Saturday, June 30, 2012

The Healthcare Debate Is Essentially A Moral Debate

A healthcare economist explains the moral problems that many people have about insurance.  All forms of insurance are bets that one makes about future outcomes. Healthy young people might believe that they would be better off if they did not pay premiums for health insurance because they are at low risk.  They might also believe that they would not be left to suffer if they were to have an accident or if they became ill.  Someone else would pay for their bad bet.  These are the rugged individualists who care little about how their decisions affect others.  Sometimes they call themselves libertarians.  Others might prefer to pay premiums because they want protection against unknown risks, and they do not want to be a burden to others. They believe more in social solidarity than in rugged individualism or fake libertarianism. Perhaps we should let young people make a decision at age 25, or so, that reflects their moral position.  The rugged individualists could choose not to purchase insurance, and they would not be permitted to get free healthcare if their bet turns out to be wrong. This eliminates the moral hazard problem of rugged individualists who believe that they will receive healthcare without insurance.  I don't think that many parents would agree with their children who profess to be libertarians.  They believe in solidarity when it comes to their family.

Nobel Laureates In Physics Meet In Berlin

This link (via Mark Thoma) is to the agenda of the Lindau lectures in Berlin.  There are several lectures on climate science and global warming.

A Conservative Pundits Explanation For Robert's Decision On ACA

This explanation for Chief Justice Roberts decision to uphold ACA makes sense.  The Chief Justice has to be concerned about the legacy of his court.  The Supreme Court used to one of the country's most respected institutions.  That is no longer true.  The majority of Americans now believe that the decisions of the court are strongly influenced by political factors.  Some analysts, who have read the dissent written by Justice Scalia, believe that it was written as a majority opinion that included Roberts.  They believe that Roberts changed his opinion along the way.  He may very well have been concerned about the reputation of the Supreme Court which rarely declares a bill passed by Congress to be unconstitutional.

This article concludes that conservatives should respond by electing Republicans in 2012.  Certainly, many conservatives will respond to the decision at the polls.  Most would have voted Republican anyway. I believe that liberals, who wanted a single payer plan like that in Canada, will become more enthusiastic over time.  I also believe that the Democrats will do a better job of explaining the advantages of the bill, and defending it better against misrepresentations.  For example this article suggests that the ACA represents a loss of liberty because it penalizes those who do not want to purchase insurance.  Almost all of our states have laws that make the purchase of automobile insurance mandatory.  Some states also have laws that mandate homeowner insurance.  Apparently, it is only a loss of liberty when the federal government mandates the purchase of insurance. This is a strange notion of liberty.

It troubles me, however, when pundits and Republican's argue that they can repeal the bill by voting Republican.  Nobody expects that the GOP can win a majority in the Senate.  They certainly will not have enough votes to overcome a Democratic filibuster.   The ACA bill is the law of the land and steps are underway among healthcare providers and in most states to comply with the law.  Attempts to disrupt the implementation of the bill are harmful to the operation of the healthcare system and to state governments.  The GOP has to learn to accept that it can not always overturn the results of elections, and the implementation of bills passed by Congress.  They have spent the last 4 years in efforts to overturn the results of the 2008 election.  America would be better off if they would participate in running the country rather than fighting the results of lost elections.  There is a reason why we have more than one party in America.  They should learn to accept that.

US Corporate Profits Fall For First Time Since Q4 2008

US corporate profits declined by less than 1% last quarter.  It was the first decline since Q4 2008.  Domestic profits increased by $41.7 billion, while international profits fell by $48 billion.  US multinational corporations are dependent upon global economic growth.  The downturn in Europe has hurt their profits, but the lack of growth in Europe has also slowed growth in China's export based economy.  That has affected economies that depend upon exporting commodities to China.  That results in reduced revenues for US corporations in South America and elsewhere.

While slower global  economic growth is not good for US multinationals, and it may affect their stock prices, Its hard to determine how this affects most Americans.  For most Americans, it only matters if exports from the US decline.  Profit declines in the subsidiaries of US corporations that don't export from the US to their international markets have no impact on US employment.  The relationship between US corporate profit growth and the US economy is ambiguous. Their economy is not our economy.

Friday, June 29, 2012

Death Notices About The Welfare State Are Premature

This article provides a graph that shows that there is no correlation between national spending on social welfare programs and the premiums that investors demand on sovereign debt.  In fact, many of the largest spenders pay the lowest interest rates on their debt.  There is a euro problem, but not a sovereign debt problem that has been caused by overspending on social welfare programs.

I would add that the sovereign debt problems are more easily explained by bad loans that banks made to private borrowers.  The banking problems have contributed to lower growth rates, and budget deficits in most of the troubled states. In any case, excessive spending on social welfare programs is not the basic cause of the problems in the eurozone.  Moreover, comparisons of the US and many other states to Greece are primarily driven by those who prefer to lower taxes and spend less on social welfare programs.

Why Zombie Ideas In Economics Never Die

The majority of macroeconomic theories and models have been badly damaged by recent economic events that are describe in this article.  Karl Popper's philosophy of science is based upon the idea that science consists of hypotheses that must be capable of falsification.  The endurance of zombie ideas in macroeconomics suggests that it is not a real science.  It clearly is not an experimental science, but historical data are available that should cause some economic ideas to die.  One of the problems is that most macroeconomic theories are also connected with political ideology.  Those that are connected to dominant political ideology are very resistant to falsification.  Moreover, economists that have built their reputations by developing theories and models that have not fared well in recent years, will not easily give them up just because they are not supported by historical evidence.

This article is about macroeconomics, but I believe that microeconomics has similar problems.  Therefore, I do not accept the view that macroeconomics must be based upon a foundation of microeconomics.  In my view some macroeconomic ideas just make more sense than other ideas.  There are lessons from history, and some theories about how economies work provide a better fit to historical data.

Franchise Industry Claims That ACA Will Cost Jobs

This article, by a franchise firm CEO, claims that franchisers will open up fewer franchises because the bill requires them to provide healthcare benefits.  She provides data to support her claim from a study by the conservative Hudson Institute that was hired to provide the evidence that the franchise association wanted.  The GOP will use this kind of data to argue that the ACA will reduce jobs in America.

I am skeptical of any study that is commissioned by organizations which are looking for data to support their positions.  There is a long list of research firms who depend upon that kind of business.  Many of them are supported by firms that deny climate change. However, I hope that the ACA does reduce growth in the franchise industry.  I would rather see more local firms and fewer franchises in America.

The Real Winners in The Supreme Court Decision

President Obama won a political battle but the real winners are Americans who will now have access to healthcare.  It will also help those who receive healthcare, through their employment, but who face the risk of losing their coverage if they lose their jobs.

The politics will continue leading up the the November elections.  The GOP will be running against the ACA.  Mitt Romney announced that he would work to repeal the law if he were elected.  He made many false claims about the bill in his announcement that will be part of his misinformation campaign.  Now that the constitutionality of the bill is no longer an issue, the Democrats will be more vigorous in pointing out how the bill will benefit millions of Americans.  A small majority of Americans do not like the bill, but that includes 15% of Americans who would have liked a stronger bill.  They would have preferred extending Medicare, which provides coverage to senior citizens, to all Americans. That was not politically possible in face of opposition from insurance companies and the GOP, but the ACA is a big step forward.  The hard core GOP base will rally against the ACA, but if the Democrats do their job well, they should be able to counter the disinformation campaign by the GOP.  After all, the basic structure of the ACA was developed by the conservative Heritage Foundation as an alternative to a single payer plan like Medicare for all Americans.  Mitt Romney passed a similar bill in Massachusetts. GOP leaders are defending his Massachusetts bill on the grounds that residents of Massachusetts, who do not like the bill, are free to migrate to another state.  That has not happened in Massachusetts, and the inability of Americans, who don't like the bill, to emigrate from the US, is weak argument against the federal bill which applies to all Americans.

Progress In Eurozone

Eurozone leaders agreed to fund banks that need to be recapitalized directly.  Before the agreement, funds were distributed to the state and distributed to the banks.  That increased the debt burden of the state and led to increases in the interest rates that they had to pay when they rolled over their debt.  They also agreed to  develop a method for supervising banking across the eurozone with a central finance ministry.  There were also discussions about the development of a plan to stimulate growth in the eurozone.

