Tuesday, December 31, 2013

Monday, December 30, 2013

Meet The Inner David Brooks

I have posted several articles by David Brooks in order to critique way that he frames his arguments to make conservative ideas seem palatable, or to discredit the intentions of liberals.  This article, written by a political scientist who teaches at Yale, goes much further in his analysis of David Brooks.  He describes a NYT op-ed written by David Brooks as a self parody of the mid-aged David Brooks as a "Thought Leader".  Brooks' criticism of liberal minded Thought Leaders is interpreted as a criticism of his own life, in which he has been successful as a Thought Leader, but has not satisfied the idealized visions that he had of himself as a young conservative whose hero was Edmund Burke. 

I found the article, which contains a selected review of many articles written by Brooks during his career, very interesting, and a much deeper description of his motivations, than one can discern by focusing attention on separate op-eds written by Brooks.

Do We Really Want A Form Of Capitalism Without Public Goods?

The US does not have a monopoly on intellectuals who have a utopian ideal of a free market economy.  Perhaps some economists in Australia have been educated at the Mid-West temple which extols the virtues of a form of capitalism that has never existed.  A recent publication in Australia argues that life in Australia is much better today because of free market capitalism and that it would be even better if government did less to improve the economy.  There are two problems with that argument.  In the first place, there has never been a free market economy in Australia or in any other country.  It does not follow that the rising standard of living in Australia is the result of a utopian form of capitalism.  Moreover, everyone would agree that the free flow of ideas is essential for innovations that lead to new products and services that are essential for economic development.  Government plays an essential role in this process.  This article describes one of the fallacies in the argument for a utopia with totally free markets.

One of the problems with ideas is that businesses would not attempt to develop them if they could not be protected with patents and copyrights.  Governments play an essential role in awarding and protecting patents and copyrights.  In fact, the protection of intellectual property rights is a critical component of most trade agreements that are negotiated by governments.  Furthermore, public institutions provide much of the basic research and support for idea creation.  For example, most of the pharmaceutical products in the US are dependent upon basic research that occurs in universities and public laboratories.  Turning those ideas into products is the last step in the process of development.  Government also protects society from products that may have harmful effects.  One could argue that government could do a better job in this process but it would not occur at all without government support. We would have a form of capitalism without ideas.

Will 2014 End The Year Of The Fiscal Scolds?

Budget deficits in the US have fallen faster over the last four years than in any other four year period since the demilitarization following WW ll.  That did not make the issue of deficit reduction less important in the media than high unemployment.  Paul Krugman argues that the age of deficit reduction mania may be at an end. 

The question in my mind is whether the Democratic Party will wait for the Republicans to determine the next issue that they will have to oppose, or whether they will go the offensive and lead the public in the directions that will restore this country as a moral force in the world. 

Democrats May Choose Minimum Wage Increase As Campaign Issue

The real minimum wage has fallen over time due to inflation.  It should be increased as part of strategy to address growing inequality.  This article describes the issue in terms of its effectiveness as a campaign strategy for 2014.  Polls suggest that it would appeal to a wide range of voters.  It would be an effective strategy as long as Republicans oppose it.  They have usually opposed most policies that interfere with the "free market", and they traditionally like to align themselves with the interests of small businesses which usually vote republican.

This may be an effective election year strategy but I agree with one of the comments following the article.  It is much too cynical to view the issue primarily as a wedge in the 2014 election.  It should be a fundamental principle that the party would fight to pass even if it were not supported in the polls.  The Democratic Party should be in the business of convincing the public to do the right things that serve the public interest.

Sunday, December 29, 2013

What Does Catastrophic Climate Change Look Like?

The relationship between global warming and environmental change is complex.  It is difficult to make exact predictions about the progress of global warming and the consequences.  The forecasts by the IPPC incorporate a huge amount of data and they acknowledge a high degree of error.  They recognize, however, that catastrophic consequences are within the realm of possibility if our responses to global warming are inadequate.  This article gives us a description of what a catastrophic climate change event might look like. It is based primarily on the rapid melting of arctic ice that we have been observing.  It is likely, that in the near future, summers in the arctic region will be ice free.  The concern is that large amounts of methane will be released into the atmosphere as the permafrost thaws.  The consequences are dire.  Unfortunately, the melting of the arctic ice will also open up that area to a hunt for oil and other natural resources.  Given human nature, we are more likely to devote resources to industrial expansion than we are to the avoidance of catastrophe. 

Wednesday, December 25, 2013

Is There A Bond Between Putin And International Conservatism?

Pat Buchanan has been a strong voice for conservative values in the US.  Buchanan believes that he and Putin have more in common than he does with secularists in the US.  Putin has taken a stance against gay marriage, and he has defended fundamental Christian values.  They both seem to be aligned with nationalist movements in other parts of Europe and Asia that defend traditional values and oppose globalization, immigration and other threats to national identity.  There seems to be room for the development of a new kind of Internationale.  Meyerson calls this the Intolerance International.

One Dark Spot In US Recovery

Households have been paying down their debt and the economy is expected to grow at 4% again in Q4.  The exception is student loan delinquencies.  Graduates funded their education with debt but the job market for new college graduates has tightened.  The unemployment rate for college grads is lower than that for non-college grads but that gap has tightened.

