Tuesday, July 31, 2012

Mitt Romney Praises Israel's Healthcare But Commits A Big Mistake

Mitt Romney's speech to Israel conservatives included praise for their performance on containing healthcare costs.  Israel's costs as a percent of its GDP are 10% lower than those in the US.  What he doesn't understand is that Israel keeps its costs down with a government plan that nobody in the GOP would support. It is a single payer plan with strict government cost controls.  He, of course,  has no plan for cutting the cost of healthcare in the US.  The Ryan plan. that he supports, does not reduce spending on healthcare.  It simply shifts some of the cost increases from government to individuals.  Its hard to explain why he would praise Israel's form of socialized medicine.

Its hard to believe that his staff does not brief him better than they did on this speech.  He is pretty clueless.

Mitt Romney Takes His Campaign To Israel

The conservative party in Israel hosted Mitt Romney on the campaign trail during his campaign stop in Israel.  He told them what they wanted to hear and he pleased the conservative Jewish Americans who he brought with him.  One of them, who had supported Newt Gingrich in the GOP primaries, was pleased.  He has stated that he will provide $100 million to the Romney campaign.  It may also help Romney in the battle for Florida, which is one the large swing states that will determine the outcome of the election.

Monday, July 30, 2012

Conservatives Control the Budget Deficit Debate And Some Of Them Are Democrats

The Simpson Bowles plan for dealing with budget deficits is being used as the starting point for debates about the budget.  It is being supported by serious people who have want to cut social welfare programs.  They are using our current revenue shortfalls, which produce large deficits as the rationale.  The debate has been one-sided because Democrats have not offered an alternative approach to deficit reduction.  The GOP has controlled the debate by default.  One of the problems is the social security surplus has been used to fund current operations.  When the surplus is exhausted, taxes will have to be increased or spending will have to be cut.  Conservatives would rather cut spending than raise taxes on the super-rich.

The Financial Times Profiles Mitt Romney

This article in the Financial Times uses Mitt Romney's mistakes on his visit to London, and the purpose of his visit to meet with the Likud leaders in Israel, into perspective.  The Obama campaign should import some help from the UK.

Robert Samuelson Argues That Economic Pessimism Is Our Problem

Robert Samuelson tries to explain why investors are so risk averse that they are willing to purchase US treasuries at historically high prices.  The high prices for risk free treasuries tell us that investors have little fear of inflation.  In other words, they are not worried about an economic expansion that would reduce unemployment and cause prices to rise. Banks are flush with record levels of reserves but there is not a high demand for loans from business or from consumers.  Moreover, they have tightened their credit standards so that only the most credit worthy customers can obtain loans.

Samuelson blames this on economic pessimism.  There is a loss of faith in the ability of government to use monetary policy or fiscal policy to affect the business cycle.  In other words it is a problem within economics.   I don't see the problems that way.  Politicians make the decisions not economists.  They tend to listen to economists who support their political perspectives.  Economists who favor a more active role for government have less influence on politicians than those who believe that markets are self correcting.  The politicians are aligned with constituents who have less concern about unemployment than they do about other matters.  Corporate profits have been very good in this climate.  They want a government that will support their interests, which include lower taxes and less regulation.  They also want a government that redistributes income upwards rather than downwards.  That is why deficit reduction has replaced employment growth in election campaigns.  Cutting social welfare programs enables government to cut taxes, and claim that deficits will be reduced, without affecting spending on programs that redistribute income upwards. Neoliberal economics serves the political interests those who fund political campaigns.  The means by which government programs redistribute income upwards is less visible than social welfare programs.

Senate Committee Reports That Billions Are Wasted On For-Profit Colleges

The Senate committee found nothing good in its study of for-profit colleges.  Over half of the students enrolled do not get a degree and they leave with a pile of debt.  The average CEO compensation is over $7 million.  Executives and shareholders are the major beneficiaries of the billions spent by government on for-profit higher education.  Their expertise is in marketing and recruiting.

The senators seemed to be surprised that private firms are more concerned with profits than they are with providing a good product.  They don't need to produce a good product as long as they can sell a high priced product to desperate customers who can use government subsidized loans to pay for it.  It is not much different than selling sub prime mortgages to poorly informed consumers who believe in the American dream of home ownership.

Unfortunately, it is not likely that Congress will do anything about the problem.  For-profit higher education is performing just as it supposed to function.  It is making a lot people rich and their lobby is good at purchasing support from politicians.  It is just another form of predatory government. The major goal of predatory government is to take tax dollars, that are collected to provide public goods, and funnel them to hucksters for private gain. Their supporters in Congress will argue that profit seeking businesses are more efficient at providing public services than institutions without a profit incentive.

The Anti-Obama Versus The Anti-Romney Campaigns

Robert Reich wishes that the Obama campaign would go beyond exposing the flaws in Mitt Romney.  It would be a disaster if the Republicans won the election, but the Obama campaign seems to believe that it does not have to propose any bold plans for fixing the economy. They believe that the electorate will reject a candidate that has nothing better to offer than the policies the won two elections for George Bush.  They may be right, but that will leave the president without a mandate to do anything that would move the country in a better direction.

I'm not convinced about the importance of mandates.  Obama had a mandate to reverse the direction of the country after winning by a wide margin in 2008. He wasted it on Obamacare. Perhaps both campaigns are correct.  Romney is hard to like. His best chance is to pin the bad economy on Obama who continues to blame it on Bush.   Neither candidate seems to have a vision for the future that it is willing to sell to the public.

Saturday, July 28, 2012

Government Payrolls Have Declined Under Obama

Many liberals have been unhappy about Obama's weak response to slow growth.  They have a good reason to be unhappy.  Government employment and spending has been less than they had expected during recession. On the other had, republican's have screamed so much about out of control government spending that many American's believe that it is true.  Most of them would only change their mind if Fox News told them that they had the data wrong.

WSJ Blog Reports That The Economy Would Have Been Worse Without Government Stimulus

Most economists would agree with the WSJ blog that the economy would be in worse shape without the federal stimulus program.  Its pretty clear, however, that WSJ readers did not want to hear this.  The comments were savage, and they reflect ideology rather than an understanding of economics.  The WSJ knows what its target audience wants to read, and they give them a daily dose of it in their editorials.

The US Budget Deficit Is Primarily Related To Slow Economic Growth

The GOP campaign claims that the US budget deficit is caused by out of control federal spending.  Krugman uses CBO data to show that the difference between projected tax revenues and projected spending is primarily the result of the slow recovery.  Tax revenue is well below projected revenue because of slow growth and mandatory spending on things like unemployment insurance etc. is well about the projection because of the slow recovery.  These factors, related to slow growth, account for 90% of the difference in the projected deficit.  Out of control federal spending is not the problem.  Slow economic growth is the problem.

Friday, July 27, 2012

Bloomberg Article On Casino Capitalism And Bain Capital

Bloomberg published an article on how Bain Capital makes money.  It has gone viral because Bloomberg is a business friendly publication.  Bain Capital operates like other private equity firms. It is a form of casino capitalism because highly leveraged risky bets are standard procedure.  The private equity firms and their investors seldom lose any money on the risky bets.  They borrow money to purchase companies, but the firms that they acquire borrow heavily to pay them back quickly. They use the funds to buy back Bain's equity at a premium, and they also use the funds to pay dividends to Bain .Bain also collect large fees for services that they provide to the acquired firms.  Many of the firms end up in bankruptcy but Bain and its investors make a profit.  If the firms survive, Bain takes them public or sells them at a profit.  Either way, Bain wins.

The author of the study is a private equity guy, so he knows how the game works.  He argues that Romney's success at Bain is not a good reason to elect him as president.  He may be wrong, however, Romney's experience is in the form of capitalism that has produced most of the profits in our economy.  The post-industrial society is dominated by casino capitalism.

What Happens If The Eurozone Fails?

We all hope for solutions to the problems in Europe.  We also know that there are no easy solutions.  Therefore, it makes sense to think about the consequences of failure.  This article explores the effects of an orderly breakup and a disorderly failure in the eurozone.  Neither of them are attractive, but a disorderly failure would be catastrophic.  The analysis of the political and economic issues that would arise from either form of failure are thought provoking.  It is a long article, that is not easily summarized, but it well worth the effort to read it thoroughly.