It seems like the need to maintain the common currency, which is under pressure, is leading to a stronger role  for greater integration in the eurozone.

Thursday, June 28, 2012

Supreme Court Rules On ACA

The court decided that the individual mandate is constitutional.  Roberts sided with the affirmative decision.  Details will be made later.

Why Is The Housing Market Recovering In US?

The article provides some bullish comments on the housing market.  Sales and prices are being driven by historically low mortgage interest rates and strong demand for rentals.  The fed has been driven the 15 year mortgage rates below 3% , which is good for real estate investors, and there is a large number of households that cannot get a mortgage because of a previous foreclosure, or a loss of income.  They are forced to rent.

JP Morgan's Loss On Big Trade Could Reach $9 Billion

JP Morgan recently reported that it had lost $2 billion on a bad trade, and that the loss could increase.  This article reports the the loss could reach $9 billion.  Hedge funds have figured out how to make lots of money by exploiting the weakness in JP Morgan's position.  JP Morgan can survive the bigger loss, but losing $9 billion on a trade is not a good thing for a bank that is using insured deposits to make risky bets. To paraphrase Everett Dirkson's comment about federal spending: "$9 billion here, and $9 billion there, after a while these billions add up".  Of course, Mitt Romney has no problem with the loss.  He argued that JP Morgan's loss is another investor's gain.  He is correct.  That is the way Las Vegas works as well.  One bettor's loss is another bettor's gain. However, we don't insure JP Morgan's deposits so that it can gamble with insured funds.

Wednesday, June 27, 2012

The Governance Battle In Higher Education

This article does a good job of highlighting the governance issues in higher education.  One of the issues, that uniquely affects state university systems, is that state legislatures have cut back on the funding of their state systems.  This is partially due to the recession and declining tax revenues, but it is also a symptom of a more generalized anti-government trend by movement conservatives.  They don't want to pay taxes to increase access to higher education.  They do not regard higher education as a public good.  Therefore, the consumption of education should be determined by the price system.  Many also believe that there is a liberal bias in university faculties that gets transmitted to the younger generation.

Universities also have a culture that is antithetical to many conservatives.  There is more participation between faculties and administrators in making academic decisions. For example, course syllabi  are usually proposed by faculty, and submitted for approval to curriculum committees that include faculty members as well as administrators. Academic policy committees are also used to set academic standards and grading policies. Faculty committees are also used to recommend promotions and the awarding of tenure. University Trustees and Boards have generally recognized and supported these traditions.  They serve a good purpose if the objective is to maintain the current system of higher education. On the other hand, those who want to cut public spending on higher education, or change the system in other ways,  also feel a need to change the traditional system of governance.  This is best done by placing change agents on university Boards, who assume a more active role in governance, and who also favor administrators that will work with them to achieve certain goals.  One of the goals is to cut costs, and to operate with less support from government funding.  They select administrators who can achieve those objectives.

The conflict that we see today in university governance is a reflection of broader changes in the external culture. It could not be otherwise when great nations attempt to navigate in a world that is rapidly changing, and when there is more polarization in society about future directions.

Tuesday, June 26, 2012

UVA Board Votes To Reinstate President Sullivan

This post contains the points that were made by the Board in a unanimous decision.  Rector Dragas did not vote on the issue.  Hopefully, this fiasco will be a lesson to other Boards on university governance.

Federal Court Deals A Blow To Climate Change Deniers

A federal court upheld the Environmental Protection Agencies ability to enforce regulations that limit carbon emissions by factories and motor vehicles. They rejected claims by industry officials that carbon emissions were not harmful to the environment.

The "Lost Decade" In Higher Education And The Future Of Higher Education

This op-ed in the NYT, by the editor of the Chronicle of Higher Education, tells us what is wrong with higher education in the US. The author argues that colleges are like record stores and newspapers that have been transformed by digital technology.  He appears to support the position of the Board at UVA that fired its President because she has not embraced technology fast enough.  Colleges need to lower their costs and adapt to digital technology or they will be history.

I have no idea what he means by the "lost decade" in higher education.  This strikes me as the kind of hyperbole that we get from pundits like David Brooks, George Will and Tom Friedman.  The only data that he provides about the lost decade is that there were only 2 colleges in 2003 that charged $40,000 for tuition, fees and living expenses.  That number rose to 224 in 2009.  That is a totally meaningless statistic.  It would only make sense if we knew what the prices were at the 224 colleges in 2003.  We really need to know how the prices have risen in relation to general inflation in order to gain a better understanding of how colleges are performing.  He turned me off immediately with his lack of statistical sophistication.

He tells us that colleges have raised their prices because they have benefited from high demand for a college credential.  They created some of that demand by advertising, providing enticing new academic programs and by improving their facilities.  In other words, the have done a good job of responding to student needs.  They also have benefited from the willingness of government to support student loans.  Government does this because it believes that a college education is a public good. Moreover,  families are willing to take out the loans because they expect to receive a return on their investment through higher wages upon graduation. He must believe that colleges which act rationally to create demand, and families that are willing to borrow because they expect a good return on their investment, is a bad situation.  It is a bad situation, but is hardly a lost decade for the reasons that he indicates.  If a college education is a public good, and the primary means by which we provide social mobility, we should be more concerned about increasing access to higher education, without requiring families to take on a huge debt burden.  I suspect that his real interest is in promoting technology as a means to lower the cost of higher education.  He may also be against government programs that improve access to higher education.

He makes his argument for cost reduction through digital technology by comparing higher education with newspapers, bookstores, record stores and book publishers which have seen their industries transformed by digital technology.  The implication is that higher education will suffer the same fate unless it moves quickly into the use of digital technology.  He refers to efforts being made at Harvard, MIT, Stanford and other prestigious colleges to explore ways in which digital technology can be used to deliver academic content.  They are doing this because most of the current platforms for providing distance learning have deficiencies.  Hopefully, they will find ways to better adapt technology to higher education.  When that happens most colleges will be quick to make use of the technology.  In the meantime, most colleges are already using digital technology, and it does not always lower cost.  They have made expensive investments in networking and in large staffs that are needed to support students and faculty that are taking advantage of computers and the Internet. Furthermore, most colleges  already use a low cost technology for many of their introductory courses.  It is called a lecture delivered by a professor. The cost per student to deliver lectures is very low.  They may easily be replaced by technology, but the real costs are in upper level courses where the cost per student is very high. Laboratory courses in the sciences also depend upon the use of expensive equipment and a well educated support staff.  In summary, the argument by analogy that he used to conclude that colleges will suffer the same fate as other industries that sell commodity products is superficial.  There is little difference between a print newspaper and a digital newspaper available over the Internet.  In fact, digital newspapers are a better solution for most customers.  The problem for print media is that their profits come from advertising.  They have lost much of their classified ad revenue to digital media like Craig's List.  Advertisers are less dependent on print media to reach their target customers.  Higher education is not a simple commodity like print media that are easily replaced by digital technology.  Harvard and MIT will look pretty much like they do now in the next decade.  However, state supported higher education may look very different if their Boards continue to focus on cost reduction instead of educational quality.  They will also suffer if their Boards continue in their efforts to transform  governance into the corporate models they are more familiar with.  That is the real crisis in higher education that we should worry about. These are the members of the UVA Board.  None of them have a background in higher education.  All of their experience is in business. 

Housing Prices Increased In 19 Of 20 Cities In Case-Shiller Index

Prices increased  for all of the cities in the index, except Detroit, from April to March.  The index is not seasonally adjusted so it may be reflecting the Spring buying season.  It appears, however, that investors are scooping up homes at their current prices.  Hopefully, the market has bottomed out.

Which States In US Are Net Beneficiaries Of Federal Taxes and Federal Spending?

This article shows how US states compare with each other as recipients, or as providers of funds, via federal government spending outlays.  Rural states, especially in the South, are net recipients of federal funds that come from the richer states, primarily in the North and on the West Coast.  Ironically, the poor states that benefit most from federal spending are the strongest opponents of federal spending and progressive taxes that primarily affect the richer states.  This says a lot about the ability of individuals to make decisions that maximize their utility.

