Monday, April 30, 2012

Why The Unemployed Do Not Choose To Be Unemployed

Nancy Folbre does what I did not bother to do when I posted the article by Casey Mulligan who blamed the unemployed for being unemployed.  His argument, which appeals to many better off Americans, is contradicted by most of the available labor market data that is cited in this article.  Casey Mulligan believes that those who can't find jobs are not looking for them because they prefer unemployment benefits to working.  I don't know why he studied economics when he prefers to consult his belief system for his conclusions about economic issues.  Perhaps it is an easy way for him to earn a good living and win praise from those who fund the economics department at the University of Chicago.

Obama Is Attacked By Ads That Lie About His Green Energy Policies

This article by Fact Checker describes two large ads that are being used in battleground states against Obama.  They make false claims about the administrations program to fund green energy.  They tell the public that taxpayer money is being used to fund foreign jobs.  The article explains why the claims made in the ads are false.  Unfortunately, millions will watch the ads but few will read this article by Fact Checker.

Corporate money has been funneled into the PAC's that produced these false ads.  The US Supreme Court has made it possible for corporations to spend unlimited amounts on political campaigns.  Their argument is based upon the idea that corporations are people, and that advertising is a form of free speech protected by the Constitution.  Our founding fathers must be rolling over in their graves.  They never imagined that the Bill Of Rights was intended to give corporations the right to free speech.  They also never imagined that advertising, which is very expensive, was a form of free speech.  It is a form of mass communication that is only available to organizations with the required funding. This form of free speech, only available to the few, is the primary method by which the public is informed in election campaigns.  This was not their idea of democracy.

Corporate Control Of The Media Is Recipe For Misinformation

Paul Krugman complained about his appearance on one of the Sunday "News" Shows.  This article describes the predictable outcome of the show.  The panel consisted of several well known individuals with well known policy positions.  The purpose of the show is not to educate the public.  The major purpose of any TV program is to build an audience that can justify high prices for commercials.  It is also important that nothing happens on the show that would upset the corporations that pay for the commercials.  The recipe for all of the Sunday "News" Shows is the same.  The panelists must be will known to attract an audience, and their positions must be predictable.  The entertainment value of the show depends upon the emotions that can be stirred up as each of the panelists argues for their predictable position.  One panelist took the popular position that corporate tax cuts were the answer for restoring growth.  Another panelist was there to repeat the message that he has been paid to provide by his employer for the last 10 years on the need to cut social welfare spending.  It was also important to have George Will represent the Ronald Reagan for sainthood club.  This is what the major media view as balance.  Three conservatives arguing against one of the liberal economists that has achieved celebrity status (and is despised by most republicans).  Of course, Fox News would criticize the show as just another example of the bias of the major media.  Fair and balanced to them would mean that no liberals need apply.

The fact that these Sunday "News" Shows are one of the view attempts of the media to educate the public is unfortunate.  We understand that they are in the entertainment business, but it is a pity that they waste their only effort to inform the public on this kind of nonsense.  It is also unfortunate that this is what the public has come to expect.  They enjoy a good fight before the Sunday sporting event provides the next competition.

Larry Summers Makes The Economic Case Against Austerity In Europe

Larry Summers explains the consequences of the focus on sovereign debt reduction in the eurozone.  It will not encourage bond investors to purchase sovereign bonds at higher prices because they understand that the ability to service the debt is dependent upon tax receipts.  They also know that spending less and saving more does not increase tax receipts. He argues that the eurozone needs a growth policy rather than a debt reduction policy. The implication is that the creditors will be better off if growth enables the debtors to service their debt.  A growth policy in the eurozone will require the surplus nations to stimulate growth, so that aggregate demand in the eurozone expands. Current policy in the eurozone is a recipe for recession and deeper problems.

Destroying The Future In Order To Benefit The 1%

This article describes the impact that our current political economy is having on the young.  Youth unemployment is around 50% in Spain and it is also very high in Ireland.  In the US even college graduates have a difficult time finding permanent jobs.  Even worse, many leave college with large amounts of debt that was used to fund their education.  Over time this will destroy the incentive for many families to invest in an education.  This is taking place at the same time that many of the pundits are proclaiming that education is the path to future success for individuals and for national economies.

In the US the response to this problem from the future GOP candidate for the presidency reflects the political economy of that party.  The future of US economy is dependent upon cutting taxes for corporations and for the super rich. Low taxes will retain the corporations in the US and they will encourage the super rich to work harder to create jobs.  In order to bribe the corporations and the super rich to invest in job creation, and to be fiscally responsible, it is necessary to cut spending on education and other social programs.  The future of the economy is not dependent upon investing in the young.

The political economy of limiting access to education is limited social mobility.  Among other things, education is a sorting mechanism in the economy.  Many job opportunities are only available to those with the appropriate academic credentials.  Consequently, the future for many of the less fortunate will also be limited.  The implication of this political economy is that it is better to have a less well educated population than a well educated population.  A highly educated population with limited job opportunities is dangerous.  Third world countries, that can't afford to invest in higher education, are a better model for the US to emulate.

How Rich States In US Transfer Money To Poorer States

This article contrasts the transfer of money from rich US states to poorer US States with efforts to do something similar in the eurozone.  It is not obvious to most citizens that this is done in the US.  That is one of the reasons, perhaps, why most of those in poorer states oppose government programs that redistribute wealth.   They also tend to vote for the GOP because of its opposition against a big federal government.  The eurozone has more difficulty dealing with the politics of income transfers for a variety of reasons.  One of the reasons, may be because it is more transparent in the eurozone.

For those who are interested, there are links to interactive graphs that breaks federal government transfers beneficiaries down to the county level.  There is also a graph that shows which states are net receivers and net givers of federal funds.

Saturday, April 28, 2012

A Thoughtful Conservative Perspective For A Change

We don't usually hear from thoughtful conservatives.  They are a rare breed today.  This interview gives one of them a chance to tell the thoughtful conservative story.

Government Spending Decline Has Been Drag On Economy

This graph shows that government expenditures on goods and services has been a drag on GDP.  Federal government spending has been affected by the winding down of defense spending in the mid-east.  State and local spending has also declined.  Personal consumption spending and business investment have been good.

Joe Stiglitz Tells Us What's Wrong In The World Economy and What to Do About It

Joe Stiglitz answers a lot of questions in this interview by The European.  His answers are thought provoking, as usual.  He puts a lot of the blame for our economic problems on the economics profession.  He argues that free marketer's provided the academic support for the liberalization of finance that led to the crisis.  They failed to predict the problems that arose, but their faith in the ideal of free markets has not been affected by the failure of their belief system.  He also articulates the problems in the US political system that undermine democracy.  The good news is that the root causes of its dysfunction are small in number.  The bad news is that they are not easy to change.  Things will have to get worse in order to arouse the public to make the changes.  He expects that they will get worse because the current policies in Europe, and in the US, will make them worse.

He makes a good distinction between rent seeking industries, e.g., finance, drugs, extraction, defense contractors, and other industries.  They are the industries that depend upon government policies that enable them to extract economic rent.  They get most of their political support from the GOP but they spread their money around.  Both parties depend upon political contributions to finance their campaigns.  He alludes to the potential for a third party to stir things up, but he does not go very far into a discussion on how that might work.

He points out the good things about the German Model in Europe. Its social welfare programs have kept the economy moving during a slowdown, but it is an export economy, and it is not possible for all of the nations in the eurozone to emulate the German model.  Exports and imports have to net out to zero.  Some countries must be net importers.  He extends the good aspects of the German model to the Scandinavian countries. They along with Germany, have shown that social welfare programs are not inconsistent with economic growth and prosperity.  He is very critical of the argument that social welfare programs are unaffordable.

He is also critical on our exclusive focus on GDP as the measure of economic success.  He believes that social welfare is more important than the gross output of an economy.  He gives many reasons why American's are less well off despite the growth in GDP.

Friday, April 27, 2012

Paul Ryan Leaves Ayn Rand For The Republican Version Of Christianity

Paul Ryan ran into problems when he made a recent presentation at Georgetown University.  In response to criticism that he worshiped Ayn Rand, and not the view of Jesus held by many of the catholic's at Georgetown, Ryan denounced Ayn Rand as an atheist who he admired in his youth.  The audience was not receptive to Ryan's claim that his politics are inspired by his religious faith.  They argued that Christ was not a Social Darwinist. Their faith is predicated on a view of Christ that is foreign to many Republicans who favor the super rich over the needs of the poor.  Paul Ryan and Rick Santorum have a faith inspired version politics that is inconsistent with the views of many who have devoted their careers to serving those in need.

