powerful to influence public opinion as well as policy.

The Relationship Between Income Inequality and Political Inequality In The UK and US

Growing income inequality appears to be an Anglo-American disease. This article raises questions about the policies of conservative government in the UK and the US. It argues that conservative policies in the UK and the US reflect the relationship between income inequality and political inequality. Growing wealth increases the purchasing power of the wealthy. They are able to purchase the support of government to increase their ability to extract rents from their economic activities. The proposed changes to the national healthcare services and the Ryan proposal for privatizing Medicare in the US are two examples. The conservative government in the UK has also proposed lowering the top marginal tax rate. That is exactly what was done in the US by both Reagan and Bush. They both claimed that lowering the top tax rates would accelerate economic growth. There is no evidence to support this theory, which some call "voodoo economics. In one of my recent posts, I reported studies that disprove the theory. The data also show that lowering the top tax rate in the US led to rising pre-tax inequality.

The bottom line is that rising income inequality in the US and the UK are due to a variety of factors, including globalization, but that government policies, promoted by the wealthy elite, have contributed to rising income inequality. It may not be a coincidence that Wall Street and The City Of London are both dominant sectors of the US and UK economies. Growth in income inequality is correlated with the rising share of economic output contributed by the financial services sector in both economies.

Wednesday, March 21, 2012

US Fed Chairman And Secretary of Treasury See Less Risk From European Crisis

Ben Bernanke and Tim Geithner testified before Congress and argued that the outlook in Europe was looking much better and that US exposure to the financial problems in Europe are minimal.

The Plan To Keep Greece In The Eurozone Painful But Necessary

This article does a good job of explaining the program that has been put in place to make the Greek economy sustainable and enable it to remain in the eurozone. It deals with Greece's two major problems. Its high debt levels and its lack of competitiveness. The restructuring of Greek sovereign debt was effectively a payment by bank shareholders who held the debt to the Greek government. That payment, along with government efforts to increase tax revenues while cutting government spending will bring Greece's debt/GDP ratio down. The austerity plan will lead to a decline in domestic output. That has to be made up by increasing Greek exports. That, in turn, requires Greek products to be more competitively priced. Wages must fall to enable the prices of Greek output to fall. Restoring competitiveness is a long and painful process. If Greece had its own currency it could happen faster with currency depreciation. Since Greece is in the eurozone, that option, which is also painful, is not available. In any case, Greece can no longer borrow money to pay for its imports. Instead of running a current account deficit it must find a way to run a current account surplus and pay for its imports with exports.

The Origins Of GOP Fiscal Policy With A Focus On Tax Cuts

This article provides an historical overview of how the political economy of the GOP became focused on cutting taxes. The original idea was for the GOP to focus on economic growth. Tax cuts were viewed as the way to stimulate economic growth. Moreover, a growing economy would provide the tax base to fund government expenditures. There was no need for the GOP to be branded as the "stingy" political party. Tax cuts were the engine that would fuel economic growth which would INCREASE tax revenues. This was the supply side vision of fiscal policy that was sold to Ronald Reagan. Tax cuts are a gift and so is economic growth that funds government programs.

The Ryan budget plan shows how the original supply side vision of GOP fiscal policy has morphed into something else. Tax cuts have become the means to limit government provided social welfare programs. This is Grover Norquist's "starving the beast" concept. The GOP should become a stingy Santa. It should provide the gift of tax cuts, but be stingy about non-defense spending.

This strategy works if the public becomes fearful of budget deficits, and if the public believes that social spending benefits "underserving" Americans. The Tea Party appears to like this strategy. We will have to see whether it has legs with the rest of the electorate.

The Ryan Budget Clarifies Its Vision Of America

This editorial in the NYT provides more detail on the Ryan budget plan. Governments collect taxes and they spend the money on things that they believe in. This plan clearly illustrates the value system of a GOP government. The tax system is made less progressive, the defense budget is increased, social programs are slashed and environmental policies are neutered. I'm surprised that they GOP is willing to make its values so clear to the electorate. Their focus groups must be telling them that this is what voters want.

Tuesday, March 20, 2012

GOP Stakes 2012 Election On Deficit Reduction

The GOP house has released a budget plan that cuts deficits faster than Obama's plan in the near term and balances the budget by 2040. The plan includes changes in tax policy and dramatic changes to Medicare and Medicaid. It also eliminates Fannie Mae and Fannie Mac along with repealing the Affordable Healthcare Act. The House GOP budget plan will become the hallmark of the 2012 campaign. They must be counting on their media outlets and think tanks to convince the electorate that budget deficits are our most important economic problem.

How Healthcare Spending In US Compares With OECD Countries

This article has a chart that shows healthcare spending in OECD countries in relation to per capital GDP. The US is an outlier on the graph. The article also provides some other facts about healthcare in tHe US that help to explain why US healthcare is inefficient.

How Tax Policy Is Related To Income Inequality

This article is part of a series of articles in The Boston Review on what to do about rising income inequality. The three economists, who wrote this article have done a lot of good work on both rising income inequality and tax policy. They found that tax policies in rich countries have been very different but that they have had no effect on economic growth. All of the rich countries have had similar growth in per capita GDP under widely different tax policies. Moreover, the US and the UK cut the top marginal tax rates and they experienced growing income inequality. Between 1975 and 2008, the top marginal tax rate in the US was cut by 35% and the top 1%'s share of income increased by 10%. Neither Germany or France reduced their top tax rates, and they saw no increase in the share held by the top 1%. The tax cuts in the US may have encouraged CEO's in the US to seek higher wages from their boards.

