Thursday, May 31, 2012

Tax Policy and CEO Compensation

This graph shows the rapid increase in the use of restricted stock grants and the decline in stock option in executive compensation.  This corresponds with the Bush tax cuts that lowered the tax rate on dividends.  This explains the motivation for the Bush tax cuts on dividends and the rapid shift in executive compensation.  Since dividends are paid on restricted stock grants, there has been an increase in dividend payouts by large corporations.

A Dialogue On The Market System And Pareto Optimization

This mock dialogue on the relationship between Pareto Optimization and the market economy, by Brad DeLong, provides some insights into "value neutral economics" which has a focus on efficiency, and a lack of interest in the maldistribution of the output of the economy. A Pareto Optimum economy is one that does not make someone else better off at the expense of someone else.  It sets the stage for a post below that takes us more deeply into the heart of economic thinking.  I have been getting a bit bored with discussions about the 2012 election and who Mitt Romney will select as his VP candidate.

Tension Between Environmentalists And Climate Change Advocates

While environmentalists, and those engaged in climate change, have some common goals; they are on opposite sides on many issues.  This article outlines some of the differences that make work more difficult for those who promote changes that reduce carbon emissions.  A classic example of this tension is taking place in my area on Cape Cod.  Many environmentalists oppose the construction of windmills for generating electricity.  They certainly have an effect of the environment but they will also reduce carbon emissions. The article discusses many similar examples.  Its difficult to counter the activities of traditional energy providers.  It would be helpful if environmentalists, who are sympathetic to efforts to fight climate change, could turn their attention to the more dangerous problem of climate change.

Ireland Faces National Vote On Eurozone Fiscal Agreement

This article describes the politics in Ireland where voters must determine whether Ireland should cede control over its fiscal policy by accepting the terms that set limits on the use of national debt.  Opponents of the plan are leveraging the imposition of austerity, and its effects on the Irish economy, in its campaign against the treaty.  Government backs the plan and its supporters are primarily driven by the fear of what might happen to an Ireland that has been set adrift from the rest of Europe.

Income Inequality In Canada Today And Tommorrow

This report on income inequality in Canada shows how pre-tax income inequality has grown in recent years.  It also shows how progressive taxation, especially at the province level, has mitigated the effects of pre-tax inequality.  Public support for progressive taxation in Canada has been falling.  That raises a question about the potential effect of growing pre-tax inequality in Canada.

The distribution of occupations in Canada among the top 1% is different from the distribution in the US.  It is more concentrated among top executives and financial professionals in the US.  It is less concentrated in Canada.  Consequently, progressive taxes in Canada affect a more diverse group of occupations.  The politics and economic outcomes from progressive taxation in both countries are very different.

Social mobility in Canada is higher than it is in the US. That is largely due to policies that were put in place many years ago under political conditions that favored social mobility.  If the conditions that favor social mobility in Canada are eroding, we can expect growing income inequality in Canada's future.

The Problem Of Calculating Optimum Output

This post is not for most people.  However some regard it as one of the best posts ever.  It starts out with with the problem of computing the optimum output for a centralized socialist economy.  That is a extraordinarily complex problem that runs into computational limitations. Market systems have their own problems.  It is clear that they do not lead to optimization, and innovation is not determined by the pricing system, or entirely by the profit motive.  Neither the central planning system or the market system work to optimize output.  Moreover, the market system seldom works in the way that is characterized by free marketers.

The comments that follow the article are very good as well.  They are also very different from most of the threads that appear after most of the posts on the Internet.  Most of the comments are very thoughtful, and they are directed toward the core questions that are raised in the post.  There is none of the warfare between folks with different political philosophies which is so common on the Internet.  

Wednesday, May 30, 2012

Why Do Economies Stop Growing?

Michael Spence gives some answers to that question.  He describes some of the persistent problems in developing countries, and he turns his attention to advanced economies.  He perceives three general factors that affect growth in advanced economies.  The first factor is a scarcity of tangible and intangible resources. That problem is exacerbated by our failure to measure important intangibles such as social cohesion.  A second factor might be called political dysfunction.  Problems that are difficult to solve, such as inequality, are a breeding ground for poor policy responses.  Lastly, he discusses policies that might be used to moderate business cycles.  He makes a case for the prudent use of fiscal policy but structural problems must also be addressed as the composition of output changes in an economy.

Adair Turner's Keynote Address

It has been a slow morning for interesting material.  I have been watching some of the videos from the INET conference in Berlin.  This video address by Adair Turner was thought provoking.  He commented on three challenges in the global economy.  While he is not opposed to growth, he argued that the rich countries have enough output to satisfy the needs of its citizens.  He believes that economic stability in these countries is a more important goal than squeezing out an even higher growth rates.  He also believes that manufacturing jobs will continue to fall as a percent of global output.  He likens it to the decline in agricultural jobs as a result of productivity growth.  Productivity in manufacturing will have a similar affect as well as the composition of output.  For example, computer products and other high tech products,  do not require large labor forces.  Globalization is a factor in some countries, but global manufacturing jobs will decrease no matter where products are produced.

Income inequality is another major problem, but it is difficult to change the pretax distribution of income.  He believes that post-tax inequality can be shifted by the use of more progressive tax policies, but he did not spend much time on that topic until the Q&A period that followed.  There were lots of good questions raised in the Q&A.  Inequality will become an even more important topic if the economic pie is not growing.  How the economic pie is divided will become the focus of attention.

The third topic was climate change.  He has been a member of the British group that has been setting the long range emission reduction goals.  He does not think that a purely economic approach to the problem is sufficient.  Even though net present value calculations show that the economic cost is relatively low, it is really an issue of fairness.  We have a responsibility to future generations to leave them an ecologically sound planet.  He is not against carbon taxes, and other means to factor in the true cost of fossil fuel consumption,  but he is skeptical about how well that might work. Again, it is a fairness issue and not a purely economic issue.  The Q&A on this topic was very good.  Climate change was one of major topics discussed at the conference and there were lots of well informed questions raised.

I also was interested in the way that Turner delivered his address, and how he dealt with questions.  Its hard to imagine a more confident and polished speaker making a presentation to a very knowledgable and critical audience.  Its easy to see why he has been so successful in his multifaceted career.

Tuesday, May 29, 2012

Why The British Government Should and Can Reverse Fiscal Policy

Martin Wolf's article in The Financial Times argues that the British government made a mistake by imposing fiscal austerity on an economy in recession.  He explains why it was a mistake and he explains how it can be undone.

Putting A Value On Domestic Output That Is Not Included In GDP

This article explains why a household with one person employed that earns $50,000 per year has a higher standard of living that a household with two employed members each earning $25,000.  In the second household, the value of household production, which contributes to living standards, is lower.

One of the most important outputs of households is their contribution to the development of human capital.  We don't measure it, but our economy would not be as productive without it.  Some economists argue that productive parenting is among our most important inputs into human capital development.  I would argue that productive parenting is also an invaluable input into formal schooling.  Any teacher will second that point.

Cameron Government Retreats From Low Carbon Energy Policy

This article describes the methods by which the conservative government has neutered the national plan to reduce carbon emissions.

The MIT Economic's Department's Family Tree

This picture of the relationships (via Paul Krugman) between economists who either studied or taught as MIT is amazing.  Seven members of this family are either current or former heads of central banks. Several of them are playing an active role in dealing with our most important economic problems.

The Evolution Of Different Forms Of Capitalism In America

Capitalism takes on different forms in different countries.  It also evolves within countries.  This article describes the evolution of capitalism in the US.  The most recent shift in capitalism is from managerial capitalism to shareholder capitalism mixed with financial capitalism.  Mitt Romney supports a blend of shareholder capitalism and financial capitalism. The buying and selling businesses replaces the production and sale of goods and services.  Increasing the return on investor capital is the single mission in this model. It is far different from the managerial capitalism that his father represented as the CEO of an automobile firm.  That model assumed a multiplicity of stakeholders, as opposed to a singular focus on the return on capital.  President Obama seems to prefer a mix of managerial capitalism, and entrepreneurial capitalism.  The economic debate in the US is not between capitalism and some form of socialism.  It is really about what flavor of capitalism is best for the country. We have seen what happens with Mitt Romney's flavor of capitalism.  I am ready for a new flavor myself.