Bloomberg Raises Questions On CEO Pay Methodology

This article (via Manan Shukla) questions the $69.9 million compensation awarded to the CEO of CBS.  It argues that CBS inflated the award by using much larger companies in the comparisons used to determine the award.  I think that it is important that Bloomberg is providing coverage on this topic.  The problem is that it only scratches the surface of the problem.  Comparisons that inflate the awards are only a small part of the problem.  Corporate boards, especially their compensation committees, are in the business of serving the CEO who often appointed the board members.  Warren Buffet, who has the strange view of basing compensation on  performance that is under the control of the CEO, claims that the boards on which he serves, keeps him far away from the compensation committee.  The compensation consultants, that are hired by the compensation committees, are selected for their skill in justifying the compensation level desired by the CEO and the compliant compensation committee.

The Clash Of Economic Ideas

This is a review of a book on the subject of economic ideas.  It might be interesting to many who see the clash of economic ideas in our current debates on how to deal with financial crises, global recession and globalization.  The book frames the clash of ideas as a debate between Keynesian's, represented by Paul Krugman who is a prominent and vocal New Keynesian, and those of Hayec and his followers. This sometimes warps into a battle between those who threaten and defend freedom.

The reviewer does not like the way that the clash of ideas is framed.  He does not believe that New Keynesian's accurately reflect the views of Keynes because they leave out the role of money, which was important to Keynes, in their interpretation.  He has his own critique of Keynes which focuses on other matters.

He has a similar distaste for Hayec and his followers who saw government as the potential enemy of freedom.  He is institutionalist who places  an emphasis on the development of democratic institutions and their potential to resolve the conflict between government and freedom.  He also believes that money matters, and that central bankers play an important role in the economy.  If there is a lot of money in the economy, somehow it needs to be managed.  The only question is how it is managed.

I found the review interesting and informative. Perhaps because I share the writer's view that New Keynesian's have primarily accepted the classical view of economics, with the addition of sticky prices that keep markets from clearing.  I also have a strong distaste for debates that are framed around freedom.  I generally avoid any discussions that emanate from those who base their positions on the maximization of freedom.  I like the phrase in one of the popular songs which suggests that "freedom is just another word for nothing left to lose".

An Explanation For The Declining Relationship Between Productivity And Wage Growth

This article provides an analysis that locates the three wedges between productivity growth and wage growth. It is important to understand this problem because economists have traditionally based wage growth in increases in productivity.  They did so because growth in productivity was shared equally between capital and labor for much of the post-war period.  Since this relationship no longer obtains, it is suggested that productivity growth is only related to potential wage growth.

Larry Summers Dislikes Comparisons Of Romney's Imaginary Budget With An Imaginary Obama Budget

This op-ed pits one prominent economist against another prominent economist.  Glenn Hubbard is one of the prominent economists on Romney's team.  He followed the other prominent economist on Romney's team, N. Gregory Mankiw, in using the WSJ editorial page to make the economic case for their client.

Larry Summers, who was an adviser to Obama, argues that budgets should contain numbers.  The Congressional Budget Office (CBO) is an independent agency that uses numbers to score budget proposals by government.  The CBO analysis of the Obama budget proposal uses the numbers to score the budget and concludes that it puts the budget on a sustainable long term path.  Hubbard ignores the CBO analysis of the Obama budget and imputes numbers to the budget that are based upon his own assumptions.  He also makes assumptions about numbers, that are not provided in the Romney budget, to conclude that the imaginary Romney budget is superior to the imaginary Obama budget.

Larry Summers is only one of many economists who have made a similar case against Hubbard's preference for imaginary budgets.  Most economists like numbers.  Someone once said that economists are persons who are good with numbers, but who do not have enough personality to become an economist.  Hubbard and Mankiw are both very good with numbers.  Unfortunately, they prefer imaginary numbers when they put on their Team GOP uniforms.

Smokeless In The Netherlands

A judge in The Hague ruled that marijuana can no longer be sold to foreigners after May 1 in parts of The Netherlands.  Amsterdam will be excluded from the ruling until next year.  He based his ruling on the grounds that the foreigners who were attracted by access to marijuana were a source of crime.

The ruling has come during a period in which legalizing the use of marijuana is being debated in the US. It is being opposed in The Netherlands by the coffee shop owners whose businesses will be affected.  It is also being opposed by those who argue that discrimination against foreign residents is illegal. Many of them believe that it is in violation of the traditional libertarian ethic in The Netherlands.

It will be interesting to see how libertarians in the US respond to the legalization debate.  I doubt that the typical  Tea Party member will support legalization.  There are limits to their libertarian views.  Many in this group come from the same segments of US society that supported prohibition against the use of alcohol.

The Virtues Of Fiscal Austerity Debated In German Press

This article in Der Speigel provides the views of a wide spectrum of opinion found in the German press.  The opinions tend to reflect the political perspectives of the major papers.  The German Chancellor, however, remains firm in her belief that more debt will not solve the debt problem.  She has been supported in this view by the French President Sarkozy, who is behind in the polls to the socialist candidate in the May elections.

There is no easy solution to the crisis in the eurozone.  The structural problems inherent in the union were not easily perceived as long as the economy was doing well.  Unfortunately, the Irish and Spanish banks over invested in real estate.  The bursting of the real estate bubble led to recessions, budget deficits, and banking crises in both countries.  Their efforts to deal with their sovereign debt problems did little to solve the problem of slumping demand. Neither country is able to fix their banking crises without external support.  The amount of support that will be required in Spain will stretch the limits of the external support structures available to the government.

Thursday, April 26, 2012

Economists Share Some Of The Blame For Our Economic Crisis And Weak Recovery

This article by Dani Rodrik shows that it is not always easy to determine the actions that special interests might take to achieve an objective.  He gives several good examples of how that has worked for businesses and for nations. He argues that economists blame special interests for all of our problems.  The powerful always get what they want.  There is some truth to that, but economists played an important role in providing academic cover for liberalization policies that led to the financial crisis.  They have also played a role in legitimizing the failed idea of expansionary austerity.
This graph tells a story that should help Obama deal with GOP criticism of his economic policies.  It shows real GDP, with 2003 normalized at 100, and compares it for the US, UK and Eurozone.  The have had similar recessions but real GDP has recovered much better in the US than in the two other economies.  The red line shows that the UK economy flattened out after Cameron took office and used expansionary austerity to grow the economy. The Eurozone has also flattened out as austerity was imposed on the debtor nations.

Wednesday, April 25, 2012

Wage Deflation In The Eurozone Has Been Very Slow

This article shows that wage deflation has been very slow in the eurozone. This means that neither of the two prongs of the eurozone strategy has been working to restore growth. Austerity has not increased investor confidence in sovereign bond offerings, and internal wage deflation has not made the troubled economies more cost competitive.

One of the comments to the article reminds us that Keynes did not believe that wage deflation was the solution to recession. He argued that falling wages only reduced consumption further and lowered aggregate demand. One of the major differences between the Neo-Keynesians and the Neo-Classical economists is the Neo-Keynesian assumption of sticky wages. Without the assumption of sticky wages, there is not much difference between them and the classical economists that Keynes criticized. Things would be even worse if wages were not sticky according to the real Keynes. Does anyone really believe that lower wages in Southern Europe would turn their current account deficits into surpluses?

British Economy Is In Worse Shape Than It Was In Great Depression

This article contains a graph posted by Paul Krugman. It shows that the recession in the UK is worse than it was in the Great Depression. The recovery has taken much longer.

Europe Has A Recession Strategy When It Needs A Growth Strategy

Dr. Doom does not mince words. In this article he claims that fiscal austerity is necessary after growth has been restored in Europe. The imposition of austerity during a period of slowing economic growth is recipe for recession. Moreover, austerity plans have not increased the willingness of investors to purchase the debt of countries in recession. Sovereign debt is becoming more expensive in the distressed countries. He predicts that social unrest is bound to be disruptive as well.

What Bad Things Will Happen If The Tax System Is Made More Progressive?

Conservatives have lots of arguments against raising the taxes of the super-rich. This article reviews many of these arguments and examines the evidence for them. You may have some fun sharing them with your conservative friends. Its bound to create a lively discussion.

A Satirical View Of The Political Economy Of 2111

I posted this essay because it contains some words of wisdom and some humorous commentary on the human condition. The following quote is one example, but he is careful to distribute his caustic comments in many directions. " Golden parachutes of CEO's will be designed not to open when they depart after disastrous reigns." I'm sure that his comments will gore at least one of your oxen.