Monday, June 25, 2012

Rigging Bids Is So Common On Wall Street That They Think Its Fair

This story (via Manan Shukla) describes the way that bankers rigged the bids on interests rates that they pay to government entities on the money that they receive from issuing bonds.  The bids are managed by brokers who manage the auctions.  They set the auctions up so that the winning bank knows what  the other banks have bid for the interest rate.  The auctions require at least three bidders, but they understand that they must submit losing bids for some auctions in order to win other bids that are rigged in their favor.  The brokers get a cut of the action and the bidders save a small percent on the interest that they pay to the bond issuer.  A small savings on the interest rates paid for multimillion dollar deals adds up to substantial returns.  This has been common practice for at least 10 years in the bond market.  It has cost government entities billions of dollars in lost interest payments.  The defense lawyers argued that the interest rates were only shaved a little bit by the rigged auctions.  Therefore, they were fair.

The former Attorney General of New York made a telling comment after the details about the scam were revealed when it came to trial.  He said that the unspoken secret about capitalism is that capitalists hate competition.  It is bad for profits.  Rigging bids is just one of the ways that is used to avoid competition.

Germany's Finance Minister Answers Questions About Greater Integration

In this interview Wolfgang Schauble provides his view of fiscal union in Europe that would cede more authority to Brussels.  Economic policy would be developed in Brussels and there would be a directly elected president of the union.  The european parliament would also be given more authority.  It might look something like it does in Germany or in the US Senate.

He believes that European prosperity depends on a European union.  Globalization makes it difficult for any country to achieve prosperity on its own.  The current crisis might enable more integration to occur than would have been possible before the crisis.  He gave an example of how Germany itself was integrated after the fall of the Berlin Wall.  He did not believe that this would be achieved as fast as it did.

It is encouraging to get Schauble's views on the crisis and on European integration.  He has been viewed in the media as one of the roadblocks to integration.

Optimum Currency Area Theory And The Eurozone Crisis

This is copy of an address by Paul Krugman to the National Bureau of Economic Research.  He describes the two basic ideas behind optimum currency area theory and shows how the theory would predict problems like those faced today in the eurozone.  He gives examples in the US of how each of the optimum ideas worked to help Massachusetts and Florida out of economic difficulties.  Massachusetts suffered an economic shock when the states largest employers went out of business when the mini-computer industry was destroyed by the PC.  Unemployment increased dramatically but it was easy for unemployed mini-computer industry employees to migrate to states that needed additional labor.  The level of employment in Massachusetts has not recovered to the level that existed when the mini-computer industry existed, but the unemployment rate is lower because the Massachusetts labor force is smaller.

Florida was hard hit by the bursting of its housing bubble. It has been helped out its slump by its fiscal relationship with the federal government.  Florida sent fewer dollars to Washington during the slump than its citizens received from federal social welfare programs like Social Security, Medicare, Food Stamps and unemployment insurance support.  Net transfers from Washington to Florida amounted to 5% of Florida's GDP.

Fiscal integration was by far the most important factor to troubled states in the US that were hardest hit by the bursting of the housing bubble.  It would be difficult to obtain that level of fiscal integration in the eurozone.  Krugman argues that the availability of a central bank that could work as a lender of last resort to struggling banks, and as well as providing deposit insurance to limit runs on the banks in the periphery, would be a step in the right direction for the eurozone.  He argues that it is in everyone's interest to preserve the concept of a more united Europe that led to the development of the common currency.

A Description Of The Affordable Health Care Act That Most Americans Hate But Don't Understand

The majority of Americans would like to see the Supreme Court declare that AFA is unconstitutional.  The court is likely to oblige.  Its a forgone conclusion that the decision hinges on a single justice who sometimes disagrees with the conservative justices.  Unfortunately, most Americans no very little about the healthcare act that they have been taught to hate.  This article does a good job of describing the ACA
 but it is probably too late.  The media have failed in their task of educating the public about the law.  They have facilitated the efforts of politicians to distort the last chance that Americans will ever get to reform the healthcare system.

Robert Samuelson's View Of Global Economic Crisis Has A Missing Link

This op-ed by Samuelson provides a reasonable view of some of our economic problems. Its hard to disagree about some of his general observations.  Whats missing, however, is that he ignores the behavior of Wall Street, and other large banks, that led to collapse of the banking system.  He also ignores the role that governments played in enabling the banks to flood the world with mortgage backed securities that have lost most of their value. The housing bubbles in the US, Ireland , Spain and the UK, were made possible by the willingness of governments to let the banks maximize their profits by taking highly leveraged risks.  Its hard to imagine a description of the global economic crisis that ignores the primary causes of the crisis.  This is a form of historical revisionism that we usually associate with the former USSR.  It is alive and well in the US.

The Struggle To Find A Solution To Banking Problems in Europe

This article focuses on Spain, and eventually Italy, which have problems in their banking systems, and national governments that do not have the resources to deal with the problem.  Eurozone leaders are dealing with two sets of problems.  They recognize the need for a more integrated financial system, but they are concerned about the problem of making money available to states, without more control over their fiscal policies. We have a problem of the chicken and the egg in Europe.  Which should come first, fiscal integration or financial integration?

Virginia's Governor Has Relationship With Koch Brothers

This article reports on visits by the Governor of Virginia to conferences sponsored by the Koch brothers.  The Koch brothers are billionaires who use their wealth to advocate radical right wing directions in government.  They have been leaders in promoting global warming denial, and for a smaller role of government in the economy.  Their father was a founder of the far right John Birch society, which accused President Eisenhower of being a communist.  Extreme views, like their accusations about the Republican president, eventually led to public disfavor and the breakup of the John Birch society.  The Koch brothers have decided that it would be better to gain control over the Republican party than to form a third party like they did when the John Birch society was in vogue.  They have been behind much of the funding and the organization of the Tea Party in the US.  The Tea Party gives them a position within the populist movement that has influenced the direction of the Republican party.  They have also funded think tanks that advocate far  right policies. One of their think tanks is the Mercatur Center which is located in George Mason University in the state of Virginia.  They also offered to provide funding for a professorship in George Mason's economics department under the condition that they get to select the professor.

The relationship between the Koch brothers and the Governor of Virginia suggests that they have common views about the direction of the US, and more directly, the state of Virginia.  The recent problems at UVA may be related to the views of its Governor.  He placed 8 members on the 16 person Board at UVA after his election.  Governors usually select members for the Board who contribute to their campaigns.  Governor McDonnell has most likely selected Board members who are also advocates for his political views which are similar to those of the Koch brothers.

Will It Be 1931 All Over Again?

This article reminds us the the Great Depression was avoidable. In 1931 a major bank in Austria failed.  Central bankers in the US and France could have done something to prevent the problem in Austria from spreading throughout the world, but they did not see Austria's problem as their responsibility.  The crisis in Austria spread throughout the global banking system and the global economy collapsed.

Today the most dangerous situation is in Spain.  The Spanish banks are in danger of failing, and the Spanish government is too burdened with debt to rescue its banks.  Leaders in the eurozone decided not to provide funds to the banks.  Instead they loaned money to the Spanish government so that it can rescue its banks.  Private investors decided that loading the heavily indebted Spanish government with addition debt made its bonds riskier.  That has driven up the interest rates on the bonds that the government needs to sell as its bonds mature.  It is not sustainable for any country to pay interest rates on its debt that exceed its growth rate.  Spain has a negative growth rate and it is forced to turnover its debt at unaffordable interest rates.

A major difference between 1931 and 2012 is that we know more about depressions and how they can be contained.  Unfortunately leaders in the US and in Europe do not appear to have the will do take the necessary actions to remedy the banking problems in Spain.  We have a global economy, and an international banking system that is tightly connected.  On the other hand, we have a political system of nation states that are constrained by national politics, and a narrow concept of  national self interest that does not  adequately recognize their vulnerability to a breakdown in the global system.

Sunday, June 24, 2012

David Brooks Op-Ed Inspired UVA Rectors To Fire President

This David Brooks Op-Ed was cited in the emails between the Rector and Vice-Rector of UVA's Board.  The Op-Ed convinced them that UVA was behind the times in pursuing online education.  David Brooks, of course, knows nothing about this topic compared with the academics at UVA.  He is just part of the conservative mafia that is doing what it can to undermine higher education in the US.  This is a university governance nightmare.  The specter of university board members firing presidents who do not agree with David Brooks is horrifying.