Weak Demand In Europe And US Is Slowing Growth In Developing Countries

This article provides a snapshot of economic issues in developing countries.  They are not decoupled from slow growth in Europe and the US; they are also being affected by slower growth in the large emerging economies of China and India.  In addition to a slowdown in their export markets, they are also being affected by tighter credit as capital flows from the industrial economies is also declining.

Thursday, July 26, 2012

40 Months Of Poor Economic Performance Changes The View Of An Opinion Leader

Brad DeLong provides us with an article written by John Cochrane, a Chicago economist who is an op-ed contributor to the NYT.  Cochrane argued against government intervention in the article.  A commentator suggested him as an example of the kind of economist that we should be listening to at the start of the recession. The commentator has changed his mind about Cochrane.  Brad DeLong argues that his new perspective on government intervention is welcome, but it is 40 months too late.

Paul Krugman Has Given Up On Europe And Europe May Have Given Up On Social Democracy

Paul Krugman has lost confidence in the ability of European leaders to solve the problems in the eurozone.  He provides some examples, and an attempt at humor, to support his loss of confidence.  One of the comments to his article, from Madrid, suggests that imposed austerity in Spain is being used as the rationale for policies that primarily benefit the Spanish elite and its conservative government.  That may explain why the bad medicine of austerity during recession is so popular among European leaders.  It may be another example of the war between neoliberal ideology, which provides the rationale for austerity, and social democracy in Europe.  I'm not sure about the rest of Europe, but many in Spain have fond memories of the Franco regime.

A Good Example Of The Problem With Journalism In America

This article describes the negative advertising that is being used by both parties in the political campaign.  Both parties have saturated the media with negative ads.  Therefore, both parties are guilty of the same sin.  There are important differences in the negative ads, however, that could be highlighted without showing favoritism to either party. That is not consistent, however, with the dominant culture of reporting in America.  Reporters are taught to ask others what they think about a topic, and they report on what others think about the issues. In order to be objective, they select "others" from both sides of the political spectrum, and they report what was said.  Reporting is selective stenography.

The negative ads in the Obama campaign have called attention to Romney's use of foreign tax shelters, and they raise questions about whether Romney really was a job creator at Bain Capital.  Romney claims that he would be a better president than Obama because of his business experience at Bain Capital.  His record of job creation is fair game, and it has been the subject of attack by the Obama Campaign.  It was also used by his Republican opponents in the GOP primary campaign. Romney's use of foreign tax shelters is also a fact.

The attacks on Obama by the Romney campaign are very different.  Quotes are taken out of context to suggest that he is not a real American.  Obama stated that businesses could not be successful without the support provided by government.  Government educates the labor force, and it provides the infrastructure and legal framework that enables businesses to operate.  The Romney campaign selected quotes from one of his speeches without providing the full context.  Obama appears to be claiming that government, and not business, is responsible for job creation. They ads claim that Obama is against small business. The Romney campaign has also used ads, and surrogates,  to reinforce a theme that Obama is not a "real" American.  There are multiple strands that are part of that theme.  One of the strands is to associate Obama with social democracy in Europe. Obama's policies are closer to social democratic policies in Europe, than those advocated by the GOP. But that only means that Obama is a Democrat and not a Republican.  The Romney Campaign goes beyond that. They claim that Obama is not a "real" American.  He is really more "European" than most Americans.

The article concludes with a comment by a GOP consultant who supports the fundamental point of the article that the campaigns are too negative.  When a GOP consultant has concerns about negative advertising it is a sure sign that the Obama campaign ads are working.  It will be hard to convince most Americans that Obama is not a "real" American.  Romney's record at Bain Capital, and his use of foreign tax shelters, tells a story about Romney that is not appealing to most Americans.

Wednesday, July 25, 2012

Paul Ryan's Economic Ideology Is At War With Social Democracy

The US economy is recovering very slowly from recession.  Unemployment is above 8% and Europe is in recession. The GOP majority leader in the House, is criticized in this article. He reflects the views of  Paul Ryan who is not worried about unemployment and recession.  Ryan claims to be worried about inflation even though it is well below the Fed's 2% target. He wants the Fed to raise interest rates to prevent inflation. If the Fed raised interest rates, one thing is certain.  The economy would get worse.  That might be good for Republicans in the 2012 election but it would not be good for the US or the global economy.

Paul Ryan has worked hard to make us worried about future inflation and future budget deficits.  He and his constituents are not affected by high unemployment.  They are also not affected by cuts in Medicare and other social programs that many depend upon.  Ryan, and his GOP colleagues, are really against social democracy.  They justify their opposition to social democracy by an appeal to neoliberal economic ideology.  The political economic issue is about the compatibility of social democracy with economic ideology. GOP economic ideology replaces the moral ideology that has been the motivation for social democracy. For the GOP, democracy is only acceptable when government can be captured by economic elites, and social welfare programs are harmful because they redistribute income from "job creators" to the needy.  The political economic issue of our time is the incompatibility of neoliberal economic ideology, as interpreted by Paul Ryan and the GOP, with social democracy.

LA Times Series On Global Population Growth And Risks

Economics was called the dismal science because one of England's early economists was worried about population growth.  Malthus argued that the population was growing much faster than the food supply and that famine would be the result.  Malthus had not anticipated the rising productivity in food production that prevented famine.  This series in the LA Times raises a host of questions about the implications of global population growth.  Most of the growth is occurring in countries that are least able to deal with rapid population growth.

Politics In Germany May Be Harmful To Germany and The Euro

This article in the German press, is critical of comments made about Greece by Germany's Vice Chancellor.  His party has aligned with the euro skeptics in Germany, which has become a popular movement because of the extraordinary levels of German support necessary to save the euro.  Many believe that Greece has sinned and it would be better if it paid for its sins by exiting the eurozone.  Others believe that a Greek exit might lead to even worse problems for Germany, and for the future of the eurozone.

Brian Wesbury Shows Us How To Succeed As An Economist

Paul Krugman was criticized by a prominent economist for making bad predictions. Brain Wesbury's criticism of Krugman was a variation on the theme that budget deficits did not help Greece, therefore, they are not good for the US in recession. One of the commentators provided an overview of the predictions made by Wesbury, who provides a good model for those who want to succeed with minimum effort.

  • former trader
  • USA
Brian Wesbury's ideology may interfere with his forecasting. From his "The New Era of Wealth: How Investors Can Profit from the 5 Economic Trends Shaping the Future," published in October 1999:

"Bubbles appear only in retrospect and they are often used to shift blame from bad government policy on to 'irrational investors.'"
"It is hard to imagine support for more intrusive regulation of the financial markets."

He also provides investment tips (many more athttp://www.amazon.com/gp/reader/0071351809/ref=sib_dp_pt#reader-link ):

"There is a reason that high-tech stock prices have risen to such high levels and it is not irrational exuberance."
"While 20+% gains each year should not be expected, gains averaging near 7-10% per year are a very real possibility. This could push the Dow to 35,000 by 2012 and 60,000 by 2020."

He applauded the 2003 Bush tax cuts:
"This is the most pro-growth tax cut we've seen since 1981."

But why should he ever admit having been wrong when:

He was Chief Economist for the Joint Economic Committee of Congress in 1995 and 1996.
The Wall Street Journal named him the "best economic forecaster" for 2001.
McGraw Hill published a paperback version of "New Era" in 2002.
Northwestern's business school has described him as an "economic guru" and a "fortune teller."
He's been on the Chicago Fed's Academic Advisory Council since 1999.
He's a fellow at a Presidential Center (guess whose).
He's still gainfully employed offering investment advice.

The Phony Debate Over Economic Policy

This article describes the general agreement among economists about several topics that are being debated on the campaign trail.  The general public is in less agreement on these topics. Politicians, and poor reporting in the media are responsible for the confusion.  Republicans are blamed for most of the confusion in the public. in this article. The economists disagree with the administration, however, on tax policy.  They believe that all of the Bush tax cuts should be allowed to expire.  The Obama Administration would like to retain the tax cuts for those with incomes under $250,000.

Its Easy To Set Up A Bank Account In A Tax Haven

Adam Davidson, from NPR, does a nice job of reporting on the ease in which one can establish a bank account in tax havens.  I fail to understand his conclusion, however.  He suggests that individuals and corporations have an incentive to use tax havens because the US tax code is too complex.  In other words, they do not have an incentive to avoid taxes.  Does anyone believe that they would be happy to pay more in taxes if the code were less complex?  The tax code is complex because Congress has riddled it with loopholes that enable special interests to take advantage of them.