More Students Dropping Out Of College With High Debt And No Job

This article describes the plight of an increasing number of college students.  Student loan debt in the US is over $1 trillion, and an increasing number of students fail to compete their degrees.  These students are the most likely to default on their debt.  The dropout rate of for-profit colleges is double the dropout rate of  state colleges.  They also leave with higher debt, and poor prospects for employment.

How Russia Is Affected By European Crisis

This article suggests that the slowdown in Europe affects Russia in three ways.  Russia is an exporter of commodities to Europe.  Consequently, slow growth in Europe implies a decline in commodity exports to Europe.  A decline in oil exports or prices has an effect on government income.  Russia uses a progressive tax on oil profits.  The tax rate increases with profit growth.  Therefore, a declined in oil industry profits affects tax revenues more than the after tax profits of the oil industry.

Equity prices in Russia are also sensitive to investor confidence.  Demand for Russian equities falls during periods of low investor confidence. Serious problems in Europe would lead to lower investor confidence and falling equity prices.  The Ruble is subject to similar declines in value in periods of low investor confidence.

While the current crisis in Europe has had a moderate impact on the Russian economy.  A more serious crisis in Europe would produce a profound impact on the Russian economy.

Monday, May 28, 2012

The Fairness Trap

This article explains why fairness is a highly valued concept. Most of the time it works well.  However, when there is no real good outcome from a decision it can be suicidal.  This is the situation in Europe.  There is no perfect outcome, and the desire for fair solution by all of the affected parties, stands in the way of a solution that might save the euro.

Another Example Of Irrational Thinking By Rational People

This article describes an experiment that shows that rational people can be deluded into believing that random events are not random. Subjects who correctly predicted the result of a coin toss, are more willing to bet on the result of subsequent coin tosses.  They become more willing as the number of successful calls increases.

This may explain why investors are so willing to bet on tips, and pay for financial advice, in a stock market that is more random than people would like to believe.  It also calls to question the dominant macroeconomic theory that assumes purely rational choices by agents with perfect information.

Mirror, Mirror, Who Is The Phoniest Deficit Hawk Of Them All?

Paul Krugman shows how he has earned the hatred of the far right.  In this article, he shows that they have little interest in deficit reduction.  The game plan is to use deficit reduction as weapon to cut social welfare programs in order to fund tax cuts for the super-rich.  We are familiar with the budget proposals by Paul Ryan and Mitt Romney that satisfy those criteria.  He extends that critique to the Governor of New Jersey who has been working hard to become a deficit hawk with a larger nest in Washington. It turns out, however, that the budget deficit in New Jersey has not responded well to his policies.  Tax cuts have worsened the budget outlook in the garden state.  The seeds that he planted to grow the economy have not born the fruit that he promised.  His response has been to kill the messenger who delivered the bad news. The emperor in New Jersey insists that he really is wearing new clothes.

This op-ed, provides a good lead into the following post, which digs more deeply into how Krugman inspires hatred from right wing emperors who wear phony new clothing.

Paul Krugman Responds To Questions From The Financial Times

Martin Wolf interviews Paul Krugman, who he describes as one of the most respected, and most hated, US economists. Krugman responds by explaining that if he were not hated, he would feel that he had not been effective in delivering his messages. In addition to explaining how he has become hardened to criticism, he provides his views on US monetary policy, and the crisis in the eurozone.  He concludes the interview with a rejection of macroeconomic theory, and praise for some of the empirical work that some younger economists are doing in the US. Some of the research that he praises  is provided following the interview.  Rational expectation theory, and real business cycle theory, which fail to explain what really happens in economies, will eventually be replaced by the work of younger economists who are less interested in abstracting away reality in order to build models with little relevance to the real world.

Sunday, May 27, 2012

How Hedge Funds Won The JP Morgan Bet

This article describes how hedge funds spotted a weakness in the position held by JP Morgan's "London Whale" and ganged up on him. Most of the article is about the hedge fund manager that spotted the weakness and bet against the "London Whale". The best title for the article would be a description of the Whale that beat the London Whale. I suppose that this is the kind of story that many like to read. I posted the article, however, because it describes the trading game as it is played by Wall Street Bankers, and by hedge funds. It is played for big stakes by making heavily leveraged bets, with borrowed money, on minor changes in the value of credit derivatives. It is a sum zero game, in which one trader's loss is another traders gain. Nothing of value is added to the economy in the process. Money that could have been used to fund business investment, is being used to fund the bets being placed by the gamblers. The successful gamblers join the ranks of America's super-rich, and they can use their wealth to influence government policies on taxation and the regulation of the casino in which they play. JP Morgan's deposits are insured by the FDIC, and it is too big to fail. Taxpayers are enabling JP Morgan to have a seat at the biggest casino in the world.

Right Wing Political Correctness

The concept of political correctness was a conservative response against the dominance of liberal ideas in the culture of the 1960's and early 1970's.  It made fun of the intrusion of liberalism into everyday life. In this article Paul Krugman explains how the new political correctness reflects conservative dominance of our culture. However, there is an important difference between the two versions of political correctness.  The conservative version has money and power behind it.  The liberal version was a more spontaneous reaction to Vietnam, and other events, that exposed some of the realities of American power that took the cloak off of the Wizard Of Oz that operated behind the scene within the power elite.

It has taken around 40 years of deliberate planning, and execution, for the right wing to replace the counterculture of the 1960's with its version of political correctness.  Essentially, they have put the curtain back around the Wizard, that operates behind the scene, to restore the operation of a more appropriate culture that better serves their purposes.  If an accurate history of the last 40 years in America were written, it would be the history of the right wing reaction to the dangerous counterculture that briefly emerged in the late 1960's.  It was a crisis that enlisted them in a common cause, and their reaction was well executed.  It is important to understand, however, that reality is omnipresent.  Disguises were made to be destroyed by the unwelcome intrusion of reality.

Understanding How We Think And What Makes Us Happy

Der Speigel provides us with a great interview of Danial Kahneman.  He is a cognitive psychologist who won a Nobel Prize in economics.  I was more impressed with the distinctions that Kahneman makes about experiencing life, and the memories that we have of our experiences, than I was about the weakness of our reliance on intuitions, which was used for the title of the article.  I was also interested in the distinction that he makes between life satisfaction and happiness.  For example, our satisfaction may increase with our income, but our happiness will not increase when our income rises above a threshold.  It is miserable to live with an income below the threshold, but happiness depends upon a lot of variables that are not affected by income above the threshold.  We have an illusion about income, that is like the illusion that we have about people with a severe disability.  We cannot imagine, for example, how a paraplegic can be happy, because we cannot imagine being happy without the ability to engage in certain activities.  Happiness, however, depends upon a complex of things that are constant in life, and may not change with disability.

Saturday, May 26, 2012

Dividend Yield Drives Equity Returns Since 1970 Globally

This graph show real yields, (corrected for inflation) on equities in several nations since 1970.  The message is simple.  Invest in stocks that have a record of paying dividends.  Yields on stocks that don't pay dividends are not worth the risk.  Retail investors in the US have been chasing after stocks that they expect to appreciate in value.  For every Apple Computer, there are 100 disappointments.  Most retail investors are irrational.  They chase appreciation and they pay money managers too much for advice.  The best strategy for most investors would be a low cost index of dividend paying stocks.  There are reasons of course why investors are irrational. They are poorly informed and gambling is fun.  They also like to pay their taxes by purchasing lottery tickets.

Whither Thou Go'est Healthcare In America?

This article provides the latest data on healthcare spending in America.  It uses Millman data on employer funded heath insurance that is alarming.  The national average cost of healthcare spending rose 6.9%  for a family of four to $20,728.  The employer contribution was $12,144, the employee contribution was $5,144, and co-payments by families was $3,470.  Since the employer contribution to insurance premiums reduces cash compensation by a similar amount, economists believe that families absorb the full cost of the insurance premiums.  The major benefit they receive is that large employers are able to negotiate lower premiums from insurance providers.  The employer contribution to premiums is also excluded from taxable income.