Saturday, June 23, 2012

Grover Norquist Holds GOP Accountable To His Pledge

This article describes the power of a GOP operative to hold GOP elected officials accountable to his simple fiscal policy.  Never increase taxes and make substantial cuts in non-defense discretionary spending (which is essentially healthcare and social security).  Norquist, and organizations with a similar  creed, such as The Club For Growth, threaten to run primary campaigns against GOP incumbents who do not adhere to the code.  They have been effective in arousing tea partiers against incumbents who dared to violate the code.  The incumbents have received the message.

Joe Stiglitz Argues That Monetary Policy and Fiscal Policy Contribute to Income Inequality

Stiglitz suggests that growing income inequality has been supported by government policies.  He provides examples of how they contributed to the recession,  and to the ineffectiveness of  the recovery.

A Lesson On How Private Equity Works

Mitt Romney's management of Bain Capital has been used as his rationale for managing the US economy as President.  That has drawn a lot of attention to how private works.  This study by the NYT provides insight into how the game is played.  Its a game in which private equity firms rarely lose even when the firms in which it invests go bankrupt.  Sometimes Bain fees and borrowing by the firms in which they invested contributes to their losses.  Many of the firms borrowed money in order to pay dividends to Bain after it gained control of the firm.  The dividend payments were used to give Bain a fast return on its invested capital even as it increased the risk of insolvency to the firm.

Virginia's Governor Gives Ultimatum To UVA Board

This is a copy of the letter that he sent to the Board.  The must make a decision about the status of Sullivan by next Tuesday or he will fire the entire Board.  Its pretty clear that this issue is getting more attention than he wants in the media.

How Much Income Inequality Is Too Much?

Most people would agree that perfect inequality would not work because it would affect an essential incentive system.  Therefore, some inequality is socially desirable, but there are debates about where to draw the line.  This article provides some ideas on how we might think about how to draw the line.

Societies determine the manner is which benefits are assigned to individuals.  John Rawls argues that the assignment of higher benefits to some individuals is fair when doing so benefits all individuals.  Most believe that we could lower the income of the top 1%, and increase benefits to the bottom 40% and also increase total social welfare. They would conclude that current inequalities are too high.  The rapid increase in incomes going to the top 1% in recent years has raised concerns that higher levels of inequality might even be damaging.

Joe Stiglitz has written about the damages of growing inequality. Implicit in this argument is that the growth of inequality violates an implicit social contract.  It has led to a decline in social mobility and opportunity.  This leads to alienation and a loss of social cohesion and stability.  In a sense the bottom 40% give up on society as it presently exists. It would also lead to a decline in productivity if the bottom 40% lost their incentives to develop knowledge and skills that benefited society.  It would also increase the costs to society for dealing with criminal behavior, violence and other consequences of lower levels of social mobility.

Others have looked at the relationship between health and income.  A market system for healthcare implies that those with higher incomes would be healthier than those with lower incomes.  Some nations have dealt with that issue be using a variety of methods to reduce the relationship between healthcare and income.  In the US, this has become an extremely important issue because it has an inefficient healthcare system.  It  relies on the market system to determine the prices paid to healthcare providers, and it has a very inefficient payment system that forces healthcare providers to deal with a large of number of insurance providers. This leads to a very expensive system that excludes millions of citizens from adequate healthcare.

Within economics, which has a long history of dependence on utilitarian philosophy, it is fairly clear that the marginal benefit that the bottom 40% would receive from a unit of higher income would be greater than the marginal benefit of a unit of income that went to the top 1%.  Therefore, many economists use the utilitarian argument to argue against growing income inequality.  That is also why they support a progressive tax system that is based upon the ability to pay theory.  In the US the tax system has been made less progressive over the last 40 years. Economists who adhere to utilitarian principles would like to restore the progressiveness of the tax system.  Unfortunately, income inequality also leads to greater political inequality.  The top 1% has used its political power to make the tax system less progressive and it has also used its political power reduce the effectiveness of government programs to redistribute income.

This is a good sample of thinking about the how to draw the line on income inequality. A combination of these ideas provides a good start for those who are interested in the problem of growing income inequality.

Friday, June 22, 2012

GOP Candidate For Senate Race In Indiana Is A Perfect Fit For Mitt Romney

This is link to two videos that have been prepared in advance of  the "Supreme" Court decision on Obamocare by the GOP nominee.  He is ready for any event.  One video is ready to declare victory for the "correct" decision. The other is ready to deal with the "wrong" decision.  He is a good match for Mitt Romney who has two positions on Obamacare, and almost everything else.

The Corporate University And William Blake

This article came to my attention because of recent events the University Of Virginia.  It is an essay on William Blake, with a parallel story about the growth in the corporate culture at UVA, which is not atypical.  After all, the GOP Governor of Indiana was just announced as the new President of Purdue University.  He built his reputation on cutting the costs of government.  He is the perfect choice for the corporate university.

Apparently, William Blake had ideals that he worshiped, but was unable to achieve in life, or in his art.  He is likened to the modern university professor who has similar ideals, but who is unable to fight off the Satan of corporatism, just as Blake was unable to deal with his Satan.

A Review Of Three Books On US Politics And Our Inability To Govern

This review provides a good description of three recent books which offer insightful analyses of how the US has fallen into its current trap.  It tells the story of the politics inside the Obama Administration that led to inadequate responses to the banking collapse, and an ineffective response to the recession.  It also attempts to explain Obama's failed efforts at bipartisanship. In a sense, the Obama Administration, like the Clinton Administration, has attempted to occupy the political center.  It does not have a coherent  ideology.  The Republican Party is united by a commitment to an eighteenth century economic ideology, and it has done a better job of connecting with angry white Americans who are concerned about their loss of dominance as the result of immigration.  Republicans have used that anger, and large budget deficits, to attack government social programs.  They are portrayed as programs that primarily serve the interests of groups that they do not like.  In the last presidential election, John McCain got 56% of the vote from white males, while losing the election by a wide margin.  No Democratic presidential candidate has won a majority of white male votes since Lyndon Johnson passed the civil rights act.

The GOP has also turned the banking crisis against the Democratic Party.  Americans were outraged against the bailout of the banking system that was begun under George Bush, but continued under the Obama Administration.  The primary goal of the government's response to the crisis was to restore the banking system to its prior state before the collapse. This has been the goal in both administrations. Efforts at reform, and programs, to help homeowners service their debt have been weak.  Republicans have led the effort to block reforms by appealing to anti-government attitudes in their base, and they have been allowed to get away with it by a political party that has worked hard to build alliances with Wall Street since the Clinton Administration.

The books reviewed in this article provide a good overview of what has taken place in America over the last few decades.  Unfortunately, it provides a picture of a downward spiral that will be hard to reverse.  As the GOP moves further towards the far right, the political center moves in the same direction.  A political party that desires to capture the center will move in the same direction.

Bain Capital Was One Of The Leaders In The Outsourcing of Labor To Low Wage Countries

This article provides details on Bain Capital's operations under Mitt Romney.  Bain specialized in reducing costs by offshoring labor in the companies that it advised or acquired. Bain was one of the first consulting firms to specialize in that activity.  It has now become common practice.  He is just the leader that we need to create jobs. Perhaps he can outsource the operation of government to low wage countries.  It might be a good way to reduce budget deficits.

Moody's Cuts Credit Ratings Of 15 Large Banks

This article provides Moody's explanation for the ratings downgrade and some of the reactions to actions taken by Moody's.  It has been four years since the banks needed to be rescued by government.  Most have better capital positions, but their balance sheets and operating performance are not up to par.  The rating downgrade will make it more costly for the banks to raise money from the bond market and it might affect cause some customers to look for safer partners.  The banks may also seek to increase profits by raising fees for services that were provided free of charge.

There is more information in this article which lists the large global banks and places them in three categories of relative strength.

Privatization As Political Patronage

This article picks up on a NYT investigation of half way houses in New Jersey that have been turned over to a private corporation to operate.  The result is pretty typical.  The profit motive leads to cost cutting and there is no incentive to provide adequate service because there are no competitors in the "market".  It is simply a vehicle for politicians to funnel taxpayer money to private operators who are supporters of the government officials who make the deal.  In other words, it is consistent with the development of the predator state, as described by a book with that title by James Galbraith.