The two major objections to increasing the top rate on high income earners are considered by the authors and they do not find an economic argument against them. They estimate that supply side effects on top wage earners may reduce their incentives to work and the top rate could be raised to 57% without a loss in tax income from supply side effects. Tax avoidance may also increase if the top tax rate is increased. That is no a problem if the well known tax loopholes are closed prior to a tax increase.

The major problem with raising the top rates is not economic, it is political. It depends on whether to public believes that the growth in income inequality is due to rent seeking behavior or to higher productivity. The top 1% has the ability to influence public opinion on this critical issue. This may limit the effort to use tax policy to deal with rising income inequality.

The French Cul de Sac

This article provides a view of economic and politival problems in France from the perspective of a UK economist. The fiscal problem in the eurozone (EZ) has only two effective solutions which are ruled out: full blown EZ union, or the abandonment of the euro. Consequently, some sort of transfer union will be used to muddle through the crisis. The transfer union comes with an imposition of austerity, and financial markets are also demanding austerity. This will slow down internally generated EZ growth that will not be compensated for by growth in exports. This leads us the the cul de sac in France.

Budget deficit reduction is being promised by both of the mainstream candidates. The goal is to balance the budget, net of interest payments, by 2014. Sarkozy proposes structural reforms and tax cuts for employers while raising the VAT. Hollende proposes raising taxes on the wealthy and on big business, along with a stronger transfer union to preserve the euro. They both face the problem, however, of an economy that is sliding into a recession. That will make it impossible to balance the budget by 2014, and lead to further retrenchment. This will open the door for the far right and the far left. Both are in favor of an EZ exit and the use of protectionism to deal with domestic economic problems. This will test the willingness of the public to make sacrifices in order to preserve the common currency.

Sunday, March 18, 2012

Tribal America And Voting Behavior

This article describes the political narratives of the left and the right in America. It explains why many American's ignore their economic self interest in their voting behavior. It argues that we belong to tribes on one of two narratives, and that we are willing to sacrifice our self-interest to support the tribe that we primarily support. I happen to belong to the tribe on the left, so I am probably biased, but much of the narrative on the left came in response to a real crisis. That is, the social welfare programs were part of the New Deal that was created in response to the Great Depression. It seems to me that the conservative narrative, that views government as the enemy of the people, is primarily an imaginary danger that is created by propaganda. Government is the only countervailing power feared by those who benefit from oligarchy. The oligarchy is small, by definition, it can only win elections, and capture government, by selling its narrative to the general public. They are pretty good at that game, and the Great Depression is part of ancient history for many Americans; it is tougher sell for that reason.

Another GOP Plan To Privatize Medicare Is On The Drawing Board

Dana Milbank describes another plan being discussed by the GOP that privatizes Medicare. The plan is supported by several GOP leaders but it is also being resisted by some because Medicare is very popular. If the GOP takes over government some version of "consumer directed healthcare" will be forthcoming from the GOP. All of their ideas on healthcare are based upon market solutions which assume that demand for healthcare services will fall if consumers have to pay a larger share of the cost. Their assumption is correct but it also means that more Americans will not have access to healthcare. The share of American's covered by employer provided health insurance has decreased by around 15% over the last decade. Cuts in government provided healthcare, at the same time that employer provided health insurance is falling, is bad news for most Americans.

The GOP Has Always Provided A Home For The Far Right Crazies

I had a conversation the other day with a relative from Georgia who has been following the GOP primary campaign. He can't believe what he is hearing from politicians who believe that they should be the president of the USA. He said that none of his republican friends in Georgia are that crazy. Unfortunately, his friends are not representative of the current GOP. This article, in The Rolling Stone gives Rick Perlstein a platform to tell us that there is a long history of craziness in the GOP. This article provides links to some of the far right propaganda that has always been a part of the GOP. It has usually been in the background, but today it is on prime time TV. The far right has done a better job of selling the propaganda to its base. It has its own TV network, its own radio network, and it has learned how to use the Internet to spread the gospel.

Perlstein is employed as a columnist by the Washington Post. He had to use The Rolling Stone to publish this article. It would be too controversial for the Post to publish. Its reporters would be denied access to GOP politicians on whom they depend for information. This is a part of American history that should be a part of the public dialogue. The links in this article provide a valuable history lesson.

Saturday, March 17, 2012

Life Crisis Explained By Institutional Failure

This article is about the life crisis described by a Harvard Business Review writer. This is not a psychology blog, but he raises a good point that is relevant to economics. He places the blame for his crisis on institutional failure. He claims that institutions make the rules and that following those rules does not provide the guidance that we need to lead a meaningful life. In his opinion the institutions extract value rather than adding value to his life. The focus that he puts on institutions that make the rules is certainly different from one of the central tenets in economics which assumes that individual agents make the important decisions that determine economic output. You won't find much discussion about the role of institutions in introductory textbooks. The invisible hand may well be the institutional rules that guide our behavior and influence our decisions.

Shadow Banking Is A Black Hole At Center Of Global Financial System

This article reminds us of the 2008 financial crisis that was precipitated by the unregulated shadow banking system. It claims that the unregulated shadow banking system is a black hole at the center of the global financial system.