The median household income in the US is illustrated by a graph in the article.  It is around $50,000.  The implication is that over 40% of household income for the median family is consumed by healthcare insurance.  Moreover, since price inflation is twice as fast as growth in income, the share of median family income consumed by healthcare spending will double in 20 years.  That is not sustainable, and there is little agreement among politicians on a solution.  If price inflation continues at its current rate, some form of rationing will be imposed.  One form of rationing, that is not referred to as rationing, is the pricing system itself.  As prices rise, healthcare spending will be rationed by income.  Families at the top of the income pyramid will be able to afford the best available healthcare.  Lower income families will only be able to afford less expensive forms of healthcare. This is the direction in which consumer directed healthcare, which is favored by the GOP, takes us. When  GOP politicians claim that America has the best healthcare in the world, this is what they mean.  Households with high income, or with good health insurance, have access to the best healthcare that money can buy.  The market determines the quality of healthcare available as a function of income, just like it determines the quality of automobiles available to households.

The Outcome Of School Choice In Many Southern States

Public funding of private schools in many states is a growing industry.  One of the fastest growing methods of funding school choice is funneling state funds to private schools. Many of these schools teach creationism instead of evolution along with other fundamental christian peculiarities.  The plan is quite simple.  Several states have passed bills which give a tax credit to families that contribute to a scholarship fund for the "needy".  The tax credits are equal to value of the donation.  For example, a family that contributed $3,000 to the fund would get a $3,000 tax credit.  The family then uses the "scholarship money" to send its children to a local private school.  The forgone tax income to the states, drains funds from the public schools that is used to fund schools that are not regulated by boards of education.  This is not a good use of public funds, but it does expand school choice, and it is consistent with libertarian ideology taken to an extreme.

Arizona May Be The Model For Government Run By The Tea Party

This article describes the political scene in Arizona.  Government officials are going out of their way to please the loonies who determine state and local election outcomes.  Arizona is not an exception.  The only difference between Arizona, and the third world states in the South, is that Arizona is a relatively rich state.  The craziness of the electorate is fueled by crazies who provide most of the electorate with information.  They can be found on the talk radio shows, cable TV networks and in many of the churches.  They are providing their market with the information that it is demanding.  The market system and democracy are in perfect harmony.  The weakness in both systems is that popular demand is too easily manipulated by a multiplicity of information providers.  Bad information has gone viral in many parts of America.  It is a contagious disease once it takes over its hosts.  There are sensible people in Arizona who have not been infected.  We can only hope that they can that they can find a cure for the viral infection.

Spanish Banks And Regional Governments Put Pressure On Central Government

This article describes the problems that have been brewing in Spain. Bankia, which is Spain's largest mortgage lender, told the government that it needed $23.88 billion to stay afloat.  This is much more than it believed that it needed a short time ago.  The Spanish treasury also told the banks that they needed to add euro 30 billion to the euro 50 billion to reserves to cover bad loans.  This raises concerns about a run on Spanish banks without support from the rest of Europe.

Problems are also escalating in Spain's regional governments.  Catalonia, which is Spain's largest regional government with 20% of the population, said that it is unable to pay its suppliers.  The city of Barcelona and Valencia, which are the second and third largest cities in Spain, are selling 6 month debt at a 7% interest rate.  They are asking the central government for help.

The central government has been trying to cut spending in order to meet fiscal goals that are required by the eurozone.  It is not clear that the central government can provide support to the banking system and the regional governments given its own financial needs.  The problems in Spain are a moving target.  As the recession worsens in Spain the needs of the banking system and the regional governments escalate.

Friday, May 25, 2012

How Prolonged Recession Reduces The Potential Of An Economy

This article in The Economist makes a good point that is worth repeating.  Recessions are periods of low demand and high unemployment.  Businesses do not invest in new and better technologies in periods of low demand.  Therefore, the potential for future output is affected by the decline in investment.  When people are unemployed for long periods they lose some of their economic value as well.  The economy will have less capital and lower levels of human capital available for future output as a result of a prolonged recession.  The failure to deal with weak demand in the current period, reduces the potential for future economic growth.

Investing In Venture Capital Is Only Good For Venture Capital Firms

This link is to a video interview of a researcher who looked at the return on investment provided to investors in VC funds.  She showed that investors would have done better if they had put their money in a low risk, low cost, and liquid index fund.  Investments in VC funds are high risk, high cost, illiquid and they produce a lower net return than the the Russell 2000 index.  (Some funds may have performed better than the industry as a whole, but its hard to predict future performance based upon past performance.)

VC investors did very well in the boom.  The VC's were able to take almost any firm public and make a killing with the IPO.  The public was willing to invest in almost any IPO during the boom.  It is more difficult today to take companies public that have no history of earnings.

This research puts another dagger in the heart of David Brook's fairy tale about the role that financiers have played in the economy.  The VC's are not any better at allocating resources to their most productive use than private equity managers.  The VC's and private equity manager's do much better than their investors. They earn large fees no matter how the investment performs.  Of course, who needs research when one can quote magazine articles to prove a point?  Dick Cheney, when he was Vice President under George Bush, used to leak information to his sources in the print media.  He would then quote the published report as evidence in support of his policies.  That is not any worse than quoting the National Review or the WSJ opinion page to prove a point.  One fiction is as bad as another fiction.

"Truthiness" May Be A Big Part Of America's Problem

"Truthiness" is a concept coined by Stephen Colbert.  This article suggests that it may lead the US into third world status.  According to Colbert, "truthiness" is what I think is right.  Facts are irrelevant to folks afflicted with "truthiness".  The GOP House Majority Leader declares that America has the best healthcare system in the world.  In fact healthcare is one of America's biggest problems.  Its the most expensive system in the world by a wide measure and we are less healthy as a nation than most of the industrialized countries in the world.  We look like a third world country when it comes to healthcare. This does not matter to the GOP Majority Leader.  Nor does it matter to most of his constituents who prefer to believe otherwise.  It wasn't always like this.  American's used to look at other countries that were ahead of us in an area, and we did something about it. Many American's no longer believe that we can learn anything from other countries.  Truthiness has reached epidemic proportions in America.  Too many American's only believe what they want to believe, and they only pay attention to politicians and pundits who tell them what they want to hear. Many prefer fairy tales to reality.  They are usually more comforting.

Krugman Unloads On Wall Street And Its Media Defenders

Krugman calls the Wall Street bankers whiners.  They brought the economy to its knees and they only exist because government came to their rescue.  They are crying now because they are not getting the respect that they believe to be their due.  After all, they still believe that they are the "masters of the universe".  The CEO of Goldman Sachs claims that they do God's work.  I guess God must operate a hedge fund and pay off politicians so that she does not have to pay taxes.

David Brooks is one of Wall Street's reliable defenders.  I posted a critique of the fairy tale that he made up about the role of financiers in rebuilding the US economy.  Since Krugman writes for the same paper, he usually refrains from attacking Brooks.  He does not mention his name in this op-ed, but its pretty clear  to most readers that Brooks is the target of his" fairy tale" critique.  Brooks fools a lot of people into believing that he is an impartial observer. He usually throws in a criticism or two of his party, before reaching his conclusions which always reflect current conservative positions on hot topics. All of his ideas come from the conservative National Review, the opinion page of the WSJ, or from conservative think tanks and academics.  He is very good at packaging those ideas into op-eds that reach a large audience.  George Will does the same thing for the Washington Post.  They have different target audiences, however.  David Brooks targets the more sophisticated NYT reader.  George Will reaches out to social conservatives through the syndication of his op-eds in small town newspapers. Prostitutes are step up from these guys.  They do no harm in the operation of their business.  Brooks and Will are very smart propagandists.  They hurt a lot of people by selling their brains to the highest bidders.

Thursday, May 24, 2012

A Brief History Of The Elimination Of Glass-Steagle

This is an excellent article on how the banking industry effectively overcame legal obstacles that were put in place during the Great Depression.  The intent of the Glass-Steagle bill was to prevent FDIC insured depository banks from taking the risks that were a normal part of investment banking.  It started out by making minor changes one step at a time.  It culminated in the Clinton Administration when Glass-Steagle was formally repealed.  It didn't take much longer for the banking industry to move towards conglomeration.  It became a too big to fail industry that earned most of its profits by developing and selling securities, and by placing bets on the direction that the prices of those securities would take. They no longer do an effective job of allocating capital to its most productive uses.  That is clearly and old fashioned concept of banking.