Thursday, June 21, 2012

House Committee Votes To Hold US Attorney General In Contempt of Congress

Government dysfunction in the US has reached a new high.  The vote by the GOP led Committee will go to full House that will vote on party lines.  The US Attorney General will then be required to prosecute himself.  There is no precedent for holding the highest legal official in the US in contempt of Congress. One would expect that it would only happen under extraordinary circumstances. That is not the case. The contempt charge resulted from the death of one US agent. He was killed by a weapon that was lost during a sting operation that sought to track a shipment of weapons to Mexico.  The Justice Department gave the Committee thousands of documents that pertained to the sting operation.  The Committee is demanding documents about what happened after the agent was killed.  They claim that this extraordinary contempt charge is necessary to provide justice for the agent's death.  One might expect that it has more to do with the 2012 election campaign.

How Has Austerity Worked In Europe?

Krugman provides a graph that shows a positive relationship between increases in government spending in various European nations and growth in GDP.  Austerity during recession was a bad idea in Europe.  He also counters critics of government spending who argued that it would increase interest rates.  The standard argument is that government borrowing will crowd out borrowing by private industry because the supply of available savings will shrink.  That did not happen.  Critics then claimed that the Fed distorted the market by purchasing securities.  The Fed cut back on purchases and interest rates did not rise.  A similar effect took place in the UK.  Countries that have the own currency have not been affected by inflation during periods of high unemployment.  There is a good time for austerity that is worth mentioning.  Clinton raised taxes and cut government spending, but the economy grew rapidly despite budget surpluses.  Consumer spending, and large increases in business investment during the internet boom,  compensated for fiscal austerity.

Update On UVA Crisis

The Vice Rector of UVA, who was part of the team that led to firing the UVA President, has resigned.  There are now 15 members of the Board.  Some believe that there are 8 votes to reinstate Sullivan.  She indicated that she would not come back as long as Helen Dragas remains on the Board.  In any case, the fiasco at UVA will become a case study for poor governance.  If Sullivan is not reinstated, UVA would have great difficulty recruiting a successor.  Nobody of any stature would want to work with a UVA Board that wants to meddle in the operation of the university, and is led by Helen Dragas.

Wednesday, June 20, 2012

Protecting Our Great Universities From External Influence

This article (via Manan Shukla) raises an important issue.  America's great universities are a public good.  They provide valuable services to society through research and the critical thinking that they provide on important issues.  There are many risks, however, that threaten the important functions that they provide.  One of these risks is that consulting contracts to faculty, research grants to universities, and other ways that money flows to our prestigious universities might have an influence of the objectivity that we expect.  This article raises questions about how a $50,000 consulting contract with a Wall Street bank might have influenced the position of a prominent professor about banking regulation. Universities should protect themselves from potential abuse by requiring public disclosure about financial relationships that might enable financial contributors to benefit from their reputations.

Wall Street Estimates On Euro Versus Dollar

This graph shows the estimates by Wall Street banks of the relative value of the euro to the dollar.  Estimates vary from a low of 1.15 to a high of 1.40.  The analysts are flying blind.  Nobody really knows what is going to happen.

How To Write A David Brooks Op-Ed

I have been trying to say something similar to this for years.  This post refines my efforts to decipher David Brooks' rhetoric.

The Plot Thickens At UVA

This post suggests that Goldman Sachs, which has an ownership position in an online education firm, made a presentation at UVA that was rejected by the president.  It needed a prestigious university to use its system in order to promote the brand.  Goldman offered to return profits to UVA for using its system.  In other words, UVA would sell its brand in return for private funds.

The theory outlined in this post is speculative but it would explain the emails between the Rector and Vice Rector about resistance by Sullivan to online education at UVA.  The GOP governor of Virginia has also been active in selling naming rights for public institutions.

Conservatives Debase The Presidency By Efforts To Disgrace Our Elected President

Dana Milbank reports on several incidents that are part of a general effort within the GOP to turn the president that we elected into an object of ridicule.  He argues that they go beyond bad taste.  They show no respect for the office of the president, and the ability of presidents to provide leadership.  Leadership is in scarce supply.  We debase it at our peril.

Milbank reports that Tucker Carlson, a conservative pundit that he used to respect, has also stepped over the limit.  He believes that one of his reporters should get a raise for heckling the president during his speech at the Rose Garden.  I think that Tucker Carlson is typical of many conservative operatives.  His behavior has been altered by the general acceptance of outrageous behavior within the conservative movement.  Individual behavior is conditioned by changes in social norms.

Details Emerge About Ouster Of UVA President

A series of emails between the Rector and Vice Rector of the UVA Board provide insight into their rationale for firing the president.  One of their concerns was that UVA was falling behind in the movement towards online education.  The Rector and Vice Rector exchanged emails, with links to articles in the press, about the efforts by several universities to develop platforms for online courses.  There was also a reference to the Darden School which is part of UVA but self supporting.  Darden specializes in executive education programs. Executives who attend these programs are funded by their sponsoring firms. The programs are expensive and do not require the overhead of a university.  The Rectors seem to like the concept of a public university that does not require the use of public funds.

It is pretty clear the Rectors believe that they know more about the issues of online education than the UVA administration.  They got their information from reading a couple of laudatory articles in the press.  This made them better informed than university administrators, who are certainly better informed about the issues than the Rectors.  The Rectors also believe that they are more knowledgeable about the "crisis in higher education".  One can read David Brooks, George Will, Robert Samuelson and other conservative pundits who define the "crisis".  It is part of a general conservative effort to cut public spending on social programs.  It is largely a manufactured crisis that leverages the decline in tax revenues that result from the recession and our slow recovery.

I devoted more time to this issue than it would have deserved if it were an isolated event.  I view the UVA incident as a dangerous intrusion of politically motivated Board members on the operation of a complex organization that they do not understand.  Their anxiety about the crisis in higher education is largely a manufactured anxiety that is being repeated in other other states across the nation.  The willingness of the Rectors to take the drastic step of firing a popular president suggests that the conservative movement is making progress in its efforts to defund public education.

Tuesday, June 19, 2012

A Critique Of Neo-Classical Macroeconomics And Monetarism

This post is primarily for students of economics.  It raises questions about  fundamental assumptions in economics such as the definition of economics as a response to scarcity.  More generally it proposes a way of thinking about economics that is more consistent with the ways that businesses and households actually operate.  It also argues that most of the models used by central bankers fail to reflect the basic operations of real economies. Economics is in need of a new paradigm.  This may point the way to for new paradigms to replace the neo-classical paradigm that has outlived its usefulness.

University Of Virginia President's Farewell Address

This is a transcript of the farewell address.  It appears that influential members of the Board wanted its recently hired leader to behave more like a corporate turn around manager, than as a the president of a great university. Some members of the Board also wanted  to eliminate courses that they did not like.  They seemed to be primarily concerned about the financial position of the university. They acted like a corporate board with a focus on the bottom line.  There also seemed to be an expectation on the Board that the president of a university can unilaterally make dramatic changes in a very complex organization that has a different culture than most businesses.  They were in search of a "corporate savior" The Interim President named to replace Dr. Sullivan is from the Business School. I suspect also that politics was involved.  The newly elected Republican Governor appointed 8 new members to the Board.

The 2012 Election Framed By An Economist

Mark Thoma, frames the 2012 election as a choice between a free market economy and an economy in which government has an important role to play.  This is one of fundamental differences between Democrats and Republicans, but it is not likely to be the primary rationale that voters will use to make their choices.  The  GOP will promise tax cuts and position itself as the fiscally responsible party that will save the country from bankruptcy.  It will also position itself as the party that is aligned with job creation, versus an administration that destroyed jobs.  Mitt Romney is the successful business leader that our country needs to fix the economy that has been harmed by Obama's lack of business experience and management skill.  These are relatively simple ideas that voters can understand.  The president will be on the defensive.  He has been in charge for the last four years and we still have high unemployment.  He will be forced to put some of the blame for the slow recovery on GOP obstructionism, but he also has to convince the public that the next four years will not be more of the same.  He has to outline the steps that he will take to grow the economy and lower unemployment.  He also has to provide a plan that will enable government to support the entitlement programs that many depend upon.

Solar Power Production Increasing Rapidly

This article explains the rapid growth in solar energy production.  Growth is driven by rapidly falling prices for solar panels, that are also becoming more efficient.  It is also affected by the the cost and complexity of competing energy sources.  Nuclear energy is losing market share to other sources.  The use of solar energy is growing most rapidly in developing economies, where time to market, and cost considerations are important.