Tuesday, July 24, 2012

Prosecutors In Britain File Criminal Charges To Top Murdoch Newspaper Officials

Criminal charges were brought against several Murdoch tabloid officers in the hacking scandal that has rocked Britain.  Two of the officers charged with conspiracy have been close to Britain's Prime Minister Cameron.

Moody's Lowers Credit Outlook For Germany, Netherlands and Luxembourg

Events in the eurozone continue to outpace remedies to some its enduring problems. Greece has a debt payment due in August that it cannot make without further assistance.  Spain's 10 year treasuries hit 7.43% and Italy's are at 6.35%.  That is not sustainable in countries with negative economic growth rates.  The exposure of core eurozone countries to problems in the periphery may affect their AAA credit ratings.  Moody's changed the outlook for three of the AAA nations from stable to negative.

Large School Districts Face Declining Enrollments

This article describes an alarming trend in large school districts.  Smaller enrollments mean a loss of tax revenue.  Falling tax revenue erodes educational quality.  That will lead to a further decline in enrollments.  This  is an alarming downward spiral.  The percentage of students with special needs in large districts is growing as enrollments fall.  In some districts, charter schools, which are funded with tax dollars siphoned from large district school budgets, are attracting more students.  We may be witnessing the resegregation of public education in large urban areas.

Globalization, Higher Profits And Lower Hourly Wages

Corporate profits as a share of GDP reached their highest level in 2010 since 1929.  Wages as a share of GDP have been falling steadily.  This article attributes this dynamic to globalization.  Workers in rich countries compete with workers in poor countries.  They have little negotiating power when employers demand lower wages with a threat to close plants down and relocate production.  Prior to globalization, private industry redistributed income downward to labor.  The process has been reversed by globalization.  This process is not likely to change.  Most of the proposals for dealing with the problem do not address the core problem.  Corporations have the upper hand in labor negotiations.

Monday, July 23, 2012

Caterpillar Demands 7 Year Wage Freeze

This article describes Caterpillar's demands that they do not want to negotiate with their union.  The company has been very profitable and it has increased executive wages while it demands lower wages for hourly workers.  Its labor policies are part of the problem that has led to a hollowing out of the US middle class.  The post below is the first in a series on the decline in median household income and the rise in income going to the top 1%.

NYT Begins Series On The Decline In Middle Class Income

This is the first article in the series.  It starts out by quantifying the problem.  Median household income has fallen by 6% since 2000.  We have not had any 12 year period like this since WW 11.  The top 1% share of the total income pie has doubled in that period.  The share held by those earning over $7 million has increased by a factor 5 over the last 40 years. Much of this gain has been in the financial industry.  Hopefully, there will be a good analysis of this problem in future articles.  There is a lot of misunderstanding that will require clarification.

The Conservative Solution For Too Big To Regulate Banks

Economists at the University of Chicago have been advocates for a competitive free market economy.  They worried that corporations could become so large and powerful that they could thwart competition in their markets.  Some also argued that they could not be effectively regulated by government.  They were effective at capturing the government regulators.  The government regulators were used to block competition instead of insuring competition.  One of the Chicago economists concluded that industries that were concentrated and difficult to regulate should be nationalized.  It appears that the US banking industry is a good candidate for nationalization.  Five large banks dominate the industry and they are too big to be effectively regulated.

Markets React to Problems in Spain

Bad economic news in Spain has not been good for international stock prices.  Borrowing costs for Spanish debt were over 7% on Monday.  The country is still in recession, and it is expected to last into 2013.  Tax income falls during recessions and puts more stress on the central government which has to provide assistance to its regional governments as well as its banking system.

Sunday, July 22, 2012

The iPhone Production Chain And International Trade Statistics

This article estimates the value added for the components that are assembled in China to produce the iPhone.    Only a small percent of the value added to the iPhone is in the assembly process that occurs in China.  On the other hand, the total value of the iPhone that is shipped from China to consumers in the US, is counted as part of the US trade deficit with China. One implication is that revaluing the Chinese currency upwards versus the dollar, would have little impact on the US trade deficit with China. Another implication, is that Ricardo's theory of comparative advantage, which is based upon bilateral trade between two countries, is inconsistent with the nature of the global production chains that are characteristic of  consumer electronic products like the iPhone.  The majority of trade today is in intermediate components that are used in the assembly of final products purchased by consumers.  The components are sourced from all over the world.  The comparative advantage of the US is in the design and marketing of the iPhone.

Republican's Love Big Government

Dean Baker makes an excellent point in this article.  Republicans love big government when it redistributes income upward.  They hate big government that redistributes income downward.  The best example is the defense budget.  About 50% of government discretionary spending is on defense.  Republicans love this aspect of big government.  It redistributes income to defense contractors.  They also resist any efforts to end subsidies to their favorite industries, and they love government regulations and laws which protect favored industries from competition. Government patent and copyright protections, which reduce competition, are zealously protected by Republicans.  Government enforcement of anti-trust laws, however, is usually resisted by Republicans.

The takeaway from this post is that the real political battle is not over the size of government.  It is about setting the rules of the game which determine the benefactors from government spending.  Democrats have been put in the awkward position of altering the rules of the income distribution game that have been set by Republicans.  They need to be more actively involved in setting the rules.

Goldman Sachs Loves Clean Energy

Goldman Sachs plans to invest $40 billion on clean energy over the next decade.  They provide a snapshot of their research on clean energy and some of the targets for investment in this post.

Hope For The Planet

The warming trend has made the problem of global warming more visible.  Thirteen of the warmest years in the history of our planet have recorded in the last 14 years.  Record temperatures in much of the US, and the drought in large parts of the country, have also increased awareness. It has been politically difficult to pass legislation that would increase the price of energy produced by coal and oil,  but the supply of natural gas has increased, and the price of natural gas has fallen dramatically.  The volume of clean energy from the sun, and from wind, has grown faster than many had predicted.  This has been encouraged by government subsidies which are expiring.  This article makes the case for government subsidies to promote new clean energy technologies as the best way to save the planet.

Saturday, July 21, 2012

John McCain's Dossier On Mitt Romney And Bain Capital

This link (via Brad DeLong) is to the data that John McCain used against Mitt Romney when they competed for the GOP presidential nomination in 2008.  It provides a good picture of Bain Capital and Mitt Romney's leadership at Bain.

Friday, July 20, 2012

An Argument For The Minimal State By A Leading War Hawk

Charles Krauthammer is the reigning neoconservative opinion writer for the Washington Post.  He was one of the strongest supporters for the invasion of Iraq, and he is a frequent panelist on TV talk shows.  In this article he argues that Europe is bad example for the US to follow.  Obama, who the GOP does not recognize as a real American, wants to create the nanny state that has led Europe to ruin.  This is just another example of the tacit agreement among conservative pundits to portray Obama as anti-American, and to blame social welfare programs for the problems in Europe.

Like most conservatives Krauthammer does not like income redistribution or progressive tax policies.  Real American's should be happy to pay for unnecessary and expensive wars.  They want to be strong like fortress America. Only weaklings need help from government.

The Misunderstood Crisis In Peripheral Eurozone Countries

The medicine that is being prescribed for the peripheral countries in the eurozone is based upon improving competitiveness in their tradeable sectors.  They are being told to cut labor costs and reduce prices so that they can grow their exports.  It turns out that they had been doing very well in their export markets.  Their current account deficits were not due to falling exports, they were caused by rising imports, supported by a flow of funds from the core countries. Since the major export markets for the peripheral countries are within the eurozone, the best way to improve their economic performance is for the core economies import more from the periphery.  That might require stimulative policies in the core rather than contractionary policies.

The iPhone Economy And The Nation State

Robert Reich describes one of the major problems with globalization.  Multinational corporations lose their national identity.  They are more interested in influencing governments in ways that benefit them, and they have less interest in supporting programs that might be good for the nations in which they are headquartered. He presents Apple Computer, as an example, by describing the iPhone economy.  Apple is doing quite well despite the lack of investment in programs that might make the US more competitive in the global economy.  The US is just one of many countries in which it operates.  It is not in the business of improving the competitiveness of any of the countries in which it does business.  Even worse, it will do what it can to lower its taxes in all of the countries in which it operates.  It also demands tax breaks from cities and states that compete for the location of Apple facilities and jobs in the US.