A Good Example Of Twisted Economic Thinking

I posted this op-ed by an economist at the University of Chicago, who has been regarded as a Nobel Prize candidate, because it demonstrates how  good minds can be distorted by their economic belief system.  I'll let you wrestle with the argument that he makes in this article.  It totally depends upon the assumptions that he makes about human behavior.  I don't know what planet he lives on.  He should take a vacation from the University of Chicago and mix it up with the real people that he describes in this op-ed.

British Economy Slips Back Into Recession

GDP growth was negative for the second consecutive quarter in Britain. This is a rare double dip recession in Britain and it is not good news for the Cameron government. It has bet on austerity to boost the economy. The government has argued that austerity would boost business confidence and encourage investment. The return to recession has had a negative effect on confidence. Businesses are more responsive to consumer demand than they are to government budget figures.

Wall Street Banks Face A Tough Economy

This article (via Manan Shukla) describes the slowdown on Wall Street. The big banks are seeing less M&A activity and new regulations have reduced trading, Bonuses have been cut and layoffs are being contemplated.

Tuesday, April 24, 2012

A Picture That Describes The TARP Program

This link is to a picture (via Manan Shukla) that describes the $700 billion TARP program authorized by Congress to save the financial system. Only $431 billion, or 60% of the authorized amount was disbursed. The picture shows what programs received disbursements and the cost or gain from the program. The net cost thus far is $22 billion.

The picture is easier to read if it is enlarged.

Apple Continues Rapid Growth in Q2

Apple reported its Q2 results and surprised Wall Street on the high side. Revenues are up 59% over the year ago quarter. Sales were driven by the iPhone and iPad which grew rapidly in the quarter. 64% of Apple's revenues came from international markets. The Asia-Pacific area accounted for 25% of total revenue. Apple's market capitalization remains the highest in the world. It is dominant in the mobile market, and it keeps coming out with new features that stimulate sales.  Sales of the iPhone grew 88% to 35 million units in the quarter.  The iPad more than doubled its sales to 11.8 million units.

There Is No Crime When MF Global Loses Track Of $1.6 Billion Of Customer Money

This article (via Manan Shukla), describes the chaos defense being used to cover up the loss of customer money that MF Global was not legally supposed to use for its own account.

Housing Prices In US Are Back To Where They Were Ten Years Ago

This graph speaks for itself. The rate of decline has decreased but they continue to fall. Prices are back to where they were a decade ago.

Note that price growth was relatively flat prior to their rapid rise during the boom in the financialization of the economy. This may mean that they will remain flat for some time after they reach the trough.

Is Dynamic Capitalism Inconsistent With The Welfare State?

One of the common themes within, the GOP, is that the US has a more dynamic economic system than Europe. Therefore, it grows faster and has higher per capita GDP. The assumption is that the US economy benefits from free markets, and the European economy is held back by its investments in human welfare. The US favors markets over security and Europe favors social welfare at the expense of economic growth. One of the problems with this contention is that it is not true. The evidence for and against the claim is reviewed in the article. On the other hand, slower growth in the US and in Europe will make it more difficult to fund social welfare programs.

Social welfare programs in the US are primarily a problem of the rising cost of healthcare programs. Healthcare price inflation, and increasing demand from an aging society, has been a burden to government, but it is also a burden for households which pay higher premiums for their share of the increase in insurance premiums. Unfortunately, it is not possible in the US to deal with this problem rationally. Insurance companies and healthcare providers put their interests ahead of the social welfare. They have had more influence over healthcare reform than a poorly informed public.

Lessons From Spring Meetings of IMF and World Bank

Jeff Sachs reports on the meetings of the IMF and the World Bank. We are moving to a multipolar world in an era of global economic problems, and deepening concerns about sustainability. It is not a pretty picture.

He begins with some data which show how the global economy has shifted. Europe's share of global GDP was 31% in 1980. It was 20% in 2011 and it projected to be 17% by 2017. The share of global GDP held by the US was 31% in 1980. It fell to 19% in 2011, and it is projected to be 18% in 2017. Global GDP growth has been fueled by growth in emerging markets. Particularly in the BRIC economies comprised by Brazil, Russia, India and China.

The IMF may require more funding in order to deal with potential problems in the eurozone. The BRIC nations are willing to help, but they demand a stronger policy role in the IMF which has been dominated by the Europe and by US. Since the US is struggling with its economy, and its political dysfunction, it is not willing to provide more funding to the IMF.  Moreover, even if the BRIC nations are willing to help, they are primarily concerned with their own problems which differ from country to country. We have a global economy, with serious problems, but there is less leadership in a multipolar world.

Increasing demand for commodities, as well as speculation in commodity markets, has raised commodity prices. Since there are constraints on supply, without raising the marginal cost of production, prices will continue to rise. This contributes to a sustainability crisis in which the global economy is vulnerable to supply shocks and ecological instability. The solutions to the sustainability problems require global cooperation and leadership. There is nothing close to the global leadership that is required to deal with the global problems that we face.

Sachs did not discuss another problem that we face because of the declining place of the advanced economies in the global market. As their share of the global economy falls, the nation states will have to deal with difficult transitions. It will be increasingly difficult for fragile democracies to provide the leadership that will be required. On the other hand, multinational corporations have benefitted from the growth of global economy. It has contributed to cost reduction and the expansion of their markets. There will be increasing tension between the nation states and their relationships with large corporations which have little real nationality.

How Do We Create A Socially Useful Financial System?

This link is to a presentation by Dirk Bezemer who is a professor at the University of Groningen. It is one of the presentations at INET that I found most interesting. It was one of the presentations on building a socially useful financial system.

He defined a socially useful system as one which supports real economic growth. It could be growth in the green economy, or something else, but he decided to keep it simple. Credit can be used to grow the real economy of goods and services, and it can be used fund asset purchases. He argues that too much credit has been used to fund asset purchases. Ordinarily, one unit of credit debt is required for one unit of GDP growth. In the US 4 units of credit supported 1 unit of GDP growth. Most of the growth in credit was supporting asset growth. This leads to excessive leverage in the economy and other problems associated with the financialization of the economy.

The financialization of the economy leads to systemic problems which includes: instability, income inequality (money is sucked to the top of the income pyramid), less investment to the real economy, and higher levels of capital flows to international markets. Interest payments, or debt overhead, also increase. This slows growth in the rest of the economy.

He argues that instead of saving the financial sector we should be shrinking it. Austerity is not the solution because GDP falls faster than debt. This creates a vicious cycle in which the debt to GDP ratio increases, and more austerity is required. He supports this claim with data from IMF studies of countries that used fiscal austerity to reduce the debt ratio.

International capital flows, encouraged by liberalization, have flooded the asset markets and elevated the prices of commodities and other financial assets. Most of the problems in the eurozone are related to asset bubbles in the private sector.

He is also critical of the use of quantitative easing by central banks. The purchase of bank assets by central banks has increased bank reserves, which provide a cushion for the banks, but it has not increased credit to the to the real economy of goods and services.

He concluded by arguing that regulations, which discourage credit to the financial asset sector, would create a more socially useful financial system. This will be resisted by the banking sector because growth in debt is good for bankers. It will encourage growth in the real economy, however, and it will prevent some the problems of systemic risk in a financialized economy.

Monday, April 23, 2012

The Tea Party Revolt In The GOP House Of Representatives

This is a summary of a book on the freshman class that turned the House over to the GOP. They were elected by the tea party zealots and they are not willing to compromise. The book highlights the problems that they created for the House leadership which bears the responsibility for governing. Many in the freshman class have no understanding of the issues that they are dealing with. Ideology is what drives their decision making.

Occupy Wall Street Is Much Stronger In France

This article highlights the difference between politics in France and the US. All of the candidates have strong negative feelings about banking, and some propose much higher tax rates on the top 1% than are even thinkable in the Democratic Party.

Marine Le Pen got 20% of the vote in the French election. She represents the far right in France. Her party shares some of concerns that are common in the US Tea Party but she also went after the banks. The other difference is that her party has not been incorporated into the Conservative Party in France. The Tea Party in the US has become a force within the conservative party in the US, otherwise known as the Republican Party.

Romney's Campaign Depends Upon Blaming Obama For The Bush Recession

Mitt Romney appeared at a drywall factory in Ohio that was closed during the Bush Administration. He blamed the closing on the Obama Administration's economic policies. In this article, Paul Krugman points out all of the reasons why the Romney campaign depends upon the forgetfulness of the American public. Even though he believes that Obama could have done more to restore economic growth, he points out that the GOP blocked almost all of his efforts to deal with our economic problems. Moreover, the policies that they advocate are primarily a return to policy's of the Bush Administration that produced many of our economic problems. The Bush tax cuts, for example, have been a major source of our budget deficit problems. The rise in transfer payments, in response to the Bush recession, is the other major source of federal budget deficits.