Monday, June 18, 2012

What Are The Options And Issues Regarding European Integration?

This article provides an excellent description of the various approaches to greater integration in Europe.  It also shows the political issues, and the technical details of banking integration. It is clear that greater integration is needed to resolve many of the issues in Europe. It is helpful to have a better understanding of how this might happen.  The consequences of no solution may be strong enough to push in the direction of a solution.

The Greek Elections Are Over But Politics In Europe Are Not More Predictable

This article shows the results of the Greek election.  A pro euro party has won the most seats, but it may not be able to form a government.  The socialist party in France also attained a majority in the French Assembly.   This may affect the consensus that has existed among the core eurozone countries on how to deal with the problems that must be resolved.

Ouster Of University Of Virginia President Has Consequences

This article sheds more light on the circumstances surrounding the firing of the president. It also describes some of the repercussions from the manner in which it was done.  The board never took a formal vote on the  decision.  Apparently, Helen Dragas, contacted board members independently until she got a majority of the board to support a decision to fire the president.  She then informed the president that she had enough votes to fire her.  The president then submitted her resignation.

Several huge donors to the university have reacted strongly to the manner in which the decision was made.  They will not make further contributions to the University unless the decision is reversed.  The Provost of the University also made a speech to the faculty that was met with resounding applause.  He told the faculty that he might have to resign because the process violated the University Of Virginia honor code which is a valued part of the university's culture. This could lead many in the faculty to resign as well.

The board has the legal authority to do as it pleases about the decision.  It does not have the power, however, to contain reactions to the decision that harm the reputation of the university.  This decision is far from being final.  Some board members have raised questions about the process as well.  Apparently, several were not included in the process that was orchestrated by Helen Dragas.

How To Match Our Top Graduates To New Enterprises

Around one third of the graduates from Ivy League colleges in the US end up on Wall Street, or working for a management consulting firm.  They do so for good reasons: The pay is good, the jobs are in desirable cities, and the firms have extensive recruiting resources at those colleges.  This article is about an effort to get more of the graduates from our top colleges to take jobs with new business ventures.  Most of the new jobs that are created come from successful start ups (not simply small businesses), and more would be successful if they could siphon off more of the graduates from our top colleges.  Many would also find the work more fulfilling because they would get a sense of accomplishment. Their marginal contribution to the success of the firm would be higher than it would be in firms that are loaded with talent.

The entrepreneur who started Teach For America, which has recruited thousands of top graduates to take teaching job where they are most needed, has started a business to funnel more of our top graduates into new business ventures.  It is off to a good start, and it has even recruited candidates from Wall Street firms who are looking for more fulfillment.  Lets hope that Venture For America is as successful as Teach For America.

Sunday, June 17, 2012

The New Washington Post Versus The Old Washington Post

The Washington Post's reporting on Watergate led to the resignation of Richard Nixon. A lot of political pressure was put on the paper to stop its investigations into Watergate.  It chose to continue with its investigations.  This article reports on the aftermath of Watergate. New laws were written to make it more difficult for political parties to secretly raise campaign contributions. The Citizens United decision by the Supreme Court has overturned all of the laws that made it difficult for corporations and individuals to funnel money into politics. The message of Watergate, and the efforts to limit the corrupting influence of money in politics has been ignored.  The old Washington Post would have taken a position against the corruption of the democratic process. This article takes both sides of the issue. It includes comments from individuals who support free speech and those who believe that money corrupts.  The reader is left to determine whether the unlimited flow of money, that does not require the sources to be revealed, puts the democratic process at risk. Freedom of speech is opposed to the potential for corruption.  We must choose between opposing free speech, which we value, over the potential for corruption which cannot be proven.

We have come a long way from Watergate and the courageous performance of The Washington Post in informing the public about the illegal behavior of our elected officials. It is less willing to take unpopular positions on important issues.

Krugman Versus Brooks On NYT Op-Ed Page

Paul Krugman is an economist who is despised by those who are invested in faith based economics. He uses data to support his conclusions.  David Brooks is a faith based economist who has not studied economics because data is only relevant if it supports his conclusions.  They are both given a platform by the NYT to write opinion articles about political economy.  They have a disagreement about whether the economic problems in Europe are the result of government social welfare programs.

Krugman provides a graph in his op-ed that shows that European governments that spend the most on government welfare programs are performing better than governments that spend less on social welfare.  He concludes that the economic problems in Europe cannot easily be explained by excessive spending on social welfare.

David Brooks belongs to a political party which believes that government spending on social welfare programs (but not on defense) is harmful to the economy.  His party has also argued for years that government spending on social welfare programs in Europe is destroying their economies.  Therefore, David Brooks wrote an op-ed which argues that the problems in Europe proves that the US should cut investments in social welfare programs.  That is how faith based economics works.

The war of ideas between Krugman and Brooks does not distinguish between data driven conclusions and faith based conclusions.  News reporters are required to back up conclusions, if they choose to reach conclusions, with evidence to support them.  This is not required on the opinion pages.  The NYT gives equal weight to Krugman and to Brooks.  Their war of ideas is good for circulation and it shows that the NYT does not have a liberal bias.  Data based economics and faith based economics receive equal treatment.

Tyler Cowen Provides A New Rationale For An Inactive Government

Tyler Cowen is an economist who claims to be a mind reader as well.  In this article, he describes the mind of the body politic whose minds he has read.  He has found that the public does not trust government.  Therefore, government should do nothing to stimulate the economy by investing in the country's future. We should wait until public trust in government has been restored before we do anything.  In particular, government should do nothing to restore state and local jobs that have been lost because of a fall in tax revenues, and it should not take advantage of low interest rates to make investments until the public regains its trust.

Tyler Cowen's political party has positioned itself as the anti-government party.  It has used its resources, which includes the Mercatur Center at George Mason University that he directs, to encourage distrust in government.  Tyler Cowen then reads the public mind to tell us that the public has passed the anti-government exam. It does not have enough trust to support investments in the future.  It is ironic that his party, which lionizes the risks taken by entrepreneurs to start up new businesses, has become so risk averse..

Mitt Romney Versus The Anti-Romney

This article describes Mitt Romney's leadership style as the Governor Of Massachusetts when he led efforts in the state to reduce carbon emissions.  It also describes his political transformation into a salesman for the energy industries after they captured the Republican Party.  He has an amazing ability to adapt his positions on almost every issue to the direction in which the political wind is blowing.  He has redefined the concept of leadership.

Saturday, June 16, 2012

Dean Baker Provides The Facts Against David Brooks Economic Lies

Dean Baker provides a narrower critique of  David Brooks' defense of GOP extremism, which adds to my analysis of Brooks' arguments. Baker attacks the claim that Europe's social welfare policies are responsible for the crisis in Europe.  If that were true, the economic problems should be more prevalent in the Nordic countries, and in Germany, which have much stronger social welfare programs than those in Ireland, Spain, Italy and Portugal.  The opposite is true, but facts are not important to David Brooks.  He is a propagandist who repeats the big lies that are made by his political friends. The fact that David Brooks is given a platform to spread disinformation by the NYT, and by public broadcasting is one of our problems.  

Is Obama Responsible For Wealth Destruction In US?

Paul Krugman responds to GOP claims that the loss of wealth in the US is due to Obama's economic policies.  He provides a graph that shows the growth in wealth during the Bush administration was due the housing bubble.  The bursting of housing bubble, which occurred under Bush, was primarily responsible for the loss of wealth.  Wealth has actually trended upwards under Obama.

Facts have become meaningless in our current political environment.  The GOP can say whatever it wants and  the media will broadcast their claims. Moreover, the GOP has conditioned much of the public to blame Obama for the bad economy.  They blame the president for not responding to the Bush recession by continuing Bush's policies of deregulation and tax cuts for the wealthy.  Obama has to deal with the deflation of the housing bubble, and a weakening global economy that is still suffering from the credit bubble.

A Gloomy Snapshot Of The Global Economy

Nouriel Roubini tell us to batten down the hatches.  He does not see a safe harbor from the perfect storm that is on the horizon.

The Doom Loop In Greece

Fears about a Greek exit from the eurozone have exacerbated its economic problems.  International firms are withdrawing from the Greek market and local commerce has collapsed as bill collection has become endemic.