If the iPhone economy is typical of the multinational corporation. And if multinational corporations continue to determine the policies of the countries in which they are headquartered, political polarization and dysfunction is bound to increase.  Whats good for the corporation without a national identity may not be good for the nation states.

A Lesson In Political Dysfunction Between The World Wars

The period following the first world war was disastrous. It was a period of slow economic growth in much of the world, and it led to the rise of Hitler in Germany.  The US was the largest creditor nation at the end of the war, and it was in a position to dictate the terms of the peace agreement.  President Wilson had to choose between a plan proposed by Keynes, which is described in this article, and the Versailles treaty.  It was not a good position for a US president to be in.  He knew that Congress would not accept the Keynes plan, but Congress was also likely to reject the Versailles treaty.  He chose to reject the Keynes plan, which might have enabled the allies to recover from the war, and it gave Germany and other nations a chance to restore their shattered economies.  We know what happened following that decision.  Keynes wrote a book which predicted the disasters that followed.  It became a best seller, but political dysfunction determined the outcome.  Our political systems have difficulty dealing with hard problems.

Procyclical Fiscal Policy Is Practiced In The Developed World

Countercylclical fiscal policy is based on the idea that government should run deficits when spending by households and business is not sufficient to support full-employment.  The developed world today seems to favor procyclical fiscal policy.  Politicians, and many economists, in developed countries prefer to raise taxes and cut government spending during economic downturns.  They also prefer to cut taxes and increase government spending during economic booms.  The recent economic history of the US is full of such examples.  For example, Ronald Reagan wanted to balance the budget during a recession, and he cut taxes, and increased government spending, during a boom. George W. Bush based his campaign on cutting taxes during the dot.com boom.  Today most developed countries favor government spending cuts and tax increases during our worst post war recession.

Procyclical fiscal policy was quite common in developing countries which typically had dysfunctional governments.  Today they seem to have learned an economic lesson.  Many of them cut spending. and raised taxes during the boom years, and now they are in a strong position to use countercyclical fiscal policy during a downturn.  They are doing exactly what J.M. Keynes recommended.

The dysfunctional governments in the developed world are much like investors during booms and busts.  During booms investors tend to ignore risk and make bad investments.  When the boom ends they tend to become risk averse and restrict credit just when it is needed.

Thursday, July 19, 2012

Vote Against Obama Because He Is Not A Real American

John Sununu, a Republican operative from another era, was forced to apologize for stating that our elected president needs to learn how to be an American.  Sununu's comment on TV is part of the GOP game plan.  They have defined what it what means to be an American, and liberals need not apply.  They have done what they can do deamericanize our president since he took office. Their understanding of what it means to be a real American leaves a lot to be desired.  For example, Mitt Romney has been criticized for having accounts in international tax havens.  He was defended by his GOP colleagues who argued that real American's do what they can to avoid taxes.  I guess if you don't put your money in foreign tax havens you are not a real American. According to that logic, most of us are not real Americans.

Do Business Schools Contribute To Amoral Business Behavior?

This article (via Manan Shukla) raises questions about the relationship between illegal and immoral business behavior and business education.  Business schools don't put a lot of emphasis on personal ethics.  Consequently, they don't do much to prevent unethical or illegal behavior.  They may, however,  encourage unethical behavior by taking an amoral approach to the subjects that are taught.  For example, economists assume that our economic decisions are made by evaluating the potential benefit from a decision versus the potential cost.  Moral considerations in making economic decision are less relevant than the potential costs of the decision.  If one has an opportunity to gain $1000 from a decision that might result in a $100 fine, it would be foolish not to go after the $1000 increase in personal utility.  Similarly, if the penalty for polluting the environment is small, and the cost of pollution prevention is high, it makes economic sense to pass the cost of pollution onto society.

It would be desirable if business education put a greater focus on ethics, but I don't believe that business schools are responsible for the increase in illegal and immoral behavior at the top of our corporations.  If people were angels we wouldn't need a criminal justice system.  We are not angels, and the potential financial gains from bad behavior have never been higher.  Unfortunately, our criminal justice system is blind to many forms of white collar crime.  Fraud has been widespread in the financial services sector but few executives have faced criminal charges.  We encourage executives who have learned the lessons of cost-benefit analysis to commit crimes.  The only way to discourage illegal corporate behavior is to throw more executives into jail. That is highly unlikely in our culture. The US has the largest number of prisoners, relative to population, in the world, but most of their criminal offenses are less costly to society than corporate fraud.

Our Economic Problems Predated Obama

The GOP campaign is predicated on the idea that the Obama administration's policies are responsible for the decline in living standards.  This article provides data which shows that living standards for the middle class were not rising in the years prior to the Obama administration.  To a large extent, living standards were maintained by a rapid growth in household debt.  Romney claims that things would get better if we returned to the policies that were in effect prior to the Obama administration.  His policies would continue the erosion of living standards that were in place before Obama took office.  Moreover, his policies are hardly radical.  The radical changes in the US economy were put in place over thirty years ago.

China's Trade Surplus Is Falling As Policy Shifts to Domestic Consumption

China has responded to declining export demand in Europe and the US by stimulating domestic consumption.  Its imports, which were dominated by commodities, and intermediate parts used for final assembly, has shifted to consumer products.  Germany, has been a major benefactor of this shift. Its exports to China have been growing.  China has also become a large market for Asian exporters of finished goods.

Explaining The Missing Link Between Productivity Growth And Median Wage Growth

During the post war era growth in productivity was strongly related to growth in median household income. In the period between 1979 and 2007 that link was broken.  The benefits from productivity growth were captured by the top 10% of the income distribution.  The bottom 90% captured only 8.6% of the income gains in that period.  Moreover, 60% of the income gain went to top 1%, and 36% went to the top 0.01%.

This paper examines the factors that might explain the broken link between productivity and growth in median household income.  The unequal distribution of the benefits from rising productivity and growth in compensation appears to be related to public policy decisions.

IMF Reports That Eurozone Is Unsustainable In Current Form

The IMF issued a report on the rising risk of a debt deflation spiral in the eurozone.  It views the eurozone as  half finished project.  The financial crisis has created de-integrating forces that cannot be addressed in its current form.  One analyst claims that there are no policy measures in sight that address the downward spiral.

Deflation often accompanies serious recessions.  Households stop spending because they believe that prices will be lower in the near future.  Falling asset prices exacerbates the problems for banks that already have problem loans, and falling product prices creates profit problems for businesses that lead to decreased investment and layoffs. Even a mild recession could ignite a deflationary spiral.  Economic growth in large economies like Italy and Spain is necessary to reduce the risk of price deflation.

The US faced similar problems during the financial crisis.  The Federal Reserve took steps to recapitalize the banks and to increase the money supply.  The central bank in the eurozone does not have the freedom of operation that is available to the Federal Reserve. Angela Merkel has attempted to provide support for the ECB but she is faced with legal and political problems in Germany that create uncertainty about the role of the ECB in this crisis.

Wednesday, July 18, 2012

Senate Filibuster Blocks Disclosure Bill

The GOP used the filibuster again to block legislation.  They offered some weak excuses for opposing the bill, but the use of filibuster, which blocks a bill from being debated in the Senate, is not a vote against the bill.  It is a vote to prevent the Senate from debating any bill that cannot win 60 votes in the Senate.  The filibuster prevents the Senate majority from passing any legislation that the GOP does not like.

Tuesday, July 17, 2012

Technology Is Not Responsible For Rise In Inequality

Some argue that technological changes are responsible for rising inequality.  This article argues that conscious decisions by governments provide a better explanation than the blind forces of technological change.

The IMF Lowers Global Growth Forecast From April

The IMF tells us what most of us already know.  The recovery has stalled and the IMF tells us that it needs more of the same medicine that has been prescribed.

David Brooks Tells Mitt Romney To Defend The Efficient Form Of Capitalism That He Represents

David Brooks describes Mitt Romney as an efficiency expert who is like a personal trainer.  He founded Bain Capital to purchase inefficient companies so that Bain could make them productive.  Companies that responded to the Bain medicine survived, and those that did not respond were left to die. Bain Capital exemplifies the economic principle of "creative destruction".  Capitalism has a downside.  Only the strong survive.  Globalization is an important feature of this version of capitalism.  Only world class businesses can survive in the global economy.  This form of capitalism works best when government lets the free market function as it is supposed to function. Big government distorts the market and it inhibits the process of creative destruction and an efficient capitalist system.