I have been intrigued by the ways in which the GOP reconstructs history to their advantage. We had an economic boom, and budget surpluses in the Clinton administration. The GOP claims that this was the result of changes made by the Reagan Administration. Clinton's policies had nothing to do with the economic growth and budget surpluses. On the other hand, the recession and deficit problems, that Obama has been faced with, have nothing to do with the 8 years of Bush Administration policies. If you scratch a Republican, most of them will agree with the GOP version of history. They will not accept any view of history that is inconsistent with their belief system. Of course, they receive a steady diet of historical revisionism from the conservative propaganda machine that reinforces their belief system.

The First Round Of French Election Results

This article describes the political situation in France following the first round of elections. There will be a face off between the socialist candidate, Hollande, and the incumbent President Sarkozy. The strong showing of the right wing candidate may help Sarkozy if he can siphon off some the votes from those who agree with him on several law and order issues. On the other hand, Sorkozy has lost much of his popular appeal.

The political mood in France reflects the tensions in the eurozone between those who believe that austerity is the solution to rising sovereign debt, and those who would like to grow their way out of the debt problem. More generally, however, there seems to be a concern that the problems faced by the national government will not be resolved by the election. Some of the issues are eurozone issues, but there is also a concern that the political system is not capable of responding to the divisive issues that have emerged in many of the advanced economies, including France.

Dutch Government Falls After Clash Over Budget

The conservative Dutch coalition government was unable to reach agreement on the 2013 budget. It is required to reduce the deficit to 3% by the new eurozone fiscal policy agreement. Its current deficit projection is over 4% and it must determine a combination of spending cuts and tax increases to conform to the eurozone agreement.

The Netherlands is in good fiscal shape relative to other nations in the eurozone. The failure of the Dutch government shows some of the political problems that have surfaced in the eurozone. The debt agreement was set in Brussels and it constrains fiscal policy. Interest rates on sovereign debt are affected by external credit agencies, and monetary policy is determined by the ECB. The failure of the Dutch coalition government was partially due to the unwillingness of one of the coalition political parties to accept the loss of sovereign control over state policies.

Sunday, April 22, 2012

Six Term Conservative Senator Faces Primary Challenge

Orrin Hatch has been a Republican Senator from Utah for as long as I can remember. It is unusual for an incumbent senator to face a primary challenge in order to run for office. There are usually good reasons for this. Seniority is an important factor in determining a senator's role on important committees. A senior senator has more influence over decisions that might benefit the home state. Senator Hatch joins the long term incumbent senator from Arizona, John McCain who also faced a primary challenge. Both of these senators have impeccable conservative records but they are not conservative enough for the Tea Party. McCain won his primary, and Hatch will probably win his primary challenge, but the Tea Party will have served its purpose. It is driving the Republican party further to the right.

This article provides a good lead into the following post which is about the radicalization of the GOP.

Is America Governable?

Tom Friedman called up Frank Fukuyama to discuss the gridlock in US politics. This op-ed is his summary of their conversation. The US political system was designed with a system of checks and balances that made it difficult for power in government to be concentrated in any political party. That system works as long as there is enough agreement between the two dominant parties to permit government to govern. As we know, that system is no longer functional, and the problems that it presents do not auger well for the future of America. We have a system in which special interest groups finance the political campaigns and write many of our laws.

Fukuyama has some ideas about changes that should be made that might facilitate governance. The question is whether change is possible. Their discussion assumes that the two parties are equally responsible for the increase that we see in partisanship. My own view, is that one of our parties does not like to share power. It wants to move the country in radical new directions, and it no longer recognizes the legitimacy of the other political party, or its elected officials. It would prefer to capture government totally, and govern the country as a single party. Much of what it does is designed to convince the public that the other political party is not really American, and that it has an agenda for radical change in our society. To test that hypothesis, I suggest that we take a close look at the Mitt Romney of the past, and the policies of his father, George Romney, and compare that with the Mitt Romney that we see today. That comparison will demonstrate the radical changes that have taken place in one of our political parties. If we do something similar and compare President Obama's policies with those of the last democratic administration, we do not see radical changes in policy. On the other hand, Obama's proposal to restore the Clinton tax rates, is described as class warfare, and his effort to make less drastic reforms to healthcare policy than the Clinton administration is described as socialism.

My point is that until we realize that the current Republican Party is not the Republican Party of the past, and that it has the radical agenda for changing our society, we will not be able to make our country more governable. They would like nothing less than a single party system, in which the other party's function is to play the role of the devil that energizes the faithful in the other party.

Saturday, April 21, 2012

What Groups Really Are Affected By High Inflation?

The Washington Post found another op-ed contributor who has no business writing about a topic that only reflects his ignorance about the topic. Thankfully, Dean Baker explains how inflation affects different segments of society. Those living on fixed incomes suffer from inflation because prices go up, and their income does not. However, wages usually adjust to inflation. Baker shows that wages increases are highly correlated with the inflation rate. That is bad news for the writer of the op-ed who argues that inflation is bad for workers. Those who lose the most from inflation are creditors. They purchase bonds or lend money at fixed interest rates. Those assets become less valuable with inflation.  Most workers have mortgages. Inflation is good for them because they can pay back their debt with dollars that have less purchasing power. That is true, as well, for countries with sovereign debt. Inflation enables them to pay back their debt with cheaper currencies.

Most of what Dean Baker writes about inflation is taught in introductory economics. The Post seems to prefer op-ed writers who reflect the positions of its editors. Many of them would get an "F" in economics 101.  The editors of the Post want to protect creditors from inflation, by appearing to defend the interests of ordinary American's.  

Income Inequality In America And The Financialization Of The Economy

This article in The Financial Times, tells us that $10 million trophy homes in Aspen are selling well to oligarchs. The market for homes below that price level has fared worse. The housing market in Aspen reflects the reality of income inequality in America. That raises questions about the sources of income inequality in America. To answer that question, the article focuses on a book being published by Jamie Galbraith. Since 23% of the growth in income has gone to the top 1%; he tries to determine how that has happened. His research shows that most of the gain has gone to those in the financial industry. The financialization of the US economy has been driving income growth to the top 1%. Swings in asset prices, and the use of leverage to amplify the returns from betting on the swings, is the major source of income growth to the top 1%.

We Can't Measure Achievement So Why Spend Money On Higher Education?

David Brooks decides to change the debate about higher education. Pundits like Tom Friedman tell us that the future of America is dependent upon winning the education race. The world is flat, and only the best educated nations will be able to compete in the knowledge economy. Others are concerned that price inflation, slow wage growth, and lower government support for higher education, stand in the way of Friedman's challenge. In this article, David Brooks tells us that students may not be learning anything important in college. He supports that claim by selecting research that supports his position. He challenges colleges to provide more information to "consumers" so that they can make better decisions about whether to make the investment in higher education. Perhaps government funding for higher education ought to be dependent upon the ability of a college to demonstrate that learning has taken place. Apparently, passing examinations on the courses that they have taken is not enough for him. That only raises the question about alternative measures of student achievement. We could have that discussion for the next thousand years. In the meantime we should not be worried about improving access to higher education. "Consumers" should not spend money on something that is difficult to measure, and neither should government.

Friday, April 20, 2012

Redefining The Role of Business

This is a report on a conference at the Aspen Institute. It contains many good observations on how to redefine business beyond the narrow focus on short term shareholder value.

Spanish Stock Market Cap Is Down 60% From Its Peak

This article provides a graph that shows the the Spanish stock market index has fallen by 60% from its peak in 2007. It is continuing its fall in recent months. The loss of wealth in Spain due to bursting of the real estate and stock bubbles is enormous. The unemployment rate and the loss of wealth in Spain is more like what occurred in the Great Depression. Even worse, the Spanish government has no control over monetary policy and the value of its currency. That is what it was like in the Great Depression under the gold standard. Moreover, the Spanish government is in no position to use fiscal policy to boost aggregate demand. On the contrary, the government has been required to cut spending.

An Analysis Of Government Spending During The Recession

This article (via Mark Thoma) provides some interesting data from a recent study by the Federal Reserve Bank of Cleveland. It shows that total government spending on goods and services, that are a part to GDP, is lower than it was in the 1970's. That is primarily due to the effect of the recession on state and local spending. Government transfer payments have risen by over 4% as a result of the recession. They are not used in the calculation of GDP.  They contribute to consumer spending, however, which would have been lower in the absence of transfer payments. The increase in transfer payments, due to the recession, is close to the share of government spending on defense.