The Great Depression produced a crisis that made banking regulation possible.  It put an end to the "gilded age" that preceded the Great Depression.  It took a long time to create the new "gilded age".  The Great Recession provided an opportunity for politicians to put and end to it again.  That was a missed opportunity.  We may have to wait for the next crisis before it is politically possible to overcome the system that has been put in place to preserve it. On the other hand, we might follow the strategy of the banking industry.  We can dismantle it one step at a time.  We just need to figure out the most effective path to follow.

Fairness Contributes To Economic Growth

Robert Reich argues that income inequality constrains economic growth. His rationale is right out of econ 101.  Wealthy households save a large percent of their income.  Increasingly, their savings are used by investors to make highly leveraged bets in the derivative markets. This does nothing to support economic growth, and it creates systemic risk in the credit markets. Middle class households would spend most of their incomes and that would help the economy to grow. He believes that Obama should build his campaign around the relationship between a more fair economy and a stronger economy.

For that strategy to work, Obama would have to have a plan to reduce income inequality.  He does not have such a plan and it would not be an easy sale if he had one.  Republican's argue that income inequality is good because it provides the incentive to work hard and to invest.  It would kill the goose that lays the golden eggs.  That strategy has worked for the last 40 years.  It could be undermined.  But it would require Obama to develop, and sell a plan that directly deals with the factors that contribute to inequality.  Its much easier for politicians to talk about reforming education; especially if it does not require increased spending.  Tax policy could be made more progressive, and that would reduce post-tax income inequality. It would take a more aggressive change than Obama has been willing to make.  His modest proposals to restore tax rates to what they were during the Clinton administration is a step in the right direction, but the resistance to that plan has been difficult to overcome.  Nobody likes taxes.  The GOP gives large tax breaks to the super rich, and they throw a small bone the middle class. That seems to make everyone happy.  A famous American jurist once said that taxes are the price that we pay for civilization.  Can Obama define the civilized society towards which we aspire to justify tax increases?  I would love to see him move in that direction.  One of the problems that he would have to overcome is that many Americans believe that they are not getting value from their tax payments.  Middle income Americans need to have a better understanding of how they benefit from public spending.  The GOP tells them that the money is taken from hard working Americans and given to those who do not deserve support.  That is an easier story to sell.

How Republicans, Democrats and Independents Differ On Moral Values

This article reports on polling results which show the difference between the three major sectors of the US electorate.  It should raise concerns withing the GOP.  It is becoming a fringe party that depends upon a small but vocal minority for its political support.  The values of the GOP base are the least accepting among the three sectors.  The independents are the most accepting, and the difference between them and the democrats is much smaller than the difference between the GOP and the democrats.  The GOP electorate is most accepting about things that involve killing.  They strongly support the death penalty, killing animals for those who want to wear fur coats or for their use in medical research.  The GOP should also be concerned its appeal to young Americans and minorities.  They believe that the Democratic Party is more concerned about them than the GOP by a wide margin.

Eurozone Summit Was A Dud

The Financial Times reports that eurozone leaders were unable to decide on a course of action to resolve the problems of slow economic growth, the ability of the banking system to absorb credit risks, and fiscal consolidation in Greece.  They put decisions off until their next meeting in June.  One of its problems is the lack of agreement about how to deal with their common problems.  The most striking difference is between Angela Markel and the new President of France.  Hollande wants to give reassurance to Greece that the leadership is committed to keeping Greece in the union.  Markel, has taken the position that Greece's membership in the union is conditional.  She is worried about moral hazard that might spread from Greece to other countries with debt problems.  They would be less willing to live up to their fiscal consolidation commitments if Greece does not live up to its fiscal commitments.  There is also disagreement about the role of the ECB.  Some leaders support the idea of eurobonds that are backed up by the 17 member states.  German leaders, see that as a measure of last resort.  In the meantime, the euro continues to fall in value relative to the dollar.

Wednesday, May 23, 2012

Senate Republicans Blame Government For JP Morgan's Loss

The Senate Banking Committee hearing on the JP Morgan loss produced an unusual outcome.  Senate republicans blamed banking regulators, and the Dodd-Frank bill, that has not been implemented, for the loss.  JP Morgan is the victim of failed government regulation according to senators who have received the majority of their campaign contributions from bank lobbyists.  It was money well spent. Republicans are experts at turning every market failure into government failure.

The Democracy Gap In Russia

This article summarizes the results of a poll by the Pew Research Center in Russia. The results show that there is a gap between what many expect from democracy and what has been achieved.  For example, 71% would like to have a fair judicial system, but only 17% believe that the current judicial system is fair.  In fact, elites have used the judicial system to violate the property rights of citizens.  A visiting Russian professor at Oxford argues that reform of the judicial system will provide the path to democracy.

Russians are not that comfortable with the notion of democracy, even though they desire some of the potential goals of democracy.  That is because democracy was used to sell the public on reforms that led to the development of the oligarchy in Russia.  They are also ambivalent about Putin.  The majority approve of Putin, perhaps because no popular alternative exists, but they also approve of the protests against him and the election. Unfortunately, state controlled television has not reported on the protest movement.  It is only known by the residents in Russia's large cities.

Robert Shiller's Graduation Speech To Finance Graduates

Shiller congratulates the finance graduates for their success in developing their knowledge of finance, economics and statistics.  He tells them that they also have a mission to understand the social goals of finance.  He charges them with the task of using finance to produce the greatest results for everyone in our society.  They should also be effective stewards of society's assets and engage themselves in the democratization of finance.  He provides some examples of how this can be done, and he reminds them that the failures of a narrowly focused finance profession, contributed heavily to our current global economic malaise.

Amarya Sen On The Democracy Crisis In Europe

This article, by a proponent of social capitalism and a democratic Europe, argues that the well intentioned imposition of bad economic policy by EU leadership, is not consistent with the economic goal of well being, or with the EU goal of sustaining democracy in Europe.

How A Sector Of Germany's Elite View The Situation In Greece

This article, from a German foreign policy blog, provides a snapshot of opinion in how to deal with the Greek problem.  It is critical of the views held by a sector of the elite in Germany. They do not respect the sovereignty of Greece and they advocate strong means to force austerity upon the Greek government.

Romney The Job Creator

This article describes the mission of private equity firms, including the mission of Bain Capital.  Their mission is to provide an above market rate of return to investors, and to private equity managers.  They often succeed in doing that.  Sometimes jobs are added and sometimes jobs are lost.  Some of the firms even go bankrupt after they are taken over.  Often it is because the private equity firms borrow heavily in order to return their invested capital to the private equity firm in form of dividends.  High debt burdens are not good for struggling firms.

Mitt Romney, along with cheerleaders like David Brooks, who regurgitates information from The National Review and WSJ op-eds, claims that he created 100,000 jobs during his tenure at Bain Capital.  That claim is false and its falsehood is documented in this article.  President Obama's campaign is accurately attacking that claim.  Romney and Bain Capital have not been in the business of creating jobs.  Nor have they been in the "creative destruction" business. They exist to make a profit by putting lipstick on a pig and fetching a better price for the better groomed pig.

Tuesday, May 22, 2012

Economics Faculty For Sale At High Prices

This article,  (via Manan Shukla) by the producer of Inside Job, describes the relationship between two prominent economists and how they are funneled to very highly paid "consulting" relationships with major banks.  One is a conservative who is the Dean of the Business School at Columbia, and the other is Larry Summers who has held numerous key jobs in democratic administrations and in academia.  They have earned the great bulk of their wealth from non-academic "consulting" engagements.  They provide a high rate of return to their clients.  Each has access to influential politicians, and each has played a critical role in policy formation.  They are not typical academics, but they are not unique.  They are just among the most highly paid for their consulting.

I followed the Enron debacle very closely.  Enron had a list of opinion makers that received annual honorarium's that were established by top management.  Some were prominent economists who might be useful to Enron.  The deregulation of the energy industry was very important to Enron's strategy.  Enron was also involved in the use of "creative" accounting methods.  It made ample use of special purpose entities to make its balance sheet look less troublesome.  Enron even funded a chair in accounting at the University of Texas.