Obama favors a system of capitalism without a downside.  Big government protects weak companies, and it blocks the process of creative destruction that is an essential ingredient of an efficient capitalist system.  He also opposes globalization which is the modern form of capitalism that puts a premium on efficiency.

The 2012 election is a battle between two forms of capitalism.  Romney should attack Obama's version of capitalism without a downside that is dependent upon big government for support.  He should vigorously defend the modern form of capitalism with a downside, that Bain Capital represents, against the old fashioned, and inefficient form of capitalism without a downside, that is dependent upon big government.

I thought that Romney attempted to sell this form of capitalism in Michigan and Ohio.  He argued that it was wrong for government to save the inefficient US automobile industry which should have been left to die.  That argument was not well received in states that depend upon the automobile industry for jobs. David Brooks may like social Darwinism and creative destruction but auto workers want jobs. Moreover, Romney wants to win the election.  He will tell the public what his focus groups tell him that they want to hear.  His base wants to be told that Obama is the devil and that they should vote against the devil.  His problem is that he does not have a good story to tell to independents.

David Brooks has not given good advice to Romney but his description of the battle between two forms of capitalism is not descriptive of the operative form of capitalism in the US.  The global financial system has not been able to function without support from governments.  The banks were not able to regulate themselves and they failed because of a lack of effective government regulation.  Uncontrolled globalization is not working either.  A global economy regulated only by the motivation of multinational corporations to maximize profits is not working either.  Corporate capitalism, and crony capitalism, will not lead to efficiency, or to the maximization of social welfare.


GOP Blocks Bill That Would Require Disclosure of Large Campaign Donors

I wonder how the media will explain the vote on a bill that would inform the public about the large donors to "public welfare" organizations that are used to fund political campaigns.  Republican senators voted as a block to defeat the bill.  That should make it difficult for the media to blame both parties for undermining the electoral process.  One party voted to block disclosure, and the other party voted to protect the identity of large donors who use their money to purchase political favor.

Monday, July 16, 2012

The Post Industrial Society Has Real Problems

Manufacturing output in the US has been in steady decline in recent decades.  We seem to have a preference for a services economy.  There are problems with a services economy, however, that are not well understood.  Nation's pay for their imports with exports.  If they can't pay for their imports with exports, they must borrow from the countries whose products they import.  Countries that export to the US have been willing to sell us products at low prices, and lend us the money to pay for them.  There are lots of problems with this arrangement.  One of the problems is that the manufacturing sector becomes less competitive over time.  The other problem is that we can't pay for our imports of manufactured products by exporting services. That means that we are dependent upon the willingness of others to lend us the money that we need to pay for the manufactured products that we will continue to demand.  Our manufacturing capabilities will continue to erode, and our dependency on borrowing to pay for our imports of manufactured products may become permanent.

The solution described in this article is that the US dollar should decline in value so that we can export manufactured products to pay for our imports.  That is highly unlikely. Even if a cheaper dollar makes US manufactured products less expensive in overseas markets, we may not be able to compete.  The consumer electronics industry provides a good example. The US cannot compete with the supply chains that have been developed in Asia to manufacture the high tech products that we consume.  We are also importing more services as other nations become more able to provide those services at lower cost.

While this seems to be a common problem in many industrialized countries, it is not a problem for multinational corporations.  Many of the products that we consume are imported by multinational corporations for resale in the US.  Moreover, multinationals are better positioned to sell their products in countries where they have located manufacturing and R&D facilities.  Our current arrangement provides the best of all possible worlds for multinational corporations, but it comes at greater cost to the nation states that have been forced to deal with the dislocations to their economies.  The Post Industrial Society will not be easily replaced by services economy that seems to be in favor.

Britain's Tea Partier's Want To Leave The Nanny EU State

This article describes some of the growing sentiment in Britain against the European Union that it joined under the leadership of a conservative government.  The last straw for a conservative member of Parliament was an EU restriction on motor bike modifications.  The "Nanny State" went too far when it interfered with one of his favorite passtimes. I doubt that the motor bike law affected his views on integration with Europe, but it provided a good opportunity for him to stake a position that is becoming increasingly popular with the British electorate.  Many have nostalgia for the days when Britannia ruled the waves.  The substantive issue in Britain is whether it can succeed economically outside of the EU.

Why Romney's Record And Character Are Fair Game

Paul Krugman explains why its appropriate for the Democratic Campaign to focus attention on Romney's record at Bain Capital and on his character.  He argues that Romney's "substantive" policies are correlated with his behavior at Bain Capital and by his use of foreign tax shelters.  His policies are designed to benefit folks just like him.

This post provides a good introduction to the post below on Robert Samuelson's effort to deflect attention from Romney's character.

Political Humorists Have A Field Day With Mitt Romney

This post on a political humor site, provided me with a LOL.

Robert Samuelson Frames The Presidential Debate

Robert Samuelson tells his readers that character assassination by both sides in the election campaign is the wrong way to run an election campaign.  He argues that there are substantive differences between the two candidates that the public should understand.  He describes Obama as "distributionalist", or a Robinhood, who wants to take from the rich and give to the poor.  Romney is an "expansionist" who believes that we can grow our way out of our economic problems.  He assumes that Romney's approach to economic growth, by restoring business confidence, will succeed, but he does not believe that we can grow our way out of our fiscal imbalance.  Samuelson believes that neither side wants to deal with the real problem. Both campaigns should tell voters how they will cut spending on entitlement programs that we can't afford.  They both should become deficit hawks and let the public decide on the best way to cut social welfare spending.  Romney has already told us that he supports the Ryan plan that was passed by the GOP House. Moreover, he can't cut taxes, as he proposes, without implementing the Ryan plan.  Samuelson, of course, know this.  The real point that he wants to make in this article is that Democrats should stop telling voters bad things about Romney's character because it might be working.  Its easier for voters to understand his character than it is to understand the substance that is easily obscured by opinion leaders like Samuelson.

Sunday, July 15, 2012

Does Ruppert Murdoch Corrupt Economists?

Alan Meltzer is a prominent economist who is provided with a platform by Ruppert Murdoch's WSJ to write opinion articles that have no basis in fact.  One economist criticized Meltzer's opinion article and suggested the Meltzer was corrupted by Murdoch.  It is true that Murdoch provides platforms for Meltzer and many other prominent economists, e.g., Greg Mankiw and Robert Barro, to write opinion articles that are based upon theory rather than fact.  On the other hand, that is like arguing that prostitutes are corrupted by the availability of bedrooms.  Prostitution is one of the world's oldest professions, but it has always been part of the tradition in economics.  Given the relationship between economic ideas and politics it could not be otherwise.  The good news is that we are still able to hold the prostitutes accountable when their claims are not supported by data.

The Class Warfare US Election

Governments raise money with taxes and they spend it.  Politics is essentially about how much money they raise in taxes, who they take it from, and how it is spent.  The tax side of the story in the 2012 election reflects the differences between the two parties on tax policy.  Romney wants to cut taxes further, and the largest cuts in the tax rate go to his friends who seek a good return on their investment in his campaign.  Obama's policy would increase tax rates on those earning over $250,000.  The spending part of the story is not graphically provided in this post, but cuts in Medicaid and other social welfare programs are on the top of Romney's list.

Since elections can not be won by gathering all of the votes from those earning over $250,000, the GOP has been dependent upon basing their election campaigns on social values and other factors that deflect attention away from the most obvious story about government economic policies.  They have been doing this for a long time and they are quite good at it.  The Democrats are not as good as they used to be in telling their side of the story. Of course, they do not have their own TV network, and their supporters do not own most of the media that create public opinion, or pay for the ads that the media depend upon for revenue.

Criminal Fraud Charges In Libor Case May Be Filed

The US Justice Department is pursuing criminal charges against bank traders and others who were involved in the Libor case.  This would be the first criminal case against bankers that many believe were guilty of fraud.  In order to pursue the case the Justice Department will need cooperation from British authorities that have not appeared to be anxious to cooperate.  New regulations that require a firewall between those who report on Libor and the traders who used that information to make trades.