Political Rhetoric In The US Has Gone Over The Top

This op-ed in the Washington Post describes some the rhetoric from conservatives that has been make possible by the current cultural and political climate. The rhetoric has the intent of delegitimizing the democratic party and progressiveness in the US. This happened during the Clinton administration, and it started in the Obama administration even before he took office. A large percent of republican voters still believe that he is not a US citizen. The silence from GOP leaders on this rhetoric is deafening. Unfortunately, Allen West's rhetoric has been well received by voters in his Florida district, and he was widely cheered during his speech at the recent CPAC meeting in Washington. Perhaps West is an example of the new norm in the GOP.

Income Inequality And The Radicalization Of The GOP

Slate has serialized the Krugman/Wells article in the Occupy Handbook. This is the first part of the series. The basic theme is that income inequality and political inequality are causally related. As the super rich became even richer, their political influence grew and it became centered in the GOP. Therefore, the war against the use of Keynesian fiscal policy by the GOP, is the result of growing income inequality and the increased political influence of the super rich.

One of the problems with this analysis is that there is a long history of conservative opposition to Keynes. Krugman and Wells report some of that history. They remind us that William F. Buckley demanded that Yale should not teach Keynesian economics in the 1950's. They also describe one of the reasons why capitalists oppose state intervention in the economy. The ability of the state to increase purchases during a recession takes control of the economy away from capitalists. Without state intervention, they could control the economy, and employment, by altering their investment decisions. Since there is a long history of opposition to Keynesian theory by conservative economists and politicians, Krugman and Wells explain the strong opposition to Keynesian stimulus during the Great Recession by the ability of the super rich to use their increased wealth to purchase support from the GOP.

In support of that argument, Krugman and Wells provide some evidence from political science which shows that the GOP has become much more conservative in recent years. The party once contained leaders who would be considered liberal today, and they could have discussions with more conservative democrats to broker compromises on legislation. That is no longer possible. Mitt Romney is a good example. He is no longer a moderate republican. The radicalization of the GOP is explained by growing income and political inequality.

I have no doubt that growing income inequality is associated with growing political influence. The question is whether that is the primary reason for the radicalization the GOP. My own view is that the conservative movement, which started in the 1950's with William F. Buckley, and accelerated in response to the anti-war protests in the 1960's, was well funded prior to the recent growth in income inequality. In fact, the policies that led to the growth in income inequality were put in place during the 1980's and 1990's. In other words, movement conservatives have been putting the infrastructure in place to support the radicalization of the GOP, and the American culture, for decades. The takeover of the US House by right wing republicans was made possible by the development of the Tea Party. That was the missing ingredient in the conservative play book. Their investments in conservative think tanks paid off in the world of ideas, but they needed popular support to win elections. The Tea Party was no accident. The organization of the Tea Party was funded by right wing conservatives who understood how to capitalize on populist themes that have had a long tradition in the US. The Koch brothers, and other billionaires who funded the Tea Party, were never short of cash.

Thursday, April 19, 2012

Why The Poor Need To Pay Higher Taxes

This article describes the class warfare of the GOP. They not only want to cut taxes for the super rich, the Ryan budget plan actually increases taxes for the poorest Americans. They argue that the poor need to "have some skin in the game". The poor don't pay federal income taxes but they pay a lot of other more regressive taxes. The taxes they pay relative to their income is actually quite high. The GOP prefers to talk about the about the absolute level of taxes paid by the rich, and the avoid talking about the tax share of total taxes paid relative to income. Of course, since the GOP media present the GOP view on tax policy, many American's believe that poor Americans don't pay any taxes, and the rich pay most of the taxes. The rich do pay for a large portion of the federal income tax, but that is primarily because they have a large portion of the income.

Frankly, I am having a hard time believing that we have gotten to this point in the US. It is no longer the country that in which I was raised. The conservative revolution has been effective in changing the culture in the US. Mitt Romney would not be arguing for federal income taxes on the poor unless he thought that it would get him votes from the electorate. The primary campaign is over and he no longer has to appeal primarily to the loony's in the GOP base. His message is targets the so called independent voter, who is independent for a good reason. They don't have any strong political beliefs and they can be sold a bill of goods by the GOP.

What Kind Of World Will Our Grandchildren Inherit?

This article examines the forecast for our grandchildren's lifestyle by looking at 10 major themes that will determine the outcome. The themes that were selected are important themes and it is not easy to predict how they will interact. The dominant theme is the growing desire that people have across the world to have a more important role in influencing government. The US has historically played an important role in spreading democracy. Recent trends in the US, however, create some uncertainty about its important role in accelerating the movement towards individual rights. It is also difficult to determine how our current generation will act to determine the world that future generations will inherit. Will this generation take the necessary actions to deal with population growth and climate change? In other words, does the movement towards individual rights include the rights of future generations? I think that the questions raised in this article are thought provoking. It is worth a read.

A Hard Look At The Crisis In Japan And Its Political Economy

Japan has reputation of operating under a strong predisposition to consensus. This article describes the economic and political chaos in Japan today. At a very general level, there is political disenchantment in Japan with politics as usual. This has led to a populist revolt that is similar to that of the tea party in the US. There is also a movement away from the consensus that led Japan in the direction of a version of capitalism more similar to that of the Washington Consensus. That is, privatization and liberalization of the economy. The nuclear crisis in Japan is at the root of disenchantment with government, but it has also created a major economic problem. Japan had 30 nuclear power plants before the disaster; today only one is operating and there is a strong popular sentiment against the use of nuclear energy. Since Japan has no domestic source of energy, it must import energy, the price of electric power is on the rise. Many fear that rising energy prices will cause domestic manufacturing to migrate to countries with lower energy prices. The potential loss of manufacturing exports, and the need to import energy, may put an end to Japan's trade surplus. Its no wonder, given these problems in Japan, that consensus is on the wane.

Why Has There Been So Much Opposition To Government Stimulus In The US?

This article raises an interesting question. That is, why has there been so much opposition to the use of government stimulus to moderate the effects of the recession in the US? Paul Krugman and Robin Wells argue that it is the result of income inequality in the US. Income inequality increases political inequality. and the elite have opposed the use of Keynesian policies. That does not ring true to the authors of this article, and they explain why. They provide some interesting references to the use of Keynesian stimulus by right wing governments, and they don't understand why the elite should oppose government interventions that would increase demand for their products. Moreover, they argue that the elite has always favored government intervention in the economy when it enabled them to extract rents. They don't really prefer laissez faire economic policies. Even republican presidents have used Keynesian arguments when it served their purposes. Nixon, Reagan, and more recently, George Bush used Keynesian arguments to sell tax cuts during slow economies.

The evidence is against the explanation given by Krugman and Wells. Two other arguments make more sense. In the first place, conservative economists, since Milton Friedman, have worked hard to reverse the dominance of Keynesian theory in economics. They have been trotted out by republican politicians whenever it has been useful to them. The Senate Minority leader said that the main objective of the Republican Party was to insure that Obama was a one-term president. Much of their opposition, and rhetoric against stimulus was in support of their goal. They want to run against a president who they can label as a socialist, whose economic policies have slowed down the recovery from the recession. Moreover, they can run as the fiscally responsible party, in opposition to the "tax and spend" democrats. They have accomplished their objective.

Wednesday, April 18, 2012

Are DSGE Economic Forecasting Models Very Useful?

This article debates the relevance of the DSGE models that are used by most central banks to make economic forecasts. It may interest some who are studying economics or who have a general interest in the subject. One of the discussions compares it to forecasting the weather. Someone once said the the purpose of economic forecasting is to make weather forecasters look good. There is much truth to that comment. They don't base their forecasts by making assumptions about molecular behavior and aggregating them. Weather forecasting has gotten much better because forecasters can observe weather patterns via satellites. They can also change their forecasts when there is change in the observed patterns.

The Economics Of The Future Will Be Dominated By Economies of Scale and Network Effects

This article describes the role that new technologies have had in transforming the publishing market. It also makes a more general point about many of our important markets today. Many of them benefit from economies of scale and network effects. Competition is not about price, or even product features, after a firm captures the dominant share of the market. For example, Amazon sells e-books which have zero marginal cost. Every additional e-book that it sells is pure profit. The economy of scale is almost infinite.