Friday, June 15, 2012

A Message To Obama: What Will You Do In The Next 4 Years?

This is the message that two Democratic strategists have delivered to the president.  Most of the public understands that the GOP does not offer a solution for the middle class.  It is not sufficient to tell them what they already know.  The president has to tell them what he will do for them over the next four years. Its OK to reinforce what they already know about the GOP, but the electorate whats to know what he will do to deal with their economic problems.

The Democratic Road Not Taken

Gary Hart argues that the Democratic Party needs to go beyond the defense of the New Deal.  The GOP has been successful running with a simple message that has universal appeal.  Nobody likes taxes, and the middle class doesn't like to pay taxes either. They especially don't like taxes when their incomes are falling and they do not see the benefit of government programs.  The GOP message is simple to understand. They provide large tax cuts to the wealthy, and they throw a few crumbs to the middle class. They also feed upon the perception that social welfare programs primarily benefit the undeserving.  They encourage class warfare between the middle class and the underclass, and they promote a war between the young and the elderly.

Gary Hart believes that defending New Deal programs is necessary but not sufficient.  The Democratic Party has to provide solutions that deal with the problems and opportunities of globalization.  They cannot let the GOP assume the position of economic leadership by invoking the principles of laissez-faire as the solution to globalization. They run the risk of being described as anti-business and anti-innovation.  Gary Hart failed to convince his party to take that strategy.  Neither party has developed an economic program that responds to the realities of the transition to a global economy.  In any case, they have not convinced the middle class that they will do more than cater to the needs of multinational corporations.

Obama Understands The GOP Vision But He Kills His Attack With Too Much Detail

This editorial on the president's speech provides a good lead into the post below on David Brooks.  The president was trained as a lawyer and it is reflected in his speech.  The speech might have convinced a judge, but the jury is still out on his speech.  He should follow the example of David Brooks who described the GOP vision the op-ed that follows.  Any democrat who cannot destroy the vision that Brooks presented, by making a short and powerful speech, laden with the proper contempt and emotion, should not be running for office. The GOP vision presented by Brooks is a fiction that attempts to put a dagger into the very heart of the democratic party.  They have declared war, and its time to destroy the assassin.

David Brooks Justifies GOP Extremism

I'm glad that David Brooks has finally come out of the closet.  He no longer pretends to be an objective observer of the political economy. The GOP wants to end the "welfare state".  Republicans always hated the "New Deal" that rescued capitalism from the Great Depression.  Now they are using the Great Recession as an opportunity to provide the finishing blow to it.  The economic problems in Europe, which are primarily the result of risky behavior by banks, prove that the welfare state is obsolete. We need to funnel resources away from a "bloated government sector" into the hands of job creators.  That means the privatization of education (choice is the preferred euphemism), and letting the market system do its magic in the healthcare market (which means that rationing is performed by the price system).  It also means the end of the social security system that transfers income from the young to the elderly.  He even suggests that it will end the dominance of large corporations. Ending subsidies to large corporations will pave the way for small businesses, that compete in a free market, to provide the innovations and inefficiencies that are required in our "brave new world"

If this is the GOP vision, and not simply a reflection of its current campaign slogans, its a vision that reflects an idealized world of laisezz-faire capitalism that has never existed in reality.  It also is inconsistent with the real behavior of GOP politicians.  Anyone who witnessed the behavior of Republican senators when they questioned the CEO of JP Morgan, at the recent Senate hearing, will understand how they worship the large corporations that dominate the banking system.  They
 did not come to the hearing to "bury Caesar", they came to praise him. They have little interest in the small businesses that they pretend to serve.  They want the votes of the small business person, while they seek campaign contributions from the JP Morgan's of the world, in return for the subsidies that Brooks derides.

David Brooks lays out the battleground for the next election for Obama.  Describe the reality of the GOP vision and tell the public what he will do in addition to protecting the social welfare system.  In other words, he has the opportunity to show that he has a plan to deal with the global economy and the transitions that must be made to distribute the benefits of globalization more broadly.

Thursday, June 14, 2012

Industrial Production In Europe

This article provides charts that show industrial production in Europe by country and by Europe as whole. Growth has slowed down even in Germany.  European growth, excluding Germany has been very weak.  That may explain the slow down in Germany.  The slow growth outside of Germany may be affecting German exports.  The US is growing too slow to reduce unemployment significantly, but it has been helped by fiscal and monetary stimulus. Austerity in Europe is part of its economic problem.  The debt to GDP ratio will continue to increase without economic growth.

Wednesday, June 13, 2012

Why We Don't Need To Produce More College Graduates

Robert Samuelson defends his position in this article.  He argues that we already produce more college graduates than the labor market requires.  We also don't teach them anything worthwhile while they are in college.  Colleges don't provide vocational skills, and we admit too many students who are not able to do college level work.  In other words, we should stop spending public money on a system that has been a major source of upward social mobility in America.  Apparently, we were better off in the"good old days" when access to higher education was limited to those from families that could pay the price.  The market system did a good job of rationing higher education.  Government intervention in the market system is always a mistake.

The GOP Inquisition

The inquisition was the means by which heretics were disposed of during the middle ages.  This article is about Jeb Bush's heretic comments about his party and the inquisition that led to his repentance.  Bush made the mistake of claiming that his father, and the GOP saint Ronald Reagan, could not win the GOP nomination in the new Tea Party dominated party.  He also stated that he did not believe that president Obama was 100,000 percent wrong about everything.  The Grand Inquisitor, Grover Norquist, quickly put Jeb Bush in his place. He had better repent if he every wants to become a presidential candidate.  The idea of a free marketplace for ideas has been banished by the political party that advocates the advantages of free markets.

The University Of Virginia's Board Is Appointed By The Virginia Governor

This article describes the process by which one becomes a board member on the Virginia state colleges.  They are all appointed by the Governor, and most of the appointees are also contributors to political campaigns.  This system is fine as long as membership on the boards is primarily a status symbol for board members, and they focus on raising money.  Its potentially dangerous if a politically partisan Governor appoints partisan board members.  Statements made by GOP Governor, about what he looks for in a board member, sound similar to the rationale that was given for firing the current President.  They should focus on funding issues, and making the college more efficient.  There is no consideration of the unique mission of a college as an educational institution.  None of the board members have any experience in higher education.

Romney And Obama Disagree About Federal Aid To States

This editorial quotes Mitt Romney who claims that Obama fails to understand the message from Wisconsin.  The message of Wisconsin is that public does not want to pay for more police, firefighters and teachers.  If Obama understood that message, he would not argue for more federal support to states and localities.  Romney describes aid to states and localities as an "economic stimulus" that has become one of the phrases that has been demonized by the GOP.

The article also provides a link to a video of Romney's interview on the GOP television network (Fox News),   in which he makes an effort to confuse the public on what he meant in his original statement.  Romney likes to tell his base what they want to hear, but he also recognizes that its important to spread confusion about what he means when he feeds his base red meat.

Are The Problems Of The Great Depression With Us Today?

Brad DeLong and Larry Summers wrote a new preface for Charles Kindleberger's history of the Great Depression.  The preface describes the central causes of the Great Depression, as well as the inability of nation states to take the necessary actions to fix a global crisis.  It also points out some of the similarities to the global economic problems that we have today.  One of the more important features of the Great Depression was the lack of international leadership.  Britain was unable to fill that role, as it had done in the past, and the US was unwilling to fill the void.  We have a similar situation today.  The US, Germany and perhaps China, have the potential to provide the necessary leadership, but they are unable to so for a variety of reasons.  Moreover, there is no international organization with the power and authority to provide leadership.

There are similarities in this analysis of the Great Depression and the description in the post below.  They both draw on Minsky's description of credit cycles, and their role in determining economic booms and busts.

Tuesday, June 12, 2012

What Is Globalization?

This article contains a definition of globalization that was written after the bubble burst in the late1990's. It links Minsky's theory of finance with the process of globalization.  The author of the article believes that it was written too early. Steps were taken to increase liquidity, and to encourage a new wave of investment in real estate.  He believes that our current global economic crisis is much deeper than the crisis and its aftermath.  We could be in for a much deeper reaction to globalization.