GOP Blockage Of Jobs Bill Cost 2.3 Million Jobs

An EPI study reported that 2.3 million jobs were lost because the GOP blocked a jobs bill in 2009 that was heavily weighted with support to states.  It reported that 1.1 million public sector jobs were lost that translated into 750,000 lose private sector jobs lost.  Cut backs in aide also reduced consumer consumption which led to further private sector job losses.  The unemployment rate would be 7% today instead of over 8% if the bill would have been passed.

Saturday, July 14, 2012

What Determines The Demand For Ideas?

Most people understand how corporate lobbying influences decisions made by governments.  This article describes the marketplace for ideas.  Ideas are important.  They shape the way people think about issues and they influence important outcomes.  There is not a free market for ideas.  Some ideas a not pursued because they do not coincide with prevailing incentive systems.  Academics, and others who are in the business of idea creation, are influenced by their understanding of the incentive system.  Idea creation needs to be funded. Some ideas are more likely to be funded than others.  Furthermore, ideas have little influence  unless they are amplified.  Control over funding, and the means of amplification, have a powerful effect on the products that are produced in the marketplace for ideas.

Some good  examples are provided in this article to show how this works.  Michael Jensen published an article in 1990 that made the case for linking CEO compensation to increases in shareholder value.  He was attempting to deal with the economic problem of agency.  CEO's are agents for shareholders and they are more likely to work in their interest if they also benefit from increases in the stock price.  Corporate executives loved that idea and the article has been one of the most frequently cited articles in the field.  It was amplified like few ideas are ever amplified.  Jensen changed his mind about the idea after he observed how it affected CEO behavior.  He wrote an article which expressed his concerns about linking CEO compensation to stock price appreciation.  The article did not get published in a prestigious journal, and it did not receive much attention when it was published.  Jensen's regrets did not receive the amplification that they deserved.  CEO compensation is tightly linked to various methods of obtaining stock awards.  Moreover, the stated objective of most corporations is to increase shareholder value. The older idea, that there are multiple stakeholders in a corporation, that deserve consideration, has fallen into the dustbin of history.

The article concludes by raising an important question for academics to consider. How is their idea creation determined by the incentive system that they understand very well.  Do they want to be part of the problem or part of the solution?  For example, business profits are affected by the degree of competition in their market.  Given a choice, businesses prefer less competition in their market, and that is reflected in their strategies.  On the other hand we also extol the virtues of free markets in which consumers benefit from competition. Perhaps we are part of the problem.

Friday, July 13, 2012

The Fiscal Crisis That Never Happened In The US

The heads of the committee that was commissioned to solve America's pending fiscal crisis predicted that the US would be forced to pay very high interest rates to service its booming debt in two years if their plan was not turned into law.  The interest rates that the US is paying to service its debt is at an historical low point.  These guys were just as bad as the very serious people who keep predicting hyperinflation in the US. That has not happened either. Few are concerned about unemployment which is still with us.

Romney Is A Real American By Avoiding Taxes

Mitt Romney's use of offshore accounts to avoid taxes has been receiving a lot of attention in the press.  Senator Lindsey Graham defended Romney by arguing that he was just being like a real American by avoiding taxes.  Congress created the loopholes in the tax code.  It would be foolish not to take advantage of them.  The IRS estimates that it loses $100 billion a year from these loopholes.  One would think that the GOP would be interested in closing these loopholes in order to reduce the budget deficits that pretend to deplore.

Did Speculators Cause A 400% Increase In The Price Of Oil?

Oil prices have dropped recently because of a weak global economy.  Prices had increased by 400% in a between 2004 and 2008.  This article attributes the 400% increase to Wall Street speculation.  There was not enough of an increase in demand, or a decrease in supply, during that period to explain a 400% price increase.

Speculators make money by purchasing oil future contracts.  That drives the price of oil up, and they benefit by selling oil that they put into inventory at lower prices.  The energy companies also benefit from the higher prices.  This article argues that Wall Street and the oil industry were successful in deregulating the futures market to enable  speculation.  The deregulation of the futures market is public knowledge.  Its also true that speculation in the oil futures market dramatically increased.  There is still a lot of debate, however, about the factors that produced the 400% increase in oil prices.  The article is quite long, but it provides an interesting perspective on the futures market, and the big time entry of Wall Street into the market.  Most of the efforts to enforce new regulations on Wall Street have been blocked by successful lobbying.

Thursday, July 12, 2012

New Austerity Plan In Spain Will Not Fix Its Problems

Spain is in  very difficult situation in which few good choices are available to government.  The government has decided to go forward with austerity measures that will make things worse.  Unemployment will increase, but it won't make Spain more competitive so that it can export its way out of trouble.  It won't solve Spain's fiscal problems either.  Either the Spanish government has a better understanding of the economics than Paul Krugman, or the Spanish government believes that has no good alternative as long it needs external support to save its banking system.  Its also possible that the government believes that it can control the political unrest, and benefit politically by justifying a more authoritative regime change in Spain.

The Failure of Shareholder Democracy In America

This article reports on a study that concludes that shareholder democracy fails on all three functions that it is supposed to provide.  With the exception of startups, corporate investment is not funded by shareholders.  Investments are funded by retained earnings.  Stock prices also fail to provide feedback on company value.  Studies show that 90% of the time stock valuations are between 50% and 200% of a corporations actual worth.  Lastly, shareholders, represented by directors, do a poor job of disciplining management.  CEO compensation is poorly correlated with company performance.

There are several factors that explain the weak power and utility of shareholders.  In the 1950's stocks were held primarily by individuals.  The average period for holding a stock was 7 years.  Today the average holding period is 6 months, and 70% of the volume on the NY Stock Exchange is high frequency trading in which the holding period is less than one second.  Shareholders are more like renters than like owners of the companies in which they invest.  Impatient capital does not fund, discipline or measure the value of a company.

The primary beneficiaries of shareholder capitalism have been managements which have more control over boards than individual shareholders.  There is no good reason for limiting voting rights which determine board membership to shareholders.  Countries, like Germany, elect directors by giving rights to stakeholders and not restricting votes to those who rent stock. German companies have benefitted from this system and so has its citizens.  The doctrine of maximizing shareholder value for the renters of stocks has led to bad developments in America.  Management focus on managing the stock price has led corporations to pursue strategies that have not been good for other stakeholders.  The system of shareholder democracy in America is a failure that will not be easy to correct.  Managements love it, and directors have no interest in changing it.  Most Americans don't understand how it works, and why it has failed.  Consequently, politicians have little interest in change either.

Putin Moves To Limit External Influences On Public Opinion

A major source of television in Russia announced that it would not provide access to CNN and the BBC for reasons beyond its control.  This follows moves that limit the functioning of external NGO groups, such as Greenpeace, in Russia.  Observers believe that Putin is concerned about the affect of external information sources on public opinion in Russia.  Frankly, US television also provides limited access to external news sources.  It has not been necessary for the US government to do anything to control access to external news sources.  With the exception of the BBC, American's do not have an opportunity to observe how the rest of the world responds to the news.

Which Countries Might Prosper In Weak Global Economy?

The global economy faces numerous challenges that will create difficulties for most countries and opportunities for a few other countries.  Dani Rodrik describes three factors that will determine the countries that best satisfy the three criteria.  Unfortunately, few countries satisfy all three.

Countries that have reasonable public and private debt burdens will do better than heavily indebted nations.  Most of the developed world, and most developing countries, face problems that result from excessive public and private debt.  Both forms of excessive debt are bad because they interact with each other.  Large private debt burdens lead to public debt problems (Spain, Ireland), and excessive public debt limits the ability of governments to respond to economic problems.  It also leads to fights over tax policy and redistribution policies, and it limits investment in needed structural changes.  It also leads to the kinds of political polarization that we see in most of world.

Countries that are not reliant on the world economy will have a better chance for success.  Countries that have current account imbalances will have more problems.  For example, Turkey, which has a current account deficit, will have more difficulty tapping into the global financial market for capital.  Countries like China, which have current account surpluses, will receive pressures to limit mercantilistic practices.

Countries that have a middle class and a large domestic market will do better than countries that depend upon exports for growth.  These countries usually benefit as well from a democratic system that is needed for making better decisions and resolving conflict between interest groups.  China and Russia, for example, are limited by two of these problems.  Argentina and Turkey are limited by reliance on authoritative regimes.

Only a handful of countries satisfy each of these criteria.  They include, India, Brazil and South Korea.