Tuesday, December 24, 2013

"Dark Money" And The Funding Of Climate Change Denial

It used to be easy to determine who was providing the funding for climate change denial organizations.  For example, prior to 2008, it was easy to trace the traditional funding sources such as Koch Industries and Exxon- Mobile.  Today 140 foundations funnel the money to climate denial organizations.  Between 2003 and 2010 $558 million was funneled through foundations which are not required to disclose their donors.  Around 25% of the funding went through DonorsTrust which is the largest source of climate denial funding.  Since 2008 there is no trace of funding coming from Exxon or Koch Industries or other traditional funding sources.  The public is unable to determine who has paid for the reports that shape the way governments might respond to the threat of global warming.

Varieties of Capitalism And Life Satisfaction

At the core of capitalism there is a fundamental logic that commodifies individuals.  That is, they are employed by owners of capital who hope to earn a profit on their input.  They are regarded as a factor of production just like any other commodity that is required for producing a product or a service.  Moreover, their services are bought and sold in an impersonal labor market.  The price that is paid for their services is subject to the law of supply and demand.  There is a lot of pressure on individuals to do whatever they can to decommodify themselves.  Many invest in education and seek occupations  in which the demand for labor is growing faster than the supply.  Others join unions which attempt to strengthen their bargaining power and provide greater security.  Governments also play a role in decommodification.  Many social welfare programs help to make individuals less subject to the vagaries of market forces. 

This article summarizes the results of research by a political scientist who argues that life satisfaction is related to the degree to which one exists as a commodity.  He found that life satisfaction is higher in capitalist countries that enable decommodification.  He argues that capitalism is a great system at the macro level.  That is, it enables nations to create a larger economic pie.  At the micro level, however, life satisfaction is dependent on the degree to which one exists as a commodity.  Differences in government and culture play a big role in that process.

What Most People Don't Know About US Budget Deficits

Many Americans believe that US budget deficits have grown as a result of the fiscal policies employed by the Obama Administration.  The opposite is true.  The decline in the US budget deficit since 2009 is the largest four year decline since demobilization after WW ll.  Moreover, the budget deficit in 2009, after Obama took office, was a foregone conclusion.  It was determined largely by fiscal policies during the Bush Administration.  George Bush cut taxes, which reduced revenues, and he increased spending by conducting an unfunded war in the mid-east and by adding a drug benefit to Medicare.  The improvement in budget deficits during the Obama Administration would have been even greater if he had not continued some of the Bush tax cuts prior to 2012.  It should be noted that the deficit hawks in the GOP were silent about the growth in budget deficits during the Bush Administration.  They saved their concern about deficit growth for the Obama Administration.  Consequently, many Americans are not aware of the decline in budget deficits since 2009.  It has been drowned out by noise from Republicans who were silent during the Bush Administration.

Monday, December 23, 2013

Restoring Shared Prosperity

There has been a lot of discussion about rising inequality and declining social mobility.  There has not been as much consideration of the means by which the problems can be addressed.  A group of economists have contributed to a book which offers a variety of suggestions for dealing with the problem of income maldistribution. This is a link to a free pdf which contains the articles that will appear in the book when it is released.

Sunday, December 22, 2013

A Case Study Of US Covert Operations in South America

This is a lengthy article about covert operations in Colombia.  It describes the history of US support to the government as part of its war on drugs.  It shows how the CIA and NSA have supported the government's efforts to eliminate leaders of the organization (FARC) responsible for drug traffic from Colombia to the US.  The operations in Colombia are very similar to those used in Afghanistan and elsewhere as part of the US war on terror. 

The Loss Of Trust Is One Of The Costs Of Inequality

Joe Stiglitz explains the importance of trust in social and commercial relationships.  He expresses his concerns about the loss of trust in our society and the substitution of incentives for the lost trust.  It is expensive to pay people to do things that were once based upon mutual trust.  While there are lots of forces at work that undermine trust, Stiglitz focuses his attention on the complete breakdown in trust that occurred in the financial crisis.  Interbank lending broke down completely and the government was forced to rescue the banks. 

What happened in the financial system is just one example of how we have become dependent upon the use of incentives, rather than mutual trust, to guide behavior.  For example, we have to pay executives with stock options in order for them to operate businesses in the interest of shareholders.  The assumption is that they will only work hard, in the interest of shareholders, if they are also large shareholders.  It is part of a more general belief that we are primarily guided by self interest.  We can't trust anyone to do the right thing unless it is in their best interest, and that is defined by the incentive system.  To the extent that we acknowledge society, as opposed to individuals, we are forced to believe that social welfare is determined by the actions of individuals maximizing their self interest.

Social systems, based upon selfishness as a guiding principle, eventually leads to a breakdown in ethics and the trust that once guided our behavior.  It encourages the powerful to engineer the rules and regulations in their self interest.  The game is then rigged to enable them to gain at the expense of other players in the game.  That leads to greater income and social inequality and a loss of faith in the game itself. 