Network effects are also very important in many markets. Once a product gains market share, it becomes the dominant platform that attracts others who add value to the product. Apple's mobile devices are a good example, the value added by application developers and hardware providers and others, makes it difficult for competitors to compete in the mobile market.

Facebook provides another example. It has 850,000,000 members in its social network. New businesses have emerged, and will continue to emerge, that attempt to capitalize on the Facebook social network. Its hard to imagine how a new competitor in the social network market will be able to compete with Facebook. Moreover, the growth and development of businesses like Facebook present some issues for the labor markets of the future. Facebook has become a very large company in terms of revenue, but it employs a relatively very small number of people. It purchased a company which has technology that will help them in the mobile market for $1 billion. That company employed 14 people.

Why Greg Mankiw's Textbook Is Not Sold In A Perfectly Competitive Market

This article makes an important point about Greg Mankiw's claim that his $170 textbook, which is the required text for his class at Harvard, is subject only to free market competition. Federal government copyright law is the only thing that prevents students from scanning the text and selling $5 copies of the text.

This brings me to another point that I will expand upon in the future. One of the major forms of competition between corporations is over intellectual property. Copyrights and patents provide important protections from market forces. The development of intellectual property, and the defense of intellectual property and trade secrets, is one of the most important activities of business. This will only become more important as the technical content of products increases, and they are sold across national boundaries. Intellectual property may be replacing capital equipment, or ownership of the means of production, as the backbone of capitalism. Firms and nations with intellectual property deficits will be seriously disadvantaged in the knowledge economy.

A Summary Of The IMF Economic Forecast For 2012-2013

Olivier Blanchard, the Chief Economist at the IMF, explains the IMF economic forecast. Global growth, led by emerging market countries, will be 3.5% in 2012 and it will improve slightly to 4.1% in 2013. The major risk in the emerging markets is their dependence on exporting to the advanced economies that will experience low growth. Nevertheless, China will grow by 8.2%; India by 6.9%; Brazil by 3.0%, and Russia by 4.0%

Growth will be slow in the advanced economies. It will be 1.4% in 2012 and 2.0% in 2013. The US will grow by 2.1% in 2012 and grow slightly to 2.4% in 2013. As one might expect, the eurozone will have negative growth in 2012 and grow less that 1% in 2013. Risks in the eurozone are also the biggest question mark in the forecast. Fiscal consolidation is necessary, but so is economic growth. The hard problem is trying to figure out how to grow the economy in the short term, while dealing with longer term sovereign debt problems and global imbalances.

Mission Impossible In Spain

Wolfgang Munchau, writing in the Financial Times, gives his analysis of the problems in Spain. He argues that the major problem lies in the dominant belief system held by leaders in the core economies. They believe that austerity and the attainment of debt to GDP goals will persuade investors to purchase Spanish sovereign bonds and lower the cost of debt service in Spain. He does not agree with the core leaders. Investors have responded to announcements about austerity goals by selling their Spanish debt. A growing economy is more able to repay its debt than a shrinking economy. He then speculates about how eurozone leaders will deal with the likely problems that are likely to ensue in Spain. His focus is on the need for recapitalizing the Spanish banks and in reducing the size of the financial system in Spain. Neither of these will be popular in Spain or in the core countries.

Tuesday, April 17, 2012

Spanish Bank Deposits Are Falling

This graph shows that deposit flight in Spanish banks has made them dependent on support from the eurosystem to fill the deposit gap. Spanish banks have been the biggest purchasers of Spanish sovereign debt. They will need continued eurosystem support to continue with their sovereign debt purchases. If that is not possible, Spanish interest rates will rise and put pressure on the treasury.

The IMF Is Concerned About The Lack Of Aggregate Demand

This article reviews the IMF's latest report. One feature of the report is the recommendation that strong countries do their job to stimulate demand. This is not the time to tighten fiscal policy. It favors a tax and spend policy that can balance budgets while increasing demand.

The 10 Fastest Growing Industries

This article reports on the 10 fastest growing industries. Most of them are small industries and they tend to grow faster than larger industries. The counterexample is the generic drug industry. It is very large and it has grown fast for 10 years. Green industries have also grown fast and they are projected to continue rapid growth even as government subsidies wind down. Several of the fast growth industries reflect changing lifestyles and consumer tastes. The fact that for-profit colleges are on the list indicates something about rational consumer behavior. For-profit colleges are more expensive, they have a low graduation rate, and students leave with high debt burdens and a lower probability of job success. Good marketing can compensate a lot for bad products.

State Tax Rates Are Not A Factor In Migration Between States

This article (via Mark Thoma) examines the migration myth raised in Greg Manikiw's op-ed. A conservative funded organization (ALEC) made the same point that Mankiw made in his op-ed. it argues that people will vote with their feet and migrate from high tax states to low tax states. Mankiw, claims that this kind of competition between states is an efficient market like that faced by most businesses. The data indicates that some people may migrate for that reason but that it is not common. There are more important factors that determine where someone chooses to live. Moreover, there has been migration from low tax states to high tax states.

Federal Reserve Research On The Impact Of Credit On The Business Cycle

This article, from the Federal Reserve Bank of San Francisco, explains why the economic models used by central banks were not useful in forecasting the Great Recession. The DSGE models do not include the credit market. The credit market contributed to the Great Recession, and it has had a predictable impact on the recovery. Credit expansion relative to GDP was greatest in those countries that experienced the steepest declines, and they have also experienced the slowest recoveries.

Monday, April 16, 2012

Meet The Economists Who Provided The Data On Growing Income Inequality

This article is about the two French economists who provided much of the data that brought attention to growing income equality in the US. They also argue the the Buffet Rule that is being promoted by the Obama administration, and which the GOP calls class warfare, does not go far enough towards reducing post-tax income inequality. Their research also shows that GOP claims about the negative effect of tax hikes on super rich are without foundation. A good way to tell whether economists have done something useful is the have the WSJ attack them. Saez and Pikketty have achieved that status.

Apple Computer's Market Capitalization Versus Spain, Portugal and Greece Combined

This graph shows that Apple's market capitalization is about to become larger that that of all of the publicly traded companies in Spain, Portugal and Greece.

Dean Baker Describes Federal Policies That Redistribute Income Upwards

Dean Baker provides another perspective on the article written by Greg Mankiw in support of his client, Mitt Romney. Mankiw argued that democrats favor a federal monopoly because they want to redistribute income. Baker points out that the federal government has done many things to redistribute income upwards. The GOP is quite happy with the upward redistribution. It only opposes downward redistribution.

If Nothing Is Done By Congress, Everyone's Taxes Will Rise and The Economy Will Sink

This article reminds us that if nothing is done about tax policy by Congress, the US could be on its way to a double dip recession. Everyone's taxes would increase. This coupled with federal spending cuts, would shrink aggregate demand.

The US faces longer term issues that raise questions about tax policy, spending, and budget deficits. The GOP is unwilling to consider tax increases as part of a deficit reduction plan. Gridlock in Washington is likely, no matter who wins the election.

Robert Reich Argues That A Fair Economy Is In Everyone's Best Interest

Robert Reich argues that a fair economy is essential for growth. A more progressive tax system would enable government to make needed investments in infrastructure that will facilitate growth. It will also put more money into the hands of people that will spend it. Reich uses Germany as an example of country that has successfully done what the US should do. My concern with Reich's proposal is that it will fall on deaf ears in the US. The GOP has turned the state into the enemy of the people, and the super rich in the US no longer depend upon the success of the US economy. Their money has no national home. It easily moves to the best opportunities wherever they may be.

European Policies Only Make Things Worse For Spain

Krugman is not happy with the policies imposed on troubled states like Spain. He calls Spain's current situation a depression. He argues that fiscal austerity will only worsen its depression. Bankers will not lower their interest rates to an economy that is in depression for a good reason. They want to see economic growth that will increase their ability to service the debt. He also reminds us that the bursting of Spain's housing bubble led to its economic problems. Public debt, prior to the housing collapse, was below the eurozone average. He also has difficulty understanding the central banks concerns about inflation during a recession in Europe.

Sunday, April 15, 2012

Greg Mankiw As Romney's Propaganda Minister

Greg Mankiw, shows us in this article, that he would have made a good propaganda minister. He has been trying to figure out a way to distinguish between his client's healthcare policy in Massachusetts and that of his opponent's healthcare plan that many in the GOP base have been taught to hate. His solution is to argue that people are free to migrate from states and localities if they do not like state and local laws. Therefore, there is competition between state and local governments which is like competition in business. On the other hand, it is not as easy to migrate from one's country. That gives the federal government monopolistic powers. If you don't like Obama's healthcare law, which is like the Massachusetts healthcare law, citizens are not as free to reject the product on offer. They can't vote with their feet.