Wednesday, July 11, 2012

Robert Barro's Theory On Rare Events And Asset Prices Has It Backwards

Noah Smith is fresh young economist who has an interesting blog.  He is about to start his teaching career as a professor of financial economics.  Brad DeLong tells him to be careful about his praise of Robert Barro's theory on the effect of rare events on asset prices.  The theory depends upon the assumptions that Barro makes about how investors will interpret the current situation,  and take actions to prepare for the future that they correctly predict.  Brad DeLong shows that Barro's assumptions got it backwards during our most recent asset bubbles.  DeLong does not discuss Barro's concept of Ricardian Equivalence, but his use of the concept to argue against fiscal stimulus in the recession was broadly criticized by economists.

A Brief History Of Political Economy In 1932

This snapshot of the economic and political debates in 1932 should sound familiar to most of us.  It sounds very much like the debates that we are having today.  The confidence fairy was alive and well in 1932 and fears of inflation were strong in a period of price deflation.  Farmers were hard hit by price deflation.  They typically borrow money to put their crops in, and pay back the loans after harvest.  The large drop in commodity prices reduced the value of their harvest and many were unable to pay off their loans.  Farm foreclosures increased rapidly and banks had to swallow huge losses.

President Hoover believed that the solution to the economic problem was a balanced budget.  He wanted to raise taxes and cut government spending to balance the federal budget.  He argued that this would restore business confidence.  Businesses were more concerned with weak demand and falling prices.  The were also unsure about the direction of monetary policy.  The regional Fed bank presidents were afraid that easy money policy would create inflation, while some economists argued that price inflation would be a good thing in a period of deflation.

There were some differences between 1932 and today.  The House passed a bill to stimulate the economy but the Senate turned it down. Our GOP House today is dominated by deficit hawks.  The New York Times back then was a pillar of respectability.  It opposed the House bill.  Today the NYT is a bit more liberal.

Tuesday, July 10, 2012

Paul Krugman Does Not Sympathize With Those Who Claim To Be Our Engines Of Growth

There has been a lot of chatter and handwringing about class warfare as the 2012 election campaign heats up.  Krugman takes this opportunity to explain why the super rich are not essential to the economy even when their marginal contribution to output is equal to their pay. That of course, is one of the foundations of microeconomic theory.  We are all paid in relation to our contribution to output.  If we raise taxes on Joe Rich who earns $30 million, and he cuts back his work by one third because that makes him unhappy, GDP will fall by $10 million but so will our payments to Joe Rich.  That does not affect anyone's income except Joe Rich, and the governments share of his income in lost taxes. Krugman also goes on to explain why optimum tax policy suggests that social welfare would be higher if we had a more progressive tax system like we had before the Reagan revolution, when the economy was doing better than it has been doing for most of the last 40 years.

Romney Is Winning The Battle Of The Hamptons

This article describes the fundraisers in the Hamptons during the 2012 campaign.  Obama is missing in action, and Romney has won the battle for the affections and funds of the top .000001%.  This is partially due to image concerns within the Obama campaign, and it is also because the president has been threatening to raise their taxes.

The Whining of The Super Rich At The Romney Fund Raiser In The Hamptons

Some people at the fundraiser tweeted comments that were overheard at the fundraiser.  The super rich were very upset that our president decided to say bad things about their unwillingness to pay taxes. Apparently, the president does not appreciate that they are the engines of growth that provide jobs for the losers.  This article pokes fun at some of the comments that were tweeted.  Many of these engines of growth became very rich by taking advantage of the losers.  Investors are often among the losers.  Many of them are willing to pay excessive fees to money managers.   The high fees generally reduce their yields below what they would have earned by investing in a low cost index. Only 20% of actively managed funds generate a higher return than index funds and they do not consistently beat the indexes. This is only one of the ways that many get rich by taking advantage of suckers.

Robert Samuelson Has Traced Our Economic Problems Back To The Original Sin Of JFK

Samuelson has discovered the cause of our economic problems.  The original sin that he uncovered is entirely unrelated to the financial crisis, or to any other factors that have contributed to our problems.  The devil made JFK run budget deficits to stimulate the economy.  The devil of course was Keynes who argued that governments had a role to play in the free market economy.  The devil told JFK that he should increase spending when cuts in business investment led to high unemployment.  (The devil also said that we should run budget surpluses when the economy was at its peak, but that is usually ignored because that would make him less of a devil.)  JFK's original sin led to the sins of inflation, and elevated national debt, which always leads to an economic contraction.  Everything would be fine in the global economy if JFK had not been tempted by the devil.  We are all going to hell as result of JFK's original sin.

Frankly, I wish that we did not have to pay any attention to serious people like Samuelson whose ignorance of economic history and the relationship between economic variables is proudly put on display in his op-eds. Along with George Will and David Brooks it is a full time job to sterilize conservative propaganda. The good news is that some people might learn more about propaganda techniques, and lots of economists respond by providing corrective lessons.  These guys do make good foils.

Robert Samuelson Shows Why Some Very Serious Opinion Leaders Should Not Be Taken Seriously

This post, is one of many that have been written in response to the very serious Robert Samuelson's ignorance of economics that he demonstrates on regular basis (here, here).  I don't believe that Samuelson is ignorant of economics.  He is an expert at putting a conservative spin on data that is of interest to conservative readers.

Stephen Colbert Is Reviewed In The Lifestyle Section Of The Washington Post

Stephen Colberts' political satire is being taken seriously in the less serious section of the Washington Post.  The serious sections in the Washington Post are being taken less seriously by academics and college students.  His satire is brilliant, and he provides greater insights into what is really happening in society than very serious people like George Will. He gets away with telling the truth because he is funny.  "Much truth is said in jest" and perhaps there is a reason.  If Cobert was not funny, he might have been put on a black list.

British Parliament Questions Bank Of England About Its Role In Libor Scandal

Officials from England's central bank are being grilled about their role in the Libor scandal that has been made public by penalties assessed against Barclays  manipulating the Libor. They are certainly being more aggressive in their questioning of central bank officials than the US Congress has been over its regulation of JP Morgan after it reported multibillion dollar loses on a trade. The US Congress questions the JP Morgan CEO over the trade and just fell short of asking if they should kiss his ring.

Barclays could not have manipulated the Libor by itself.  The rate is set by using rates submitted by 20 major global banks.  Several US banks must have been involved but it has attracted little attention in the US. Perhaps that is because few people understand what the Libor is, and why it is important.  It is the rate that banks charge when they borrow from each other to meet liquidity needs.  It appears that banks reported lower rates than they actually charged each other during the banking crisis. If banks demanded higher rates from each other it might have raised questions about increased risk in the banking system. If central banks were aware of this practice, and it appears that they were, they encouraged the practice rather than taking early actions to deal with rising risk in the banking system.  The Libor is also important to consumers and to business. A wide variety of loans are set in relation to Libor.  It also affects the value of derivatives that are traded in the $700 trillion derivatives market.  Banks that have information about the direction of Libor have an advantage over their counterparties when making trades.  Trades who are less informed would be making bets in a Casino in which the House had loaded the dice.

Among other things, the Libor scandal has raised further questions about the integrity of the global banking system and also about the central banks that are supposed to protect the integrity of the system.  It appears that the regulators are too close to those that are they are supposed to be regulating.

David Brooks Redefines The Opportunity Gap To Deflect Attention From The Top 1%

Economist's like Joe Stiglitz, and many others have argued that America is no longer the land of opportunity that it once was.  David Brooks cites some evidence that suggests that there is a growing opportunity gap.  As one might expect, Brooks and Stiglitz have a different perspective on the causes and the solutions to the opportunity gap.  Stiglitz argues that the schism in society is between those at the very top of the income pyramid and the rest of society.  Some refer to this as the gap between the top 1% and everyone else.  Some even go further.  The real gap is between the top .01% and everyone else.  Brooks is more worried about the bottom third of the income pyramid.  They are not doing very well, but the top two thirds is doing very well.  Brooks describes the opportunity gap as the top 66% versus the bottom 33%.  He doesn't like all the attention that is given to the shift in income and opportunity to the top 1% or to the top .01%.  Brooks does not see any economic or opportunity problems in the broad middle class.  There certainly is no opportunity gap between the middle class and the top of the pyramid.