A bank can be defined as an entity that borrows money short-term and invests the money on less liquid assets that pay a higher return. The depositor banks "borrow" short term by taking deposits and they are regulated by government. Much of our focus after the financial system crisis is on reforming the regulation of depository banks. Shadow banking works in similar way but they raises money by borrowing short term from money market funds, and other sources, instead of from depositors. They use collateral to back up their short term borrowing. Lehman Brothers collapsed when the collateral that it used for its short term borrowing became less acceptable as collateral. It was no longer able to turn over its short term loans as they became due and it was brought down by a liquidity crunch.

Shadow banking grew rapidly from 2002 when it had $27 trillion in assets to $60 trillion at the peak of the crisis. It is estimated that shadow banks hold 50% of all financial assets. Their credit creation is much larger than that which is captured in statistics and the use of leverage not easy to measure since the carry trade, for example, is conducted via off balance sheet derivatives and only the net positions are reported. The top 5 banks in the US act as prime brokers for 97% of the derivative trades that are conducted. A major problem in the shadow banking system represents systemic risk to the regulated banking system.

Robert Reich Expands Upon What We Learned About Goldman Sachs

Robert Reich expands on the issues raised by Greg Smith's explanation of his reasons for resigning from Goldman Sachs. There is nothing new about greed on Wall Street. Greed is a human weakness that is amplified by the lack of safeguards against it. We need to provide the safeguards as we did after the Great Depression. He argues that trust is a public good and that the loss of trust in our system will have consequences.

The Importance Of Innovation And The Means Of Fostering It

This article explains the importance of innovation in the global economy. Investments in human capital and R&D are the inputs to the output that we call innovation. The article also compares the US with the rest of the world in spending on R&D and investments in human capital. The federal government invests huge sums in defense. Some of this investment finds its way into commercial applications but most does not. The bulk of business R&D is done by multinational corporations. Some of that investment is migrating to emerging markets. The emerging market countries are also investing heavily in human capital development. They turn out a much larger percent of engineers compared to the US. Perhaps that is why immigration policy is mentioned as an important issue in the article. The US has become more dependent on importing human capital because we do not produce the technical talent that is demanded.

One of the problems raised in the article is that investments in human capital and R&D is growing at a slower rate in developed countries than in emerging market countries. It may be difficult for government to make the needed investments given the fiscal problems in many developed countries.

This article provides a good introduction the subsequent post which is about tax policy. We need to set priorities on where government spends its tax revenues as well as how they are raised. These are the kind of debates that we should be having leading up to the 2012 elections. They may be more important than debating our policies on the use of contraceptives and whether the display of french kissing on TV is pornography. The people who are concerned with those topics will not lead us into the future that most of us want. It will be a future that transforms our cultural and economic richness into what we find in the most backward parts of our country.

A Good Lesson On Tax Policy

This article is about giving a tax preference to capital gains over ordinary income. This practice violates the rule of horizontal equity which holds that people at the same income level should pay the same tax rate. Congress makes changes to this rule because it wants to encourage certain kinds of behavior. In this case it wants to encourage capital investments. But the buying and selling of stocks in the secondary market does not increase productive investments in capital. It also implies that investments in human capital are not as valuable as investments in other forms of capital. Why should a surgeon be taxed at a higher rate than someone who purchases an asset and then sells it for a higher price? The surgeon has made an investment in human capital that we want to encourage as well as we want to encourage business investment.

The tax code is riddled with preferences like the capital gains preference. They are referred to as tax expenditures because they reduce tax income. They have the same impact on the federal budget as a change in government spending. If Congress wants to encourage certain kinds of behavior it would be more transparent to subsidize it by putting it in the budget as an expense. Its easier for citizens to examine the expense budget than it is to analyze the tax code. Perhaps that is why Congress rewards lobbying for tax breaks.

I would also argue that we often encourage behavior that the we don't want when we put preferences in the tax code. For example, most of the trading in the stock market today is high frequency trading. Shares are purchased and resold in fractions of second in order to capture a small capital gain that is highly leveraged. This increases volatility and it serves no public purpose. We also encourage large numbers of our brightest students to become hedge fund managers or private equity managers by taxing their income at the capital gains rate. That may not be the best way to get a return on our investment in human capital.

Democracy only works well when we have an informed public. Some decisions are so complex that few can invest the time and energy to understand them. On the other hand few things are more important than tax policy and where the government spends it money. I live in a small town that has to pass a budget annually. The citizens debate the budget every year and the attention given to it is rewarded. We get the level of services that we want and we have a relatively low tax rate. Not everyone agrees with the budget but the process works. The process is more complicated at the national level but few or our citizens have been provided the education that they need to contribute to the process. If you learned something from this article it is a good thing, but it also illustrates a gap in our education system.

Friday, March 16, 2012

A Research Report On The Relative Contributions Of Cyclical and Structural Factors On Unemployment In Great Recession

Unemployment is due to cyclical and structural factors. There is always a debate about the relative contribution of cyclical and structural factors in every recession. This study was conducted to determine the relative contribution of each factor in the Great Recession. The results suggest that cyclical factors accounted for 75% and structural factors accounted for 25%. The split was 60-40 when only long term unemployment was considered.