Mankiw's argument, on behalf of his client, is clever but it ignores the fact that there has not been a mass migration from Massachusetts as a result of Romney's healthcare bill. The public reaction, and the consequences of the bill, have been highly favorable. The citizens of Massachusetts have spoken with their feet. The favorable market reaction in Massachusetts implies that it is a product that should be more widely available. The GOP efforts to discredit the plan appears to be purely political. It would be like preventing a business from selling a product nationally that has been tested by the market reaction in Massachusetts. His argument also suffers from another flaw. HIs client does not want to cut our national defense budget. Support for the defense budget is stronger in some states than in others. Should citizens in states that would like to reduce the defense budget be allowed to exercise their freedom by reducing their federal taxes accordingly? That would provide competition for the federal monopoly and it would maximize consumer choice and economic freedom. Maybe his client would argue that some monopolies are good for the country.

Mankiw goes a bit further with argument based on the goodness of market competition. He argues that conservatives like competition, and they would like more competition in government. According to Mankiw, liberals prefer a federal monopoly because they believe that government should do more than providing services to its citizens. They want to redistribute wealth. Citizens who oppose redistribution are not free to migrate from the country. Their only recourse is to elect his client, who does not want to redistribute wealth or income. The election is really about the maximization of individual freedom. As someone once said: "The poor should be perfectly free to sleep under bridges."

I like the way that Mankiw has framed the 2012 election. Should we maximize the freedom of Americans to sleep under bridges or we should we restore the progressiveness of the federal tax system? I think I know how the market will respond.

Another CEO Myth To Laugh About

Dilbert provides us with some laughter about the the imperial CEO. The CEO is just another emperor with no clothes on. Corporate boards, which consist primarily of other CEO's, are the one's who see the CEO clothed in full regalia.

Day Two At The INET Conference In Berlin

Mark Thoma sends us this link to the video presentations at Day Two of the INET conference. I intend to comment on some of them.

Saturday, April 14, 2012

Countries Most Affected By Economic Crisis in Eurozone Are Having High Suicide Rate

We sometimes forget the real effect of the statistics that we report on unemployment and economic growth and decline. This article reports on the substantial increase in suicides in the eurozone economies with debt problems. Suicide, of course, is an extreme response by those most vulnerable, and those without a strong support structure. Its harder to calculate the anguish of those who are unemployed, or who lost their confidence in their future well being. So much of our identity is associated with our work and our ability to provide for our families.

These tragedies are made worse by an examination of the causes, and the manner in which the crisis has been managed. Banks seeking profit opportunities made too many bad private and public loans. Private and public entities borrowed more that they should have as well. The consequences of over lending and over borrowing have been asymmetric. The shareholders of many banks have seen the value of their stocks decline, but governments have acted to keep most of the banks afloat and most of the bank executives are still working and are being well paid. Moreover, the austerity measures imposed on the debtor nations have exacerbated their debt problems. Some of the suicides, reported in this article, were related to delays in payments by governments to individuals and small business owners.

A Nobel Laureate Speaks About Issues In Economics That Are Also A Topic At INET

This interview of Nobel Laureate Amarta Sen, provides an interesting perspective on economics as a discipline. Some of the themes in his interview have been reflected in several presentations at the INET conference in Berlin.

One of the discussions at INET has been around the goals of economics. Some have raised concerns about the focus on the efficient use of resources. Others have raised objections about the goal of building mathematical models of an imaginary economy which assumes perfect competition, and other a host of other factors that are important in the real economy. Sen favors a broader goal for economics. He argues that the goal should be to have a decent society. People should be able to lead lives that would allow them to be proud and happy. He also expands the concept of freedom beyond the notion of being free from government. Real freedom enables people to have a decent life.

Another of the issues raised at INET, and in this article by Sen, is the absence of economic history in the teaching of economics. He responded to student demand at Harvard by teaching a course on the real Adam Smith. (He believes that US students should have a good understanding of economic history in their own country.) Conservatives have ignored most of what Smith was really concerned about, and focus only on his concept of the invisible hand, which they have used to make the case for free markets. Smith was very concerned about poverty and the need for government to provide public goods. He was an early advocate for public education. Sen and some presenters at INET believe that history provides many insights into how we might deal with economic problems, and that these lessons are not found in our mathematical models which assume perfect competition. Some of these models preclude a role for government intervention in the business cycle. Mathematics is useful in economics but there are some things that cannot easily be understood with mathematical reasoning.

Sen, and several presenters at INET, have also raised concerns about the dominance of finance in our economies. Central banks play a major role in determining economic outcomes but they have been intentionally insulated from political influence, and they have been instrumental in enabling the banking system to play a dominant role in the economy. Several countries in the eurozone have even lost their sovereignty. They are being forced by rating agencies, bankers and others to take actions which are not in their best interest. It is easier to deal with excessive debt by growing an economy. These countries have been directed to take actions that will reduce economic growth and make it more difficult for them to deal with their debt burden.

Sen was not asked about his concerns about global warming in this interview. He, and many of the presenters at INET, are very concerned about global warming and they have raised concerns about the difficulty that we face in dealing with a global economy that does not have effective global governance structures. This is confounded by the inability of many national governments to take unpopular leadership positions . Leadership should be a more important role of government in democratic societies. Many take the easy way out by leaving the hard decisions for those that will succeed them.

Labor Market Convergence Between US And Eurozone

This study uses the employment to population ratio to examine trends in the US and Eurozone (EZ) labor market. The overall trend is one of convergence. The ratio has dropped by around 5% in the US, but it has increased by around 4% in the EZ. The total change in the difference between the US and the EZ of 9%, suggests that the supposed dynamism of the US economy has declined relative to the EZ.

The study also found interesting differences between these labor markets by age and by gender. The ratio for women in the EZ increased by 10%, while the ratio was flat in the US. The ratios are now close to equal. This is because the entry of women into the US labor force began earlier than it did in the EZ.

The ratio for males fell in the US and in the EZ. However, it fell by 10% in the US and only by 4% in the EZ. The convergence between the US and the EZ is primarily the result of a larger decline in the male ratio in the US, and because the EZ caught up to the US in the employment of women. The decline of the male ratio in the US and the EZ is probably due to loss of manufacturing jobs in both economies.

The data on age related employment was also interesting. The ratio of middle aged workers was around 4% higher in the EZ, but the ratio for those over 65 was 12% higher in the US. Middle aged Americans who lost their jobs may have more difficulty in finding employment. It also appears that more Americans have continued to work after they qualify for Social Security.

Friday, April 13, 2012

Smokeless In Seattle

This article describes the opposition to the legalization of marijuana in the state of Washington. Medical use of marijuana was legalized in Washington and it led to the development of a medical marijuana industry. The medical marijuana industry is now opposing the legalization of pot in Washington using the same scare tactics that were used by those who opposed the legalization of medical marijuana. I guess vested interests will always work hard to protect vested interests.

Can Capitalism Survive If Laws Are Not Enforced?

This article brings together some of problems that we have seen in the enforcement of law when it applies to powerful groups together into a theme. The theme is that the lack of enforcement creates the seeds that can destroy capitalism itself. The financial system seldom achieved 20% of corporate profits in the US. Its share rose to 30% at the peak, prior to crisis, and it is now back to the peak. We have an anomaly in which the financial sector, which provides 10% of the value added in the economy, collects 30% of the profits. The growth of profits in the finance industry has been obtained by the use of practices, and the development of products, that are either illegal or unethical, yet those responsible for that behavior have not been subject to criminal prosecution. Whether this will lead to the destruction of capitalism is an open question. Whether this is the kind of capitalism that is consistent with democratic governance and the public good is not an open question.

Day One Presentations At INET Conference In Berlin

Mark Thoma sends us a link to the video presentations made on day one of the INET conference in Berlin. There are bound to be some good ones in this group.

David Brooks Has A Problem With Social Entrepreneurs

David Brooks has a new target. He doesn't like young idealists who want to try out new ideas to create a better world. He prefers Humphrey Bogart. Bogie was no idealist. He could tell good guys from bad guys, and somehow the good guys beat the bad guys. The absence of idealism made Bogie a hero to many in Brook's generation. They were corrupted by idealism in the 60's when they ended the war in Vietnam. Brooks is having deja vu all over again. The social entrepreneurs in the 60's learned about the world from their experiences when they organized to change it. David Brooks joined a conservative student organization that wanted to preserve the existing social order.