The changes that we have witnessed in business and in government policy over the last 40 years could not have happened without the support of well placed academics.  They provide the academic cover and respectability that is usually required to redirect the economy and gain support from government.

I have ordered a copy of the book that is just being published by the author of this article.  Not surprisingly, there is an ad for the book associated with the article.

David Brooks Explains Why America Needs A President With Private Equity Experience

David Brooks argues that the US was in decline and losing ground to foreign competitors like the Japanese.  Private equity managers, along with financiers, stepped into the breach and restored our economic leadership.  Government today is like corporations were before they were rescued by private equity.  It is bloated and inefficient.  We have to make a choice between someone who can transform government like he transformed many inefficient businesses, or someone who is only able to repeat ancient Democratic Party nostrums.  It seems like David Brooks is "leaning" towards casting his vote for Romney.

I don't want to get into the debate about whether private equity is good or bad for our economy, or for job creation.  On the other hand, I don't think that many business historians would agree with the version of history that was just invented by David Brooks. The US share of global exports has decreased by 3.5% since the 1980's. The US share of global GDP has also fallen. This may not signal a decline in US competitiveness, but is is clearly not a sign of business revival.  Moreover, private equity plays a minor role in the US economy.  The output from firms "rescued" by private equity is a negligible percent of GDP.  David Brooks will vote for Romney, but it is more likely he will do so because he always votes Republican.  He knows that he just made up the history that he reported.  After all, he majored in history at the University of Chicago.  He would have received an F on this version of history even at Chicago.

Accounting For Decline In US Share Of Global Export Market

This study by the NY Fed was conducted to determine the factors that contributed to the decline in the US share of global exports between the 1980's and 2010.  The US share of exports fell from 12% to 8.5% in that period.  Over half of the decline was explained by being in export markets that were suffering from a falling share of the global export market, and by a decline in the US share of those sectors.  A decline in US productivity, or competitiveness, did not account for a large share of declining US exports.

One of the largest export markets is transportation products.  The loss of share in that market made a contribution to lost export share, but it is not explained by declining productivity.

This report did not mention anything about the role of offshoring in the declining share of US exports.  US computer manufacturers, for example, were major exporters of information technology products.  Today they export most of their products from offshore locations.

Congress Is Not Only More Partisan, It Is Dumber

This study applied a common measure of grade level to congressional speeches.  It found that Congress, as a whole, has dropped one grade level in its speeches since 2005.  Republican's have captured the bottom 10 places on that measure, but republicans also captured most the spots among the top 10.

In any case, congressional speeches are above the grade level of the average voter.  They are well below the grade level given to US Constitution. The language of our founders was at the college level.  It is ironic that many who complain about elite intellectuals, appear to revere the US Constitution which was written well above their grade level by an intellectual elite.

Why China Won't Replace The US As The Global Superpower

This article suggests that it wrong to ask whether China will replace the US as the global superpower.  The real question is whether China will assume the role of a global leader that provides global public goods.  In the first place, the US has assumed a unique role as a superpower in the aftermath of the destructive world wars that affected Europe. It has not replaced Britain in that role, as many imagine, because Britain was never a superpower.  It was one of several powerful nations that sustained an empire, but it never attained the status of the sole global superpower.  The second part of the article is about the changes that China needs to make in order to achieve the respect that it desires from a position as a global leader.  China has to decide whether it wants to join the western world in sharing global leadership, or whether it wants to attain the leadership of an eastern block that it might create.  If it chooses to join the western block, it will have to make some difficult changes in the management of its economy, and in its political structure.

A Message From Britain's Rust Belt

This editorial from Britain's rust belt, does not mince words about the governments management of the economy.  It sounds pretty similar to what critics are saying about the US economy.  The Blair government, like the Clinton government, bought into the neoliberal ideology that led to the deregulation of financial sector.  Both countries are paying the price for that mistake.  Moreover, the Cameron government has made things worse.  It has imposed austerity on an economy with depressed demand.  There are ample opportunities for profitable investment in decaying infrastructure in Britain.  The government is not interested in public investments.

Facebook Shares Drop 11% On Day Two

This article analyzes the Facebook IPO and the rapid decline of the stock price from its initial offering price.  One of the reasons for the decline in the stock price was that the number of shares offered was increased by 25% just prior to the IPO.  There were not enough buyers to purchase the additional shares.  Morgan Stanley, the chief underwriter of the IPO, was forced to step into the market and purchase shares on day one, in order to keep the stock price from falling below its offering price.

The article also provides some information that is informative about the IPO process.  The underwriters allocate shares to their major customers prior to the offering.  One of the hedge funds reported that it received 500,000 more shares than it anticipated.  That provides some insight into the magnitude of the allocations that are available to the underwriters best customers. It is valuable to be a good customer on an investment bank.  The potential to earn a large profit from an IPO, is one of the reasons why customers are loyal to investment banks. During the dot com boom, access to IPO shares was a gold mine for the best customers of the underwriters.  It was not unusual for the share price to double in the first day of trading.  The early investors could earn a quick profit by selling.  The longer term success of the company that was taken public did not matter to the early investors.  Few of the high tech start ups that were taken public survived.  All of the money was made by the early investors and by the underwriters who earned large fees from the IPO.

Ordinarily 20% of the shares are allocated to firms that can sell the shares to retail investors.  They allocate shares to their best customers.  This is valuable for the brokerage firms.  It helps to sustain the loyalty of their largest clients.  The Facebook IPO was widely anticipated.  The allocation to brokerage firms was increased to 25% for the Facebook IPO.  There were more shares available to retail investors than they were willing to purchase.

OECD Lowers Economic Growth Forecast For Eurozone

OECD forecasts negative growth for the eurozone in 2012, and lowered its 2013 forecast to less than 1% growth.  It raised a concern about a number of factors that could set the eurozone on a negative economic spiral that would be difficult to arrest.  It also indicated that slow growth in Europe would affect the global economy.

Monday, May 21, 2012

The California State College System Accused Of Political Activism Of The Wrong Kind

This article (via Brad DeLong) was written by the California chapter of the National Association Of Scholars.  It provides a few anecdotes that it uses to describe the intellectual corruption of the state universities in California.  One of the anecdotes is reported to be by a student in a computer science course (61 A) that is not in the college's curriculum.  The article is timely, during a period in which funding for the state college system is under economic pressure.  Brad DeLong wondered why the LA Times published this kind of "research".  The link above is to a description of the NAS in Wikipedia.  The group was founded and funded by conservatives who oppose multiculturalism and affirmative action.  It is the kind of group which would argue that climate scientists should give equal time to climate change denialists.

What Kind Of Capitalism Do We Want?

The big debate in the political economy is not between socialism and capitalism as some politicians are claiming. This article describes the debate as one between two forms of capitalism. In simple terms, it is a debate between social capitalism and anti-social capitalism.

Mitt Romney appears to favor the anti-social form of capitalism.  He claims that Bain Capital produced jobs.  Some of the companies that Bain took over did produce jobs, but that was not the objective of the firm.  Its objective was to earn a return on investment for Bain investors, and for Bain management.  Some of the businesses taken over by Bain were stripped of its assets and eventually closed down.  Jobs, and some communities were destroyed in the process. Romney also defended the huge trading loss at JP Morgan that has risen from $2 billion to $3 billion.  He argued that there are winners and losers in capitalism.  JP Morgan lost some money, but other traders earned a profit.  The problem with his viewpoint is that JP Morgan's deposits are protected by government.  The gains from a successful trade go the firm, but the risks are ultimately born by the taxpayers.  JP Morgan's deposits are insured by government, but it is also to too big to fail.  Romney's view also suggests that capitalism is a sum-zero game.  There is a winner for every looser.  That may be true for a casino economy, in which there is a counterparty for every bet, but it is not the picture that most of us have about capitalism.  It is a picture of a financialized economy in which income is funneled to the managers of money.

The article contrasts Romney's view with that of the Obama administration.  Vice President Biden made a speech about the differences between an economy focused on the production of real products and an economy that produces risky financial assets for sale and for betting purposes.  President Obama is also campaigning with similar messages.  They may not actually represent a strong view of a social economy, but it is less anti-social than the type of economy that Romney seems to favor.  He is campaigning on repealing laws that regulate banking and on cutting spending on social programs.