Goldman's Traders Have No Obligation To Serve Their Trading Counterparties

This article in The Financial Times argues that Goldman and other Wall Street banks serve two types of clients. The have a fiduciary responsibility to clients that they advice on investments. On the other hand, they trade with hedge funds as well as pension funds and municipal clients who are less sophisticated. Goldman is playing poker with their trading counterparties and their only obligation to them is to make sure that they are not playing with marked cards. Some of these players should not be permitted to play poker with Goldman. They are the "muppets" that are described in Smith's resignation letter. The Dodd-Frank bill provides some protection for them but the banks would rather play poker with them than with the hedge funds. The implication in this article is that we should expect derivative sales people to fleece the suckers at the poker table. I wonder, however, if Smith was so naive that he did not distinguish between the poker players and other Goldman clients.

Drill Baby Drill Has Returned As The Way The GOP Will Create Jobs

Krugman looks at two of the GOP talking points for promoting job growth. Cutting taxes for the wealthy is always at the top of their list but they are working hard to blame the Obama administration for higher gasoline prices. They have revived John McCain's "drill baby drill" talking point from his failed 2008 campaign as the way to cut gasoline prices and create jobs. The only problem with their talking point is that the high gasoline prices have nothing to do with administration policy. They reflect high oil prices which are primarily a result of increased demand in emerging markets and concerns about Iran. The GOP claim that growth in the oil industry will increase jobs is also a joke. The industry has grown fast with the rise in oil prices but it has added only 70,000 jobs.

So how can we explain the GOP talking points? In the first place, the extraction industries are one of the the GOP's most generous constituencies. Krugman's second point is that the GOP has simply run out of ideas. He claims that they are intellectually bankrupt. I would add a third point. They rely on their propaganda machine to educate their base and it works. They believe what they are taught by the Murdoch media which includes Fox News and the WSJ, and they also believe what they hear on talk radio. Why would they tell their base anything else?

Thursday, March 15, 2012

A Positive Review Of Andrew Haldane's Comments About Banking And Finance

This article by the executive editor of the Harvard Business Review, is about the ideas on finance and banking found in speeches and articles written by Andrew Haldane who is a senior executive at the Bank of England. After reviewing many of Haldane's comments, he wonders why nobody in the US displays the same depth, and critical insights that he finds in Haldane. I would have to agree with him. Haldane provides valuable information and lots of food for thought.

MIT Economists Discuss Implications Of Rising Income Inequality

This article reports on a conference at MIT on rising income inequality. Two of the comments cited in the article are worth repeating. MIT's Associate Chairman of the Economics Department, David Autor, argued that the concept of meritocracy is a valuable, and widely held view in America. It is based on the idea that people who work hard and play by rules will be successful. Rising inequality and declining social mobility puts that valuable concept at risk. Noble prize winning economist, Peter Diamond, presented data on tax policy in the US. He claimed that the debate in the US is too narrow. It is focused on the small difference between the top marginal rates in the Bush and Clinton administrations. He argued the the optimum top rate should be set above 50% and bellow 70%. We had less inequality and faster economic growth in the US prior to the Reagan administration when the top rates were dramatically reduced from 50% to 25%.

The Goldman Resignation Has Stirred Up Wall Street

The public resignation that was published by the NYT has stirred up debate about investment banks. The PR reaction by Goldman has been predictable. The CEO denies the charges and the motivations of an employee who only has a salary of $500,000 is questioned as well. He must be a disgruntled employee if that is all that he earns. Goldman will still be able to recruit bright graduates who could be doing more economically valuable work, and few will leave Goldman even if they agree with accusations. They accept the culture as it was described, and they have become dependent upon their large paychecks. The biggest problem that it creates for Goldman and other investment banks is the effect that it might have on their lobbying to neuter the Dodd-Frank reform bill and the Consumer Protection Agency.

Wednesday, March 14, 2012

Climate Smart Farming In Rwanda Shows What Can Be Done By Small Landholders

This article by the President of Rwanda describes how his country increased food production by a factor of four over the last 5 years. Most of the farming is done by small landholders who implemented climate smart sustainable practices. They used manure in place of fertilizers and they used terracing to conserve water. He argues that small landholders could duplicate this around the world with proper training.

Higher Tax Rates May Cause The Top 1% To Work Harder

I posted a critique of Alan Meltzer's recent article in the WSJ that suggested that growing income inequality in the US did not require any political response because it was a global problem and not unique to policies in the US. This article explains why Meltzer's claim leads to a conclusion that he and his fellow conservatives will not like. If one accepts the claim that income inequality is rising even in country's with very high tax tax rates, it is devastating to the conservative argument that high taxes will cause those with high incomes to reduce their efforts which will slow down economic growth. If that were true, their incomes would not be growing fast in high tax countries. Perhaps higher tax rates will even make them to work harder. In fact, the top marginal tax rates were double our current rates when we had our our highest rates of economic growth.

Private And Public Morality Are Different

Robert Reich looks at the GOP campaign which is based upon the private values that many American's share. He argues that government's role is enforce and shape public values. It is not in the business of imposing private values on its citizens, He then tells a story about the erosion of public values that should concern us. This article provides an excellent lead into the two posts below which is about many of the point raised by Reich.

A Goldman Sachs Executive Explains His Resignation

This confession by a Goldman Sachs executive painfully gives his reasons for resigning his lucrative job at Goldman Sachs. He describes a culture that has eroded from one in which serving the customer was the right way to become successful, into a culture where the dominant goal is to get rich. The confession reads a lot like "Liar's Poker" which told a similar story about the culture at Salmon Brothers which led to its demise. I'm sure that there are many at Goldman who feel the same the way about the culture of the company. But culture has a strange way of influencing behavior. It can make bad things seem like good things to those who have absorbed the culture. How can things be bad when everyone does the same thing, and everyone gets handsomely reward for doing so? I'm sure that most of the writer's friends at Goldman will call him a traitor and refuse to accept the value system that they associate with "losers". There are winners and losers in their worldview, and the winners are meant to take advantage of the losers. Only jerks identify with losers.