Given the definition that David Brooks has given to the opportunity gap, he suggests solutions that might address the gap between the bottom 33% and the top 66%.  Government should devote more resources to social welfare programs for the young than it does today for the elderly.  This means cuts to Medicare and Social Security in order to potentially spend more on the young.  Instead of class warfare between the rich and the poor, conservatives prefer to stimulate warfare between the young and the elderly.  They have encouraged the young to believe that social security will not be there when they are ready for retirement so that they might be less willing to support our current system.

David Brooks defined the opportunity gap in terms of income, but his solutions to the problem do not address the income gap.  He prefers to talk about the morality gap.  Liberals are responsible for the morality gap.  One of his solutions to the morality gap is that liberals must be more concerned about family values.  If they believed that it was better to get married before having children, the opportunity gap would be reduced by some magic means.

He has a message for conservatives as well.  They should either be more willing to raise taxes, or they should cut spending on entitlements, so that they could devote more resources to the bottom 33%.  He knows that conservatives are not going to raise taxes.  They will, however, eagerly cut entitlements.

As usual Brooks concludes his op-ed with a message for politicians.  They should spend less time exploiting social divisions and engaging in class warfare. He would rather not have Democrats focusing on the gap between the top of the pyramid and the bottom 99%.  They should all work together improving social morality and making cuts in entitlements so that the bottom 33% will have better opportunities.  The only kind of warfare that he favors is a war between the young and the elderly, and a war between the middle class and the bottom 33%

I posted an op-ed by another conservative opinion leader, George Will, who was so concerned about the bad things that the Environmental Protection Agency was doing to Native Americans, that we should shut down the EPA and deregulate the economy.  George Will's concern about Native Americans is very similar to David Brooks' concern for the bottom 33%.  Their phony concerns for the less privileged is used to propose a way of thinking that benefits the top .01%.  They are expert propagandists, who have collected a premium for their expertise that has entitled them to be in the top .01%

Household Balance Sheets In US Are Gradually Improving

This graph show that household balance sheets have been on steady rise since the trough of the recession.  Liquid assets to liabilities are at the highest level since 2001, and they are at their longer term average between 1980 and 2008.  The graph also shows the influence of the two asset bubbles that we have had.  The ratio rose rapidly during the boom in stock prices in the 1990's.  It fell dramatically from the peak in the 1990's and it was well below the longer term average during the early 2000's.  That reflects the boom in housing that was fueled by household debt.  It dropped further in the recession and it has been slowly moving up towards the average as households curbed spending and repaired their balance sheets.  That process is continuing.  Consumption is expected to grow at around 1% on an annual basis for 2012.  Since median incomes are not rising, it is not likely that the ratio will move above its average in the near term.

Monday, July 9, 2012

Mitt Romney's Economy Is Not His Father's Economy

The differences between Mitt Romney and his father reflect differences in the political economy over the last 50 years.  George Romney ran American Motors and he created jobs.  He also paid 37% of his income in taxes, and he revealed his financial information when he ran for president.  His son represents the new political economy.  Mitt's income is earned by buying and selling companies, and only 15% of Mitt Romney's income is paid in taxes.  He also has been unwilling to make his financial holdings, which includes millions in foreign tax havens, public.  Mitt Romney's political economy is more like that in the "Guilded Age" in the 1920's, when great wealth was accumulated by financiers on Wall Street, who also controlled the political system.  Mitt Romney and his friends would like nothing better than a restoration of the "Guilded Age".

German, Austrian and Swiss Economists Argue For Banking Integration

A group of German economists signed a manifesto against the development of a banking union.  This is a response by 100 economists who argue that a banking union is necessary to save the common currency as well as the general integration of Europe's economy.  It seems as if economists differ in the strength of their support for European integration.  Economists with a stronger nationalistic philosophy oppose banking integration and those who favor integration believe that it is necessary.

This is a translation of the original article that was in German.

The Hollowing Out Of The Middle Class

We are familiar with the problem of business cycles.  We know that in the trough of the cycle we have unemployment.  Experience suggests that the economy will recover and that we will attain full employment at the next peak.  This article suggests that our current unemployment problem is not typical.  Business investment has been growing and corporate profits are at an historical high.  GDP has also been growing but the employment to population ratio is at an historical low and it continues to fall.  It appears that the economy is capable of producing the goods and services that are demanded with fewer workers.  Some argue that growing productivity and the globalization of production have hollowed out the demand for labor.  Some jobs can only be done locally, and many of them can be done with low skilled and low paid workers.  Many of the jobs that provided a middle class living standard have either been reduced by increases in productivity, or they have been offshored.  On the other hand profits continue to rise, and those who own capital, or are required to produce or manage capital, have seen their incomes rise.

Keynes anticipated that rising productivity would solve the economic problem of scarcity.  He imagined that it would lead to the end of poverty, and that it would allow more people to enjoy leisure and engage in activities that enabled them to grow intellectually and to engage in cultural activities that were typical in his social class.  That would require an organization of society that has not occurred.  Economies are creatures of the broader social system.  We are responsible for the creature that we have, and we are empowered to shape it in ways that better serve our values.

Sunday, July 8, 2012

The Supply of Scientists With PhD's is Greater Than The Demand

This article tells a sobering story about PhD's who can't find jobs in their specializations.  The pharmaceutical industry is cutting back on R&D, and there is less funding available from government organizations like the National Institute Of Health. It is also harder to find teaching jobs in our research universities. This story runs counter to what we hear from pundits and politicians about the inability of our education system to produce scientists and engineers.  It also runs counter to the claim that our high unemployment rate is due to the poor skills in our labor force.

George Will Tells Us That The EPA Is Bad For Native Americans

George Will is a nationally syndicated propagandist.  This article provides a good demonstration of his skill as a propagandist.  This op-ed is ostensibly about EPA regulations that are making life difficult for electric utilities operated by Native Americans. The EPA wants them to remedy problems that arise from their use of coal to generate electricity.  The plight of the Native American's, however, is not what his article is about.  He probably believes that his readers might be more sympathetic to them than to the Koch brothers, Exxon and other large energy corporations who benefit from his propaganda.

It doesn't take long to figure out the real points that George Will wants to make in this op-ed.  It is the story that he makes in most of his op-eds.  He is against high minded progressives whose ideals inspire government to do bad things for "good" reasons.  He is against government bureaucrats like those in EPA who write the progressive rules that have consequences that they do not understand.  He is against government intervention into the "free market" that is controlled by large oligopolies.  And, of course, he is against the Obama administration that is over-regulating the economy and destroying jobs.  I doubt that George Will really cares about the Native American electric utilities. I have no doubt, however, about the real purposes of his propaganda.

Saturday, July 7, 2012

The GOP Has Learned From George Orwell

George Orwell taught us about the ways in which politicians distort language to serve their political purposes.  They are able to distort language to the point that what we think is up is really down.  The GOP was successful in the 2010 elections by telling senior citizens that Obamacare was going to cut Medicare and that it would use death panels to limit medical services to seniors.  Paul Ryan introduced a plan that would drastically change Medicare.  His plan was passed by the GOP House of Representatives.  Medicare would be replaced by a system in which vouchers are distributed to seniors that can be used to purchase health insurance.  Ryan claims that this is just like the healthcare plan that Congress has.  He leaves out an important difference, however.  The vouchers that are provided to Congress increase in value at the rate of healthcare price inflation.  The vouchers that would be provided to senior citizens would increase at the general inflation rate which has been well below the healthcare inflation rate.  In other words, the burden of healthcare inflation would be shifted from government to seniors.

The GOP has revived its successful campaign against Obamacare by repeating the lies that worked in 2010. They claim that Obamacare will reduce Medicare by $500 billion.  This article explains why that claim is false and it shows how the Ryan plan will reduce Medicare spending by $500 billion by using the voucher system.  George Orwell understood why the GOP plan is effective.  They confuse the public with false information and it takes considerable effort to educate the public on complex subjects.  Even this article, which was in the right direction, is not the best way to educate the public.  It takes the general position that both sides distort information.

What's Good For Bain Capital And Mitt Romney Is Not Good For America

Bain Capital and Mitt Romney made a lot of money by investing in companies that engaged in offshoring labor to low wage countries and in outsourcing labor to contract workers who receive lower pay and do not receive benefits.  Romney argues that he should be elected as President so that Americans can take advantage of his business experience.  In other words, we should continue the process of redistributing income from wage earners to those who own and/or operate businesses.