Inside The Facebook IPO

Facebook's IPO, which raised $16 billion from investors, was the largest tech IPO in history.  This article  provides some significant insights into the IPO.  Facebook's founder retained on 18% of the shares issued but he controls 57% of the voting shares. This pattern of dual shares was started by Google and it has been followed by many tech start up's since that time.  This decreases the ability of shareholders to hold management accountable for short term performance, which may be a good thing, but it raises a question about why they permit it to happen.  The answer is that there is too much money chases after too few investment opportunities. Investors, chasing yields, are forced to take the deals that are on offer.

Since Facebook has enough profit to fund its growth, another question is raised.  Why did it go public?  The $16 billion will probably be invested in treasuries.  Apparently, it gives the founders a chance to get an early payout without losing control of the company.  This raises a more critical question.  Is the stock market becoming less central to American capitalism?

NYC Leads Nation In Inequality

This article compares inequality in NYC with the rest of the nation.  In 2009, there were 15,000 filers with incomes over $1 million.  They represented the top one half of 1% of the filers, and they received 26.7% of total income. Nationally this group only received 10% of total income.

James Oddo, a republican from Staten Island, commissioned a study which found that the top 1%, with an average income of $2.25 million, received 33% of the total income.  He then did what the GOP typically does with statistics.  He shifted the focus to the top 10%, which has an entry position of $105,400. and argued that taxes should not be raised on the rich because that group included veteran police officers, nurses and school principles.  The GOP uses a similar strategy when it defends the interests of big business.  They claim that they are defending the interests of small businesses.  Its OK to defend the little guy as long as it protects those at the top.

Sunday, May 20, 2012

How We Can End Government Dysfunction In The US

This article by Mann and Ornstein, who blamed the GOP for our political dysfunction, describes 5 things that we should not do, and 4 things that we should do to the reduce polarization and dysfunction.  They understand the political morass better than most of us. Their article provides a good starting point for discussion and  action.

Change Our Metaphors To Change Our Thinking About Economic Policy

In this article Robert Shiller argues that we are locked into a metaphor that shapes how we think about economic policy.  President Obama and Angela Merkel have used that metaphor to explain why government needs to cut spending when it experiences rising debt.  A rational family would do the same thing to bring spending in line with income.  The problem with that metaphor is that if every family would cut its spending at the same time we would less savings because national income would decline.  This is called to paradox of thrift.

Shiller argues in favor of another metaphor that would encourage us in another direction.  It is called the balanced budget theorem.  If government spent the same amount on hiring new teachers, as it raised from increasing taxes on millionaires, the economy would grow and deficits would fall.  The new teachers would spend their income and pay taxes.  The millionaires would not have to cut their spending but they would save less.  The IMF has argued in favor of the balanced budget theorem but it has not gone anywhere.  We seem to be locked into the rational family metaphor. It is easier for most people to grasp than the better metaphor as a solution for our economic problems.

Research Report On Economic Mobility In Canada and Denmark

This study of economic mobility in Canada and Denmark (via Mark Thoma) found that fathers pass on their career paths to their children.  This was especially true among high income earners.  Even in these countries with low inequality the chances of moving out of the bottom 25% to the top 25% are low.

I was lucky enough to attend good public schools, and I was encouraged by my teachers to pursue higher education. There was also an inexpensive state university in my hometown.  No one in my family had attended college.  I was also lucky to pursue a graduate degree when there was lots of support available from government for graduate education. I got my first son a job, upon his graduation from college, through personal contacts that I had made in my career.  He has remained in that field throughout his career.  My first daughter got her first job after graduation through a family friend.  She moved up the ladder in her career path before starting a family.  My second son is pursuing a graduate degree.  He plans to be a professor.  He supports himself as a tennis professional.  He learned how to play tennis at a club to which we belong.  My youngest daughter had an exceptionally good biology teacher in high school. She helped her to get an internship in a local biotech firm.  She spent each of her summers working at the firm during her undergraduate education at an excellent state university.  She took a job with the firm after graduation, and the firm paid for the masters degree that she earned.

The careers and future earnings of my children fit the pattern described in this study.  My good fortune, which was made possible by the availability of good public schools, and government supported higher education, was passed on to my children.  One of my concerns is that government support for public schools, and access to higher education, is not as strong today as it was when I was a child.  I was lucky to escape from the bottom 25%, and that luck was passed on to my children.  I don't think that children in the bottom 25% today, will have the same chances for upward mobility that I had.

Group of Eight Meeting Discussion On Growth Versus Austerity

This article reports on the meeting of leaders from US, Germany, France, Italy, Russia, Japan, Canada, Britain and Canada at Camp David.  The major concern was to restore growth in Europe. There seemed to be a wide agreement that it was essential to focus on growth while dealing with longer term fiscal consolidation.  Angela Merkel understood the concerns but she has to deal with national politics at home that will not be easy.  She has also been concerned about creating moral hazard by easing up on austerity measures. There seemed to be agreement on doing what was necessary to keep Greece in the eurozone.

Saturday, May 19, 2012

A Bullish Comment On The Survival Of The Common Market

This article makes the case that the common market will survive, even if Greece is not part of the union. New restrictions placed on fiscal policy and enforcement will limit moral hazard and contagion.  The ECB will play a larger role in maintaining the banking system and the ESM will provide support to countries that follow the new rules that have been put in place.  Recovery will by slow for the countries on the periphery but recovery is always slow following a financial crisis and debt hangover. Germany can help to keep the eurozone growing by using fiscal policy to expand its economy.  It is in Germany's interest to do what it can to save the common currency.

The Anti-Government Society

This is a review of the book by Mann and Ornstein that blamed government dysfunction on the GOP. It goes into more detail about the content than does an article that I posted earlier on the book. One bit of data really got my attention.  In 1964, 77% of Americans believed that government would do the right thing almost all of the time.  After Vietnam and Watergate, in 1974 only 36% of Americans held that view. Today, less than 20% of Americans believe that government will do the right thing almost all of the time.

Given the shift in public opinion about government, it made sense for the GOP to become the anti-government party. This was consistent with its historical support for free markets, and the deregulation of business. It also was consistent with its positioning of the Democratic Party as the "tax and spend" party.  The democrats take your money away your hard earned money, and they give it people who do not deserve it. They based their election campaigns on cutting taxes, and promises to cut spending on social welfare programs.  They also sharpened their efforts to build up their political base in areas of the country that were responsive to social values.  The Democrats were positioned as anti-family, anti-american, and godless. Liberalism became the new Communism after the transformation of the Soviet Union ended the cold war. Newt Gingrich extended the attack on liberalism to the intellectual elites who supported progressive policies, and scientific theories which held that man descended from monkeys, along with the science of global warming.  Anti-rationalism was added the GOP's platform of things to be against.

The transformation of the GOP into the anti-government party made sense to politicians who place focus on winning elections.  The major concern, raised in the book, is that the US does not have a parliamentary system.  Nothing important can get done unless the two parties work together to provide solutions to important problems.  That is no longer possible when elections are based upon demonizing the opposition.  Cooperation with the devil is no longer an option.  It opposes the tools available to government to moderate business cycles. Monetary policy should focus only on inflation, and fiscal policy is regarded as a sin, along with the budget deficits that it spawns. The anti-government political party is the major reason for the governmental dysfunction that is apparent to everyone.

The GOP has positioned itself into a trap from which it cannot easily escape. It is not realistic to continue with its tax policies and the neutering of government in our current circumstances.  On the other hand, if it chooses to make rational decisions about tax policy, and rational cuts in government spending that are not totally focused on social programs, what happens to its political positioning?  It will differ from the Democratic party only on social value issues. Its political campaigns are based primarily on the evils of budget deficits and government spending on social programs.  Under these circumstances, the polarization of politics will only get worse.

Friday, May 18, 2012

Georgetown University Goes Ahead With Graduation Speaker Criticized By Archbishop

This article reports the decision by Georgetown to honor its invitation to the Secretary Of Health And Human Services who reflects views on contraception that are contrary to Catholic doctrine, but not followed by most Catholics.  Georgetown's status as great university depends upon its support for the free exchange of ideas, including those held by the church hierarchy.  Its location in Washington also is an asset worth protecting.  It can easily bring government officials to campus to exchange ideas with students and faculty. It is not in the business of criticizing church doctrine, but it is also not in the business of indoctrinating its students. Its student body represents a large variety of religious viewpoints.