This op-ed will cause the PR Department at Goldman to work overtime, but I doubt that it will have much of an impact on the culture at Goldman. I also doubt that it will affect Goldman's ability to attract recruits from the top colleges in America who have based many of their decisions on how to best land a job at Goldman or another investment bank that has a similar culture. That is where the gold is stored that must be captured to provide the "good life".

Tom Friedman Reviews A Good Book On The Future Of American Capitalism

Tom Friedman summarizes the messages in recent book by David Rothkopf who writes that we are engaged in a contest between different versions of capitalism. The American version of the mixed economy has been the dominant version of capitalism but it is in competition with other versions. On the one hand, the American version is being threatened by internal factors that weaken the successful relationship we had between business and government. It is also being threatened by other forms of capitalism, where government and business have been working together to develop strong economies. In order to win the contest between different versions of capitalism, America must rebuild its successful version of the mixed economy. We can't win if the internal contest is between those who want a free market economy, with a limited role for government, and those who cannot agree upon the structure of he mixed economy.

After stating the problem raised in Rothkopf's book, Friedman ticks off a list of things that require our attention. It is hard to argue against most of things on his list. In fact, they seem a lot like the policies that our current president ran his campaign on in 2008. Friedman argues that we need to have an informed debate on these issues so that we can get to work on the things that need to be done. That brings us to the real problem in America that is raised by Rothkopf. Our political debates look more like a TV reality show. We have an uniformed public, and a set of problems that can't be effectively addressed by an electoral system in which one of our major parties is dependent upon misleading the public over the issues that should be on the table. In other words, the issue should be over the future of democratic capitalism and not about contraception. That is not likely to happen in an America in which the selection of our leaders depends upon their ability to raise almost unlimited amounts of money in order to run effective marketing campaigns. Democracy is not supposed to be about selling soap.

Tuesday, March 13, 2012

McCain's Campaign Manager Admits Mistake In Selecting Palin For Ticket

Steve Schmidt was John McCain's Campaign Manager in the 2008 presidential campaign. He admits that selecting Sarah Palin was a big mistake. He believes that she was not prepared for the VP position and that it became apparent during the campaign. He also argues that she has done nothing to prepare herself for leadership in the last four years and that it would be a disaster if she were to become a GOP leader. I don't think that a large segment of the GOP base would agree with him. Those voting in the GOP primary this year are still strong Palin supporters.

Corporate Leaders Today Are Different Than They Were During Great Depression

This article describes the role that business leaders had in supporting federal programs to end the Great Depression. The Chamber of Commerce, and many in government, believed that deficit reduction was the best way to deal with the Depression. FDR shared that view. In 1937 he raised taxes and cut spending in order to balance the federal budget. That made the Depression worse than it was in 1929. This hurt our large corporations that depended on domestic demand for their products, and they encouraged FDR to take stronger actions to end the the Depression.

The CEO's of our major corporations have a different outlook today. They no longer depend upon the domestic market as they did in the Depression. This is what the Business Roundtable, which includes the CEO's of our large corporations, recommends that we do to restore economic growth in the US. It reads like a wish list for making them more profitable and for reducing the role of government. They oppose banking regulation and major parts of healthcare reform even though they complain about the increasing cost of providing health insurance to employees. They want to reduce healthcare costs by using tort reform to limit malpractice suits and they favor using market forces to reduce costs. In other words, they sound like conservative republicans on most issues. Their strongest argument was for reducing corporate taxes.

Pell Grants No Longer Serve Their Intended Purpose

Krugman picks up on a point made in the post below. He posts a graph that shows how that Pell Grants, which had enabled low income students to attend college, have not kept up with the cost of attending college. He suggests that we ask pundits, who place education at the forefront of their strategy for improving US economic competitiveness, if they are in favor of increasing the value of Pell Grants.

Education's Role In The Reproduction of Privilege

This article describes how the education system reflects and reinforces the existing structure of society. It no longer serves as the means for upward social mobility that it once was. Family differences in income are now a stronger predictor of college completion than race. We now have a large segment of white males who feel left out of society.

Roubini Predicts Greek Exit From Eurozone

Roubini predicts that Greece will eventually have to leave the eurozone and that Portugal's time in the woodshed is coming. He also sees continuing weakness in the US and slowing growth in China as it adjusts to an internal consumption based economy. Roubini calls them as he sees them. He was called Dr. Gloom when he predicted the bursting of the housing bubble and the financial crisis. He is really sticking his neck out on this prediction, but Greece is in turmoil and its hard to see a way out of its problems.

Monday, March 12, 2012

The Trust Deficit In Europe

Barry Eichengreen argues that trust is a necessary lubricant for the changes that are required in the eurozone. He describes the areas where he believes that trust has been eroded and he explains why restoring trust is critical.

Joe Stiglitz Worries That Good Job News May Lead Us In The Wrong Direction

Joe Stiglitz is worried about how we might respond to the recent jobs report. We have heard the "green shoots" story several times in the past, and there are good reasons for being skeptical about the outlook for a return to full employment. He describes the problems that he sees in the economy and he points out how difficult it will be to attain a growth rate that would be required to substantially reduce unemployment. We could become satisfied with a 7% unemployment rate.