The author believes that globalization is primarily a monetary phenomenon.  Throughout history we have seen increases in liquidity that have induced investors to take risks.  Investments in new technologies in communication and transportation increase capital flows to every part of the globe.  Globalization is viewed as inevitable and advantageous by the public. The appetite for risk eventually creates problems in the banking system.  Bankers take on risky investments, and they are forced to turn the money spigot off  to rebuild reserves needed to cover the bad debts that ultimately result. Liquidity contracts and the globalization process goes into reverse.  In other words, the globalization cycle is a function of the monetary cycle.  The reactions tend to be similar during each cycle. Debt deflation is usually painful, and it often reveals problems that were not visible during periods of debt inflation and globalization. Bankers, who led the globalization process, become public enemies, and a new wave of populism, and reaction to globalization ensues.  We are in the middle of a debt deflationary period today in many parts of the world.  Financial flows are being reversed, and risk aversion is more apparent.  We will have to see how this affects the globalization process.

Net Worth Of Median US Household Is Back To Where It Was In 1992

The Federal Reserve reported the findings from the study that it does every three years on consumers.  This article highlights the results for the period between 2007 and 2010.  Median net worth fell by 40% during this period from $126 to $77 thousand.  Median household wealth comes primarily from the equity that they have in their homes. Most of the decline in wealth came from a 42% fall in home equity.  The value of median family stock holds fell 8% to $44 thousand.  To make matters worse, median income fell 8% to $45.8 thousand over the three year period.  The net worth of the wealthiest families increased slightly during this period.

The Federal Reserve report explains the slow economic recovery in the US.  Declining wealth and income in the middle class affects consumption which is 70% of GDP.  It also affects business investment which responds primarily to demand for products and services.  The Federal Reserve forecasts a continuing slow recovery from the Great Recession.

Interest Rates On Spanish Bonds Have Increased After Bailout

This graph shows that investors are demanding a premium on Spanish debt following the bailout.  Investors are concerned about the way in which the deal has been structured.  The money is in the form of a loan to the Spanish government that it will funneled to the banks.  Investors may be concerned that loans to the government will be subordinated to the debt held by the creditors who are funding the bank bailout through the Spanish government.

The Romance Between Germany And France May Be Over

This article in Der Speigle points to the unraveling of the relationship between Germany and France.  It also suggests that national interests stand in the way of dealing with the eurozone crisis.  It argues that France has always feared German hegemony in Europe.  French leaders viewed the common market as a defense against that threat.  German's bought into the vision that national interests would diminish over time and that the common market would be good for everyone.  The election of socialist president in France has changed that impression.  Hollande recently lowered the retirement age to 60 in France.  The implication of this article is that an economically stronger Germany will end up paying for socialist policies in France.  It also suggests that France's objective in aiding the struggling countries in the eurozone is to save its banks which hold a lot of the sovereign debt.

The article also suggests that a game of blackmail is going on among Germany's partners in the eurozone.  It suggests that Spain wants its banks bailed out with a no strings attached loan.  It also argues that Greece is looking for a way to cash in on leaving the eurozone.

Der Speigle has been a supporter of the eurozone.  It made sense economically for Germany because the common currency enabled German exports to its partners.  The fear that Germany will be forced into transferring its wealth to weaker countries in the eurozone, has made it skeptical about the vision of a united Europe.  National interests prevail among Germany's partners.

The economic problems in the eurozone are not easily addressed in its current form.  This article suggests that the difficulty of dealing with the crisis has brought national interests into the foreground.  Perhaps they never went away.

Monday, June 11, 2012

Why Is This US Recovery Slower Than Past Recoveries?

The GOP is comparing our slow recovery to the more rapid recovery from the 1981 recession.  They argue that Reagan's policies worked, and that Obama's policies have not worked.  What they don't say is that the Reagan recovery was fueled by a rapid increase in federal spending and tax cuts.  This is a classic Keynesian response to recession.  This article points to another important difference in the recoveries.  State and local tax revenues increase during the Reagan recovery.  They have decreased dramatically during our current recovery.  If they had expanded on trend, this recovery would have been faster than the the Reagan recovery.

The Bank Bailout Does Not Solve The Eurozone Problems

Stock market responded positively to the Spanish banking system bailout.  This article raises several questions about the impact of the bailout.  One problem is that the funds are actually loans to the Spanish government.  They will pay lower interest on these loans from central agencies than they would in the market, but the government's total debt will also increase.  Private investors may respond to the increase in sovereign debt by demanding higher interest rates on sovereign debt.  It is also not clear that providing liquidity to the banks will make them more solvent.  If the economy continues to shrink, the assets that banks hold will become less valuable as the default rate increases.

University Of Virginia President Resigns After Two Year Reign

The resignation of the University Of Virginia's President came as a surprise to many.  The university is one of America's top public universities, and it has been successful in attracting top students to the campus in the last few years.  No explanation for the resignation has been given.  It is only reported that there was a difference of opinion between the Board and the president about strategy for the university in "troubled times".  Many states have responded to "troubling times" by putting pressure on administrators to raise more private funding and to cut costs.  The universities board has 8 new members who were not involved in hiring the president two years ago.  The problems in Virginia are quite common in other states that have cut back on funding the state university system.  State universities are under attack by budget hawks, and by conservatives who argue that they are too liberal.

Russia Enforces Anti-Protest Law

Soviet authorities are going after the leaders of the protest movement.  They are enforcing the new anti-protest law by raiding the apartments of the leaders.  Russia may have moved to a more market based economy, but its government's distaste for democracy is quite apparent.  Conservatives in the US hated the Occupy Wall Street protests, but they did not propose anti-protest laws.

The Global Stock Market Likes The Spanish Bank Bailout

This article documents the positive stock market reaction to the bailout of Spain's banking system.  The Spanish stock market led the surge in Europe.

A Snapshot Of Spain's Premier

This is an unflattering picture of Spain's Premier.  Its commonly understood that a debtor is in trouble when the level of indebtedness is low.  When the level of debt is high, the creditor is in trouble. The Spanish Premier is making a vain effort to convince his public that the recent bailout of Spain's banking system is a sign of the strength of Spain's banking system. Its more likely interpreted as a sign that Spain's banking system is weaker than he has pretended, and that the bailout was necessary to protect the eurozone.   The conservative party in Spain has something in common with the GOP in America.  It is always necessary to project an image of strength.  Any sign of weakness would be fatal to the image that of strength that is essential to their brand.

Sunday, June 10, 2012

GOP Wants To Fix The Economy By Rolling Back Programs That Might Prevent The Next Crisis

The Tea Partier's hate Wall Street almost as much as they hate Obama.  Their favorite party is doing what it can to help Wall Street repeat the mistakes that caused the financial crisis.  Ignorance is bliss.

North Carolina Legislator Proposes Bill To Make Climate Science Illegal

This is a link to a video of Stephen Colbert's comedic report on an effort in North Carolina to outlaw the use of climate science reports on North Carolina's coastal areas.  One suspects that this might be outdone by bill to make tides illegal in the Carolina's.  Colbert's video is very funny, but it demonstrates the extremes that will be taken by GOP politicians who cater to the faith system that the GOP has developed in its base.  Much of the US experienced the highest deviation from normal temperatures in our history.  Much of Europe suffered from the extreme winter cold while the US had record high temperatures.  Climate scientists have predicted extreme deviations from normal weather patterns for years.  My cousin in Florida, who is a fervent Tea Party member, told me that a cold spell in Florida last year proved that climate change was wrong.  She believes that climate change is a liberal hoax.  It is an article of faith in her group.  Politicians that affirm her faith will get her vote.

Nixon Was Worse Than We Thought

This article, by the Washington Post team that investigated the Watergate break-in and reported on it, describes the full extent of what was learned about the criminal enterprise that was established in the White House.  It is a story about a president who put himself, and the desire for political power, before his obligations to the country and to the Constitution.  It provides a good history of Watergate and its aftermath.  It reminds us that "power corrupts, and that absolute power corrupts absolutely".  Richard Nixon was forced to resign from office when it was made clear to him that he would be impeached.  In an important sense, our system of law prevailed against a president who chose to break the laws that he was elected to defend.  The Supreme Court, for example, voted unanimously against the cover- up attempted by the White House.  One wonders if our system would work the same way today. Richard Nixon's lust for power seems to be endemic in one of our major political parties that places party loyalty above the interests of our nation.