Japan's Q4 Growth Rate Sets The Pace For Advanced Economies. Italy Is A Laggard.

This graph (via Paul Krugman) shows that Japan had the fastest economic growth in Q4 at an annualized rate.  The US and Germany did OK but austerity has not been good for Italy.  Japan's growth rate was influenced by government spending in response to the tsunami.  I guess it takes a crisis to get government to use fiscal policy.

David Brooks Makes The Conservative Case Against Democracy

David Brooks provides a steady diet of "big ideas" to his readers.  His big idea today comes right out of conservative ideology.  The fundamental idea in conservative ideology is the preservation of hierarchy. The common people don't know what is good for them, and that is why we need a monarchy.  Democracies in the US and Europe are suffering from that disease.  The people are depraved.  They want government to provide benefits for which they do not have to work.  Governments in the US and Europe feed the depravity of the people.  They provide the benefits, that people do not want to pay for, in order to win elections.  Budget deficits and national debt are the consequence of failed democracies.  His analysis of our political problems reminds me of Ronald Reagan's description of social welfare recipients driving Cadillac's.  Government is overgenerous, and the taxes of hard working American's are wasted on the wrong people.

Democracy is fragile, as Brooks correctly asserts.  His analysis of our political problems is partially true as well.  People do want things that they don't have to pay for, and it is natural for politicians to give them something for nothing in order to win elections.  That has always been true.  Therefore, it does not explain our current economic crises. The economic crisis in America, and in Europe, began with the collapse of the financial system in America.  The US government changed the rules of the banking game so that the banks could "innovate".  Our "depraved citizens" were not responsible for banking deregulation, and the production of trillions of dollars of toxic financial securities that were sold to willing buyers across the world.  Government in the US was captured by the ideology of free markets.  Our leaders were sold on the idea that markets are self regulating and that government should give them the freedom to innovate. We are paying the price for the innovations today.  Europe was doing well until its economies went into recession.  Tax revenues fall in recession, and social welfare payments increase.  Recessions produce budget deficits.  Moreover, easy credit in the US and in Europe made it easy to borrow.  Private debt in the US and in Europe fueled bubbles that eventually burst.  The consequence is that real estate developers and household are less able to pay down their debt. Banks in Europe and the US are still dealing with losses from the defaults on bad loans that they made.

It has been easier for the US to deal with its economic problems than it has been in Europe. The US has an integrated monetary and fiscal union. The dollar is also the global reserve currency.  Nations with current account surpluses are willing to purchase dollars for their reserve accounts, even at low interest rates. It is more difficult for European monetary policy and fiscal policy to deal with the problems that have developed in several of its nation states. The affected states do not have the tools of a nation state at their disposal, and they are at the mercy of financial market, speculators, and the inability of EU leaders to provide the needed help.

If David Brooks had not been a supporter of free market ideology and deregulation, and if he had studied economics instead of history, perhaps he would not have invoked Edmund Burke to describe the very different political economic problems in the US and in Europe with the same conservative paint brush.

The End Of The Common Market Soon If Leaders Fail To Act

Krugman does not mince words in this article.  Greece is a disaster, and Spain and Italy need help.  The economic medicine that has been prescribed is making things worse, but the only solution to the problem would be for Germany to do what it does not want to do.  It is against its economic religion, and it may not be politically doable.

If the common market fails, the worse fallout will be political.  The noble idea of an integrated Europe will have failed and the established political parties will suffer a loss of confidence.  It will be an invitation for the more extremist parties to move into power.

I hope that Krugman is wrong, but the austerity disease has been resistant to most of the antibiotics that have been injected from the outside to the carriers of the disease.

Thursday, May 17, 2012

Wage Rates Across The World Are A Function Of The Productivity Of The Economy

This post summarizes the Presidential Address delivered by Orley Ashenfelter at the American Economic Association annual meeting in Chicago.  Ashenfelter compared wages for workers doing similar work in McDonald's restaurants in 60 countries.  Wages in the more productive western economies were much higher for the same work than in most other countries.  They were related to the productivity levels of each economy.  Skill, talent and effort had nothing to do with the different wage rates. One's wages and standard of living depend upon the output per hour of the economy in which one lives.

Dean Baker Reminds The Washington Post Editors That Critics Of Austerity Do Propose Remedies

The editor of the Washington Post has been a deficit hawk for several years. Government spending on social programs have been a target of many editorials.  Dean Baker criticizes a recent editorial that makes the claim that opponents of austerity in Europe fail to provide methods of funding economic stimulus.  He cites the solutions proposed  by many of the economists who have argued that the debt problem is only worsened by policies that impede economic growth.  One might disagree about the policies proposed, but the lack of proposed solutions is not the problem.  Perhaps if the editors do not like the solutions they are not visible.

A Good Example Of How George Will Appeals To Emotions To Win Debate Points

George Will argues that there is too much bipartisanship in Congress rather than too little.  He provides several examples of bills that won bipartisan support in Congress.  He then turns his attention to subsidized student loans which receive bipartisan support in Congress.  He argues that they are paid for by taxpayers who do not have a college education, and that they encourage inequality because college graduates will have a higher lifetime income than the poor taxpayers who paid for their loan subsidies.

Rather than tearing apart his argument about student loans, I want to point how he appealed to the emotions of his target audience in the last part of the article.  He concluded the article by referring to a comment made by a woman student after a speech made by Obama at her college.  According to George Will, she was more interested in free birth control, provided by government, than in low cost student loans.  We certainly would not want to subsidize loans for women who want government to provide free birth control.

George Will's column is syndicated widely.  It is picked up by many small town newspapers.  His readers get a steady diet of opinion that is heavily colored by appeals to their emotionally held values. It is one of the principle means by which he gains support for the questionable lines of reason that he provides in his op-eds. He is also a regular "talking head" on many of the TV news shows.  He is one of the "serious people" who is willing to attack popular government programs with the latest ideas from the conservative "think tanks".

Faith Based Economics Threatens Democracy

This report from The Financial Times makes an interesting point about the recent introduction of the concept of credibility into economic models.  It has become a big factor in the way that the sovereign debt crisis has been framed.  Debtor nations must establish credibility to market participants by the fiscal and monetary policies that they establish.  The problem with this idea is that there is no good way to measure success or failure in building credibility.  If efforts to establish credibility do not lead to good outcomes, the true believers argue that the efforts were not strong enough.  Faith in the concept of credibility is a firm assumption in the economic models. Security markets become the de facto means by which credibility is measured.  Bond traders replace democratic institutions as the arbiter of government performance. The recent flight to safety by bond traders confirms that some government efforts to establish credibility have failed.  On the other hand, governments that have been praised for their efforts to establish credibility, have also seen an increase in their interest rates.  It is assumed that credibility will follow if they try harder. It is not possible to test the assumption of the necessity to establish credibility, or the role of bond markets in measuring government performance.

Paul Krugman posted a similar critique of the credibility concept.  He argued that it was necessary for the Fed to create very high unemployment rates to disinflate the US economy in the 1980's.  Credibility of the Fed had little to do with the disinflation.

Widening Disparity Between Public and Scientific Community On Climate Change

This graph shows that there is almost unanimous agreement among climate and earth scientists about the human contribution to global warming.  On the other hand, 41% of the public believe that there is substantial disagreement among scientists,  and only 46% believe that global warming is caused by human behavior.  A recent report from the Yale Project on Climate Change and the George Mason Center for Climate Change Communication, reported these findings along with an analysis that offered several reasons for the discrepancy.

.* It has become identified with the Republican Party along with its contention that regulation of the energy industry will cost jobs.

* The mainstream media is biased in the debate.  It gives a disproportionate amount of coverage to the relatively small number of dissenters.

* Information consumption and dissemination has become personalized.  Inaccurate information is rapidly communicated to groups that have coalesced around dissent.

* The scientific community has not been effective in communicating that global warming is real and that human factors are a major contribution.  Scientists are overly careful in their communication by their very nature. Opponents of global warming do not share that constraint.

The report does not mention the role of the energy industry in influencing the debate.  It spends million on ads that promote their support for clean energy, and it funds politicians and think tanks that provide much of the disinformation.