Sunday, March 11, 2012

We Have At Least One Recession Proof Industry

The recent report on job growth was encouraging. Growth in the healthcare sector was an important contributor to total job growth, but the trend in the growth of healthcare jobs has been remarkably consistent. Demand for healthcare is fueled by an aging population and the availability of private and public insurance to pay for the healthcare needs of an older population.

Altruism May Be Good For The Top 1%

Jared Bernstein observes behavior within the top 1% that may affect its potential future gains. Henry Ford believed that paying higher wages to his employees enabled them to purchase his cars. In our global economy that is no longer true. Multinational corporations are not as dependent upon on the incomes of domestic employees as was Henry Ford. Profits in their international subsidiaries are increasing as a share of total profits. That may make them less concerned about what happens domestically, but it may be short sighted. He uses some data on altruistic behavior from biology to support his appeal for corporate altruism, but I doubt that this will provide many converts to his cause. We may be engaged in a self destructive game, but unless the rules and the incentives in the game are changed the game will continue to be played as it is now.

The Cost Of College Education Is Rising While Entry Level Wages Are Falling

Its difficult to increase access to higher education when tuitions keep rising and state funding for education is falling. This article attempts to explain tuition inflation. Education, like many other service industries, has not experienced a rise in productivity. Despite low growth in productivity, colleges must pay wages that are competitive with wages paid in more productive industries. Colleges also compete for prestige, and competition for academic super stars has led to wage inflation. The super stars get large salaries and they get lower teaching loads. This problem, however, primarily affects a relatively small number of research universities.

Whenever wages grow faster than productivity there is bound to be wage inflation, and that is part of the tuition inflation explanation. There are other factors at work as well. Colleges also compete for students by providing amenities for students. Even small colleges must invest in athletic facilities, and provide funding for athletic teams that do not pay for themselves. Salaries for administrators have risen as well, and the number of non-teaching employees has also grown. Overhead costs have grown even faster than the cost of instruction in most colleges. Colleges have increased the number of less expensive adjunct faculty to contain the cost of instruction, but they have had to supplement the services ordinarily provided by full-time faculty with non-teaching employees.

This article only touches on the problem of tuition inflation, but it introduces another problem that deserves attention. Wages offered to new college graduates have seen little growth in recent years. A small number of prestigious colleges produce graduates who are recruited by consulting firms and investment banks which pay very high salaries, but graduates from less prestigious colleges have a low probability of landing those jobs. The graduates from low tier colleges have even experienced a decrease in their entry level wages. Many do not even get job offers. They end up taking jobs that would ordinarily have been filled by high school graduates. We may be producing more college graduates than our economy demands, and the number of higher paying jobs for recent graduates is declining along with the number of middle level managers employed by major corporations.

Saturday, March 10, 2012

Russia's Rising Middle Class And Rising Demand For Democracy

The charts in this article illustrate the growth in Russia's middle class. It is double edged sword for Putin. Some of his support is due to improvements in the Russian economy during his reign. On the other hand, the rise in the middle class has already increased demand for more participation in politics and democratic reforms in Russia.

The GOP Response To Job Growth Is Predictable

Job growth in the US comes at a bad time for the GOP. It has done what it can to slow down economic recovery prior to the 2012 election. Therefore, the growth in jobs is due to the greatness of the US economy. It is able to recover despite the anti-growth policies of the administration. I would not give all of the credit for job growth to administration policies, but it has done what can be done to mitigate the effects of the GOP's anti-growth policies. The GOP has spent 4 years betting on high unemployment this November. Its focus on deficit reduction, rather than high unemployment, was part of its decision to put political interests above those of the national interest.

Is The 1% The Same Everywhere?

Alan Greenspan argued that his policies had nothing to do with the US financial crisis. He pointed to financial crises in the rest of the world and claimed that it was a global phenomenon. The conservative economist, Alan Meltzer, made a similar argument about increasing income inequality. This article points to data which suggests that pattern of inequality growth in the US is not explained by common factors in the global economy. The growth in the share of income in the US is greater than it has been in similar countries and some countries have had little growth in income inequality. The 40 year stagnation in median household income growth is also unique to the US. Moreover, the growth in the top 1%'s share of income cannot be explained by arguing that the global economy has placed a premium on rare skills possessed by the top 1%. The growth in executive income in the US surpasses that in the rest of the world substantially. Are US bankers and Enron executives that much smarter than those in the rest of the world?

The bottom line is that conservatives will do what they can to deflect attention from factors unique to the US. If that is successful, there will be no need to examine policies in the US that have contributed to income inequality. More importantly, it will impede efforts to develop policies that might reverse the trend in the US.

Can Friendship Between Merkel and Legarde Resolve Their Differenences?

This article devotes a lot of space to the personal relationship between the head of the IMF and Germany's Chancellor, as well as a snapshot of their different backgrounds and their paths to leadership positions. It does, however, provide a short summary of some of the issues that lie beneath a solution to the economic problems in the eurozone. The IMF would like to raise $1 trillion to support countries in financial difficulty. It believes that this will discourage speculation on interest rates. The IMF also would like the strong economies to use pro growth policies to compensate for slow growth in the rest of the eurozone. Merkel believes that the firewalls will give the debtor countries a false sense of security and impede their efforts to make the necessary structural reforms that will make them more competitive. Austerity is the path to success. German leaders are also suspicious of advise from American leaders. They believe that the administration is focused on the 2012 elections and that recession in Europe may affect the US economy prior to the election. Merkel also has to deal with political sentiment in Germany which is against sending money to the troubled economies.