Thursday, April 12, 2012

Why A Book Written 150 Years Ago Provides The Best Remedy For Financial Crisis

Brad DeLong provides an abstract of his presentation on the financial crisis and his reasons for believing that a book written 150 years ago provides the best advice on how to deal with a recession triggered by financial crisis. He explains why the typical empirical and theoretical foundations of economics are less relevant and even stand in the way of the best solutions. He also argues that the transmission mechanisms of financial crisis on economic behavior are the same as they were 150 years ago.

The President Of The Minneapolis Fed Believes It is Time To Tighten Fed Policy

This is the first of three posts by regional Federal Reserve members of the FOMC which makes decisions on Fed policy. This speech, by the President of Minneapolis Fed, explains his rationale for making Fed policy less accommodative. He would like the Fed to raise short term interest prior to 2014, and he would oppose a new round of quantitative easing, which is the Fed purchase of longer term treasuries to keep longer term interest rates low.

Economies are always in a state of flux. Some industries decline and others arise to take their place. He believes there have been structural changes in the economy which make it harder to replace lost jobs with new jobs. Households have lost trillions of dollars in housing wealth. This has limited the ability to start up new businesses with their own capital. That would explain why new business formation has been lower than normal. New business start ups are major source of new jobs.

Existing businesses are also reluctant to hire because they do not like to hire new workers and be faced with firing them if the economy should have another shock. He believes that businesses were shaken by the financial crisis and they are still worried about a potential relapse.

He believes that demand is not below the current productive capacity of the economy because the inflation rate has been stable at close to the target rate of 2%. We should have price deflation if our productive capacity was above aggregate demand. Of course, Fed policy has been successfully directed against price deflation but there are signs that it is time to turn away from further accommodation. He expects unemployment to fall to 7% by the end of 2013 and that is closer to the new "natural rate of unemployment" in an economy undergoing structural changes.

Kansas City Fed President Opposes Too Big To Fail Banks

Ester George, the President of the Kansas City Federal Reserve explains the problems with the US banking system that has banks that are considered too big to fail. She makes the case for the Fed to use prudential regulation to insure that government does not have to intervene in the banking system like it did in the last crisis.

Janet Yellen Explains Why Fed Policy Should Remain Accommodative

Janet Yellen, the Vice-Chair of the San Francisco Federal Reserve, gave this speech yesterday at NYU. There has been much discussion within the FOMC regarding the reasons for the slow growth in employment during the recovery. Some argue that we have substantial structural unemployment that cannot be resolved through monetary policy. They would like the Fed to bring interest rates up to their traditional levels. Yellen disagrees with that view and provides her reasons in this speech. She argues that unemployment has been widespread across sectors. Labor force immobility due to "house lock" is also not a factor since renters have the same mobility rate. Therefore, structural factors in unemployment are less of a cause than cyclical factors.

Yellen describes several headwinds that are slowing down economic growth. The major factor is weak demand for new homes. Growth in demand for new homes has been the engine that has driven recoveries from our recent recessions but new home sales have not recovered for several reasons. High unemployment, tighter credit standards for mortgages and the selling off of excess inventory have constrained the sale of new homes.

Fiscal factors have also slowed the recovery. State and local governments have cut spending and the federal stimulus has wound down. The cap that was put on federal spending going forward is also pro-cyclical. Exports to Europe have also slowed due to economic headwinds in Europe.

Since core inflation has been below the target rate of 2%, and because inflation expectations have been normalized, she is more concerned with the employment mandate than she is with elevated inflation. She favors the continuation of near zero short term interest rates until the end of 2014. Unemployment is expected to return to 5.25% by that time.

Wednesday, April 11, 2012

How CEO's Manage To Avoid Taxes On The Use Of Corporate Jets For Personal Travel

This article (via Manan Shukla) describes the waste of shareholder's money, and taxpayer money, on the personal use of corporate aircraft by corporate executives and directors. The personal use of corporate aircrafts is subject to taxation unless it used for security reasons. So corporate boards declare that there is a security risk if their CEO or directors use commercial airlines for personal travel. They also will compensate the CEO for any taxes associated with the use of corporate aircraft for personal travel. Its nice to be king or a CEO these days. It wasn't always this way. The CEO for a large computer company that for which I worked always flew economy class for business travel. He did this because he wanted to set an example for the thousands of employees who traveled on company business. I had friend who operated a travel agency that many of the computer company's employees used to book business travel. She told me that the company's employees were different from the employees of other companies that used her agency to book travel. She said that they always tried to get the least expensive flights. I guess the CEO knew what he was doing. Of course, he was just an old fashioned CEO who was concerned about his stakeholders.

Bill Gates Tells Us That His One Wish Would Be Getting To Zero Carbon Emisisons

This is a link to a TED talk by Bill Gates on what can be done to solve two of our energy problems. One problem is the high cost of energy. The high cost is a real hardship for the poorest 2 billion on the planet. The other problem is global warming. That will create many problems, but it will also create hardships for the poorest 2 billion. They will starve to death because of the impact on their food production. He argues that we need to get carbon emissions down to zero because temperatures will otherwise continue to rise. He then discusses some of the ways to get to zero carbon. Since currently we emit 5 tons of carbon per person worldwide, and 20 tons per person in the US, we need to innovate our way to zero carbon. He discusses several approaches, along with the strengths and weaknesses of each, and ends up with a proposal to do the research that would enable us to burn the wasted uranium from our current nuclear reactors. There is enough wasted uranium stored in a single location in Kentucky that would produce all of the power needed in the US for 100 years. There is enough wasted uranium available from all storage facilities to satisfy the global demand for energy forever. We can even burn the waste from the reactors that use the original wasted uranium. He thinks that it could take 20 years to develop the needed reactors and 20 years to deploy them.

A GOP Congressman Does His Imitation Of Elmer Gantry

This link is to a video of a speech (sermon?) that was delivered at the annual CPAC meeting, which attracts hard core conservatives to hear the latest gospel. The speech is by Alan West who is a republican representative from Florida. West recently, told an audience in Florida that half of the democrats in the House are communists. He equates the Progressive Caucus with the Communist Party that no longer exists. The new McCarthy era is based on the assumption that progressives and liberals are really communists. Conservatives need to invent a devil in order to scare their worshippers. West brought the house down with his sermon that included biblical references and hand waving about our sacred constitution that was under attack from liberals. I hope that this speech finds it way to U Tube. The GOP is even crazier than I had imagined.

Texas Defeats Arizona In Battle Over Apple Computer Campus Development

This post is based upon an a local report of the decision by Apple to locate a research campus, that would employ over 3,000, in Austin, Texas instead of in Arizona. Arizona proposed a package of incentives that reduced the property tax from 20% to 5% and it included job creation tax credits. The total package of incentives is estimated at $10 million. Some of those involved in the contest estimate the incentives provided by Texas at around $21 million. One of the factors in Apple's decision is the availability of highly educated labor from the state university in Austin. Apple had been discussing a partnership with Arizona State University in its study of Arizona sites for the campus. Some officials believe that Apple was predisposed to the Texas site because it already has a smaller campus in the area. They believe that Apple was using Arizona as competition in order to get more incentives from Texas. They claim that Boeing did something similar when it decided to locate its headquarters in Chicago rather than in Texas. In that case Texas was used as the foil to get more incentives from Chicago.

There is something perverse about this whole process. Apple Computer is one of the richest corporations in the world. It has over $40 billion in cash, and its shareholders have benefitted enormously from the rise in Apple's stock price. Texas and Arizona have spent taxpayer's dollars in educating the workers that Apple requires for its campus. Both states have also reduced Medicaid coverage in response to the falling tax revenues. Yet Apple and other corporations demand incentives from states and localities when they consider new locations for expansion. Government's which invested in educating the workers that Apple needs are required to grant tax incentives to Apple and other corporations in order to bring jobs to their states. This is similar to what happens globally. Nations compete with each other by providing incentives to corporations in the battle for jobs.

I recently posted an article on a Harvard study of US competitiveness. That study was based on a survey of 10,000 alumni. My guess is that business executives believe that the battle between Texas and Arizona for the Apple campus location, is their version of national competitiveness. Freedom from taxation and regulations, that add the their cost, is high on the agenda of corporations that are totally fixated on increasing shareholder value. They expect taxpayers to provide them with an educated workforce, and the infrastructure that they require, but they don't want to pay for it. Rich corporations, behaving in this fashion, shift the tax burden to the less fortunate. This is an exorbitant privilege that governments should rebel against. They only encourage this type of extortion by their willingness to enter into this perverse form of competition.