Wednesday, May 16, 2012

A Talk On Inequality That TED Would Not Post In Video Library

This  is a text (via Manan Shukla) of a video that TED decided not to post because it was too controversial.  Its actually full of common sense. It provides a good insight into a couple of myths about why inequality is a good for everyone.  We all know that perfect inequality would not work, but we certainly don't need the current levels of inequality.  I think that it can be demotivating for the very wealthy and for those who believe that they are too far down on the pyramid to work their way up.

Will The US Retain Its Super Power Status In 21st Century?

Martin Wolf provides and answer to this quesion in The Financial Times.  He provides a good analysis of America's strengths which leads him to argue that our current world is a made in America world.  His last few sentences reflects his major concern.  He does not believe that country which views government as it worse enemy can retain its power.

Catholic Archbishop Criticizes Georgetown University For Invitation to Graduation Speaker

This article describes the efforts underway in the US by church authorities to bring Catholic institutions into greater conformity with church dogma.  Georgetown University invited a public official who was responsible for  requiring Catholic hospitals to provide contraceptives upon request from individuals in the Affordable Healthcare Act.  The bill has been changed to put the onus on insurance companies but the public official is certainly persona non grata to church authorities.

This puts Georgetown University into a difficult position.  Catholic colleges, like other colleges in the US, encourage the free exchange of ideas.  Criticism from church authorities, that demand conformity to dogma, is inconsistent with the common function of higher education institutions.  Opposition to a government bill by church authorities creates a conflict between church and state.  The church feels threatened by government legislation on issues like contraception which is in violation of church teachings.  The government, on the other hand, does not believe that it should be constrained in providing services to the public that are inconsistent with dogma.  This also reflects a general trend in the US in which religious leaders have been taking a more active role in politics.  They believe that the government should more actively reflect the values that are part of their faith.

Police Remove Occupy Moscow Protesters From Park

This article describes the response to protesters in Moscow who share some of the concerns of their counterparts in the US and elsewhere.  The protesters are being described by authorities as under the influence of the US government.  This tactic is similar to the response of authorities in the US to political protesters.  They are either socialists, communists, or dupes whose activities are funded by unfriendly foreign governments.

Third German Interview Of James Galbraith On Inequality

This interview focuses on inequality between nations in the eurozone.  Galbraith made several interesting observations that I have summarized.  The interview is well worth reading in its entirety.

Galbraith's general perspective on inequality growth is based upon credit cycles.  They create booms and busts that determine winners and losers.  In this case, countries on the periphery over leveraged on credit during the boom and now they are deleveraging during the bust.  That is increasing inequality between the states within the eurozone.  Moreover, unlike the US, the eurozone does not have a transfer union to redistribute income from one region to another.  Inequality between geographic areas in the US have been reduced dramatically by transfers to individuals via Social Security, Medicare; and other government programs such as defense spending and infrastructure investments that have been concentrated in the poorer southern states.

The idea that structural reforms in the peripheral countries can reduce inequality is nonsense.  Economic activity concentrates in competitive areas.  Northern Europe is more competitive than Southern Europe and there are not compensating mechanisms in Europe.  This is especially true at the individual level. In the US, government programs to individuals act as an income redistribution mechanism.  There is no income redistribution mechanism in Europe.  There will population redistribution instead.  Professionals, and other individuals with marketable skills, will migrate to countries with job opportunities.

The idea that countries on the periphery in Europe can become more competitive, and that this will enable them to finance their budget deficits at lower rates is a fantasy.  Once investors realized that debt in these countries was not guaranteed by membership in the eurozone, there has been a flight to safer investments.  Funds are flowing to Germany and other places that are believed to be safer.

Trade between the core nations and the periphery has also increased inequality between them.  Greece and Portugal, in particular, are the largest importers of military weapons relative to their size.  In Greece, spending on defense is better explained as a payoff to military leaders than it is by fear of attack.  They have purchased their tanks and submarines from Germany and France.

At the beginning of the crisis in Greece, the major concern was how to protect the German and French banks that were the major creditors.  The financial assistance to Greece was recycled as a flow of funds to those banks which ultimately were compelled to write down their loses.  In order to sell the financial aid to the public it was necessary to argue that Greece had to pay for its sins.  Austerity was the necessary penalty for their sins. It is not clear whether politicians really believe what they say about paying for sins, but it is certain that politicians know what they have to do in order to win popular support for their policies.

Norman Ornstein Told The Truth And Lost Access To Sunday Talk Shows

This article reports on the consequences of truth telling.  Norman Ornstein, who is a Resident Scholar at the conservative American Enterprise Institute,  co-authored a book that violated one of the media's unwritten laws. He was a frequent guest on the Sunday talk because he played the bipartisan game very well.  He often made cogent analysis of political issues that did not spare either political party.  In his recent book he decided to blame the republicans for most of our political problems.  The op-ed that he wrote about his book has gone viral.  Ordinarily, that would make someone more attractive to the media.  They play a big role in creating stars, which helps them to attract an audience.  That did not happen after the publication of his book.  He has become an "untouchable" for violating the unwritten law of the media.  They are supposed to referee a game in which both parties are equally wrong about most things.  The idea that one of the parties has gone off of the rails is taboo. If the republicans say that the earth is flat, or that it is the center of the solar system, the media must pretend that those views are worthy of debate against their opponents.  If they do not play that game, Fox News and Rush Limbaugh, among a host of others faithful to the flat earth hypothesis, will tell their audience the fair and balanced truth that the earth is really flat, and that it is in the center of the solar system. How else do you think that people have come to believe in the "confidence fairy"?

Tuesday, May 15, 2012

A Gloomy Outlook For Spain

This article from Dr. Gloom, who is usually more right than he is wrong, provides some details on the banking problems in Spain.  He does not see how Spain can deal with its problems without economic growth.  Furthermore, he does not see how economic growth in attainable in its current situation.  The ECB will not be able to step into the void because it will not be permitted to do so by Germany, but also because the Spanish government does not want to turn its banks over to the EU.

France's New Power Couple

This article in The Guardian provides an introduction to France's first socialist president in 20 years.  His politics may differ from that of his predecessor, but they have something in common as well.  They both have attractive and interesting partners.  Politics in France is nothing like politics in the US. Its hard to imagine a US president sharing the White House with a "partner", despite that fact that unmarried couples have become quite common in the US. Our presidents must reflect the values of a bygone era when Ozzie and Harriet were the model family on TV.

An Overview of Recent Events In Eurozone

This post is by a blogger who is not surprised by the problems in the eurozone.  He provides a critical outlook on recent events in Germany, Greece and Spain.  He argues that the recent elections in Germany's most populous state are a setback for Angela Merkel. He acknowledges that the election focused an local personalities and issues, but he also suggests that what happens in Germany's largest state is a bellwether for national elections.  The problem is Greece has escalated to the point in which none of the major political parties are interested in forming a government charged with implementing the unpopular austerity measures.  The public believes that austerity has been imposed on Greece by external forces.  The most recent concerns in Spain are about the health of its banking system.  The banks have written down the value of their loans to real estate developers and they may need help from the government as real estate prices continue to fall.  One bank has been bailed out, but the government does not have the financial means to deal with a broader banking problem.

It seems clear that the eurozone problems are not easy to resolve.  Discussion are underway about policy changes, but one wonders whether the medicine that might be prescribed will be adequate to the task.

Extending Bush Tax Cuts Is Twice The Cost Of The Social Security Shortfall

This graph (via Mark Thoma) tells an important story.  Republicans continue to spread alarms about the shortfall in Social Security over the next 75 years.  Many American's have been misled into believing that Social Security will not be there when they retire.  That has the effect of decreasing support for Social Security in the electorate, and raises concerns, in general, about the cost of government support programs.  It turns out that extending all of the Bush tax cuts is twice the projected shortfall in Social Security.  The cost of extending the upper income tax cuts is almost equal to the Social Security shortfall.

The bottom line is that the war on entitlements is essential to pay for the cost of the upper income tax cuts.  The so called budget deficit hawks should be focused on letting the Bush tax cuts expire in accordance with the legislation that made them temporary. The are really tax cut hawks wearing the disguise of deficit hawks.