Friday, March 9, 2012

This Is Not Your Father's Republican Party

This article in Foreign Affairs describes the decline of the moderate wing of the GOP. The changes in the GOP are represented by the differences between Mitt Romney and his father who represented the moderate and more progressive wing of the GOP. Romney's father would roll over in his grave is he were able to observe the contortions being made by his son in order to win the support of the current GOP base.

The article is well written and it describes an ongoing problem for America. This is no longer a party that is concerned about governing in the national interest. One observer described the party under George Bush as a well muscled party without a head. Indeed it may be a party that would like to lead a nation with an electorate without a head. It is a dangerous party that has the potential to disrupt the operation of government even if it fails to take over the awesome power of the state.

The Battle For Control Of The State And The Survival Of Liberal Democracy

This article, takes advantage of the recent efforts of the Koch brothers to take over the libertarian Cato Institute. It does so to encourage a more general debate about the future of liberal democracy in America. The far right views the state as an evil monster than must be contained and/or controlled. The left views the state as an agent for the interests of powerful businesses. The question is whether the state will be controlled by extremists on the right or the left, or whether liberal democracy can effectively manage the state to serve the interests of the greater public. The author of this article, based upon our failed efforts to reform the banking system, has a dim view about the prospects for liberal democracy in the US. He will be engaged in a debate with his colleagues who believe that liberal democracy will survive and prosper in the US. This will be an interesting and informative debate. It is really about the future of America and perhaps about the direction of history.

Rising Gasoline Prices Are Responsible For Falling Home Prices On The GOP Campaign And At Berkeley

One of the strange ideas coming out of the mouth of Rick Santrorum as he campaigns for the votes of the cognitively challenged, is that rising gasoline prices are responsible for the fall in home prices. He argues that homeowners are unable to pay for their mortgages because more of their income is needed to purchase gasoline. He then argues that Obama's energy policies are responsible for rising gasoline prices and for the problems in the housing market. Its no wonder that Santorum also campaigns against higher education. His campaign is dependent upon ignorance.

While we are no longer surprised when Rick Santorum speaks nonsense, we are surprised to learn that a Berkeley economics professor shares Santorum's view that rising gasoline prices are at the root of the housing crisis. Perhaps the state university system in California is showing the signs of budget cuts more quickly than one might imagine. In any case, this article also examines the evidence for the relationship between gasoline prices and housing prices and exposes the problems with that theory.

What Does A G-Zero World Look Like?

This article describe a world that lacks leadership on global economic and political issues. It argues that this is a recipe for an unstable world that is becoming less able to provide economic prosperity and security.

England and then the US once provided that kind of leadership which provided important public goods. Political and economic issues in the US, Europe and Japan have made it more difficult for them to cooperate on important global issues. They can't agree on the details for reforming the global financial system, or on how to deal with global warming or the political unrest in the mid-east. Moreover, the G7 has become the G20 in order to reflect the rising importance of emerging nations. The G20 is more diverse on many issues than the G7, and while the US, Japan and Europe are focused on their own problems, the emerging nations are primarily concerned with the next stages of their development. That is the G-Zero world observed by the author. It is a world without international leadership.

Ignorance Is Strength

Krugman is concerned about higher education in the US. The recession has led to a 12% reduction in state support for higher education over the last 5 years. California, which has some of the best state colleges in the the US, has cut spending by 20%. These cuts come during a time of rising tuitions and fees. They have increased by 70%, adjusted for inflation, over the last decade. (This trend has been accompanied by a rapid rise in student loan debt, which now exceeds the level of credit card debt in the US.}

Access to higher education has been a traditional American value. It has been the means for economic mobility, and it is viewed as a necessary condition for maintaining national competitiveness. Support for education has not been one of the themes of the GOP primary campaign. Rick Santorum has campaigned against higher education on the unsubstantiated grounds that it encourages secularism. It is not surprising that Santorum would adopt that stance, given that his target market in the GOP base denies global warming and the theory of evolution. Romney's lukewarm comments about education may reflect a greater concern about support for higher education within the better educated segment of the GOP base. In a global labor market, well educated employees are available at a lower cost than similarly educated Americans.

227,000 Jobs Added In February In US

The February report from BLS is encouraging. The unemployment rate, however, remains at 8.3% and some are concerned that the unusually warm winter may have pulled jobs in that would ordinarily be reflected in April. The unemployment rate did not increase because more are looking for work. That is also encouraging.

Wednesday, March 7, 2012

Krugman's Lisbon Speech Wins Over A Krugman Critic

Karl Smith explains why Paul Krugman's Lisbon speech made him change his mind about Krugman's attack on fresh water economists.

Nordhaus Provides Detailed Refutation OF WSJ Article On Global Warming Denial

The WSJ found 16 scientists to argue against global warming, They improperly interpreted data from the Yale economist, William D. Nordhaus, to reach their conclusions. This made Nordhaus angry. This is a detailed refutation of the claims made in the WSJ. He provides data that refutes each of their six reasons for being skeptics on global warming.

Krugman Is Concerned That One Of The Good Guys Wants Austerity In US To Spur Structural Reforms

Paul Krugman despairs because a good guy makes the case for austerity in the US. Krugman is less sure that structural reforms are needed in the US, and he has a less rosy outlook on the US recovery. It will take the US 4 years to reach a 5.5% unemployment rate if we add 179,000 jobs per month. Should we accept 4 more years of high unemployment?

Mankiw's Defense Of Romney's Taxes Is Criticized In More Detail

James Kwak provides his critique of Greg Mankiw's defense of Mitt Romney's tax rate on his gains as a private equity manager which are taxed at the capital gains rate of 15% and not at the 35% tax rate for labor income.

In an earlier post I ignored the points raised by Kwak in order to show the subtlety in Mankiw's defense. It was only necessary for him to make the point that it is difficult to define a capital gain in some of the examples that he gave. Kwak, argues that Ronmey provided labor in achieving his gain at that it should be taxed at the ordinary income rate.

One could go further and ask whether Romney had any capital at risk. The rationale for the lower tax rate for capital gains is to encourage risk taking. One could take this a step further and ask why the gains from labor should be taxed at a higher rate than the gains from capital investment. They were taxed at the same rate prior to GOP tax "reforms". Neither Mankiw or I went that deeply into the topic.

Tuesday, March 6, 2012

A Tale of Two Depressions

This article on how we have responded to the Great Depression and the Great Recession is a good lead into the following post on Paul Krugman's speech in Lisbon.

Paul Krugman's Speech In Lisbon On The Failures Of The Economics Profession In Great Recession

Paul Krugman's speech in Lisbon provides his analysis of the economics profession failures to deal with the Great Recession. He does a great job in pulling it all together. He does not believe that the profession is guilty of not predicting the GR. He does find it guilty of not understanding the growing role of the shadow banking system and the excessive use of leverage, and the dangers that they created which led to the financial crisis.

He also argues that practical and wise business people, and many experienced investors, have an intuitive understanding of how the economy normally operates which is adequate for normal business cycles. We don't need economists in normal periods. They were needed in the GR and the profession let us down. The DSGE models that are widely used in macroeconomics were not as useful as the older IS-LM models which did a better job of predicting what would happen, and in explaining why fiscal policy was even more important when the private sector was deleveraging. The DSGE models are essentially based on the failed real business cycle model with the addition of sticky prices and sticky wages.

There is normal tendency of politicians, who spend lots of time with practical business people, to look to them in a crisis. That was a big mistake. Their experience is less useful in abnormal periods. They encouraged politicians to make the mistaken analogy between how families respond to a fall in revenues and what government should do. The GR was not the time for government to tighten its belt. The GR is essentially a problem of depressed aggregate demand, and restoring business confidence is not the solution for increasing aggregate demand. Businesses respond to demand. They invest when spending is high and they hold back on spending in periods of weak demand. Economist's familiar with the IS-LM model were better prepared to provide advise to government.

Krugman is also critical of the role played by "fresh water economists", particularly those from the University of Chicago who revived Say's Law, which had been disproven long ago, to argue that government stimulus spending could have no impact on the GR. They provided lots of help to politicians who shared their view that government intervention in the economy only made things worse. The GR led to lower tax revenues and increased federal spending on transfer payments. Fresh Water economists aligned with politicians who used the resulting budget deficits to attack spending on social programs that conservatives have never liked. They put the focus on deficit reduction when we should have been paying more attention to aggregate demand and high unemployment.

The Koch Brother's Seeking Greater Control Over Cato Institute

This article describes the effort by the Koch brothers, who founded the libertarian Cato Institute 30 years ago, to tighten the link between Cato and other advocacy groups funded by the Koch brothers. The Koch brothers are suing Cato, in their home state Kansas, which gives them a better chance for gaining legal control. They have also stopped contributing to Cato's annual fund drives. The Cato institute has generally supported the GOP on economic issues but it has more independent on social issues such as gun control, same sex marriage etc.

This battle between Cato and the Koch brothers is part of an effort by the Koch brothers to extend their influence over non-profits that are useful to them economically. Super PAC's such as American's For Prosperity, which were empowered by the Supreme Court's Citizen's United decision, are effectively replacing the Republican National Committee as the leadership of the GOP. The Koch brothers have also funded and organized the Tea Party which has had a dominant role in the GOP primary campaign.

Monday, March 5, 2012

Greg Mankiw Comes To The Defense Of His Client Mitt Romney

Greg Mankiw argues that it is not easy to distinguish a capital gain from ordinary income. His client, Mitt Romney, is being criticized because his income, that comes from his private equity firm, is taxed at the 15% capital gains rate instead of at the 35% tax rate for ordinary income in Romney's tax bracket. His defense is like that of those who deny global warming. They don't have to prove that it does not exist. They just have to argue that there is uncertainty about how to interpret some of the data.

Mankiw also misleads us by writing that the capital gains tax rate has varied over time. This too is a correct statement of fact. On the other hand, it is also a fact that it was once taxed as the same rate as ordinary income, and that the tax rate on capital gains has been reduced substantially in recent years by GOP administrations. The changes in the tax treatment of capital gains are not random historical events. The downward trend is a statement about how the tax burden should be shared. Warren Buffet, who benefits from the cuts in the capital gains tax rate, claims that it is unfair. Fairness is not a concept that is used by economists. Mankiw, and others, argue that it is a normative concept and that economics is a positive science that nothing to add about questions of fairness. He just wants us to be fair about how we view his client.