Saturday, December 21, 2013

Is The Period Of Household Debt Deleveraging Over?

Economies typically recover slowly from recessions that are associated with a financial crisis.  This graph shows that household consumption has been limited by the need to pay down debt that was accumulated prior to the recession.  It would appear that households have effectively paid down their debt and that they are beginning to take on new debt.  The housing market has strengthened and the purchase of durable goods like automobiles which are typically debt financed has rebounded.  That might explain the strong results in Q3.  GDP growth in the US came in unexpectedly at over 4%.

Robert Solow Reviews Alan Greenspan's Recent Book

Robert Solow is a Nobel Prize winning economist.  He is gifted with the ability to express complex and difficult to understand ideas simply and with precision.  Alan Greenspan was Chairman of the Federal Reserve for 19 years.  Over that period he played a powerful role in determining the path of the US economy.  His reputation was severely damaged by the financial crisis which he helped to make possible.  His book is an attempt to restore his damaged reputation.  Robert Solow gives him credit for dealing admirably with two crises that occurred on his watch.  He then turns to the faults that he finds in Greenspan's book, and they are revealing.  For example, Greenspan argued that the payments that are made to social welfare programs reduce savings which are required for investment.  This aligns Greenspan with those who favor a reduction in social welfare programs.  Solow explains why Greenspan is wrong to infer a causal relationship between social welfare payments and lower savings and investment.  He also shows that savings do not necessarily result in investment.  Corporations are rich in cash, and interest rates are at an historical low, but business investment has been weak.  Greenspan believes that the lack of investment is due to fears about government regulation.  Solow believes that businesses invest when they need to expand their capacity in order to satisfy growing demand.  Greenspan's belief about the lack of investment reflects his bias against government regulation.  Clearly, a business that did not increase capacity to satisfy growing demand would not be around very long.  The same fate would befall a business that invested under conditions of weak demand.  Solow's explanation is more consistent with the operation of real businesses.

Greenspan also argues that income inequality is not a real problem.  He believes that individuals are compensated for their marginal contribution to production.  It would be unjust, and a distortion of the efficiency of the market system, to redistribute income.  Efficient markets provide an optimum level of social welfare.  Solow does a better job of destroying that argument than any that I have seen.  It is worth reading his review of Greenspan's book to see how he destroys the myth of Pareto optimization of social welfare.

Friday, December 20, 2013

A GOP Lawmaker Explains Why Inequality Is Not Bad

A GOP lawmaker gives his reasons for opposing efforts to deal with inequality in Minnesota. It is simply his version of trickle down theory.  The real reason for this post is that six slides are included in the article which provide a good analysis of the relationship between inequality and social mobility.  American's place a high value on social mobility, but many do not appreciate the impact that growing inequality has on social mobility.  Inequality is greater in America than it is in many other countries and the slides show how it has affected social mobility.

America's Social Democratic Future

This article suggests that Social Democracy in America is driven by different forces than it is in many other western nations.  There is not an ethic or a culture of Social Democracy in America like that of other nations.  Social Democracy in America is driven by crises that result in policies patched together to solve specific problems.  The Affordable Care Act is a classic example of how Social Democracy works in America.  It was designed to fix an expensive healthcare system that fails to provide universal healthcare.  It has been strongly challenged by powerful forces in America that furiously oppose any movement towards Social Democracy.  Those forces have been active in efforts to dismantle the New Deal since it was forced upon them in response to the Great Depression.  The Affordable Care Act has been attacked fiercely because it is part of a more general battle that has been going on in America since the New Deal.

The article concludes that nothing can really stop the development of Social Democracy in America for a variety of reasons.  There will always be social crises and politicians will be forced to deal with them.  Unfortunately, the politics will distort the solutions to the social problems that are being patched up.  The Affordable Care Act is what results from the process.  It is an inefficient solution to a serious social problem, but how could it be otherwise given the politics.  Hopefully, it will improve over time.  Social Security, for example, was improved despite efforts, which are still underway, to dismantle it.

Thursday, December 19, 2013

The CEO Investment Cycle

The investment behavior of the typical CEO varies over her tenure period.  This study shows that the CEO tenure cycle is as powerful as other factors such as the business cycle and industry changes that affect investment.  It is also independent of the circumstances of the CEO's appointment.

The new CEO is busy divesting the poorly performing assets that were the responsibility of the replaced CEO.  New assets, and employee growth, are well below average during the first three years following the CEO's appointment.  Over time the new CEO gains more power over the Board (which contains more of his appointments to the Board).  The CEO then begins a new investment cycle which is designed to increase the CEO's utility.  The new investments are typically viewed negatively by investors.  The more powerful CEO is more interested in increasing personal utility than in increasing shareholder value.  Eventually, the CEO loses control over the Board and they search for a replacement who will focus on increasing shareholder value.  That sets the stage for a new CEO and a new CEO investment cycle.

Monday, December 16, 2013

Inequality And The Left

Simon Wren-Lewis is concerned about rising inequality in the UK.  Politicians on the left are more likely to be concerned about inequality than those on the right, but they learned that it is easier to win national elections by moving to the center which right wing politicians have abandoned in recent years.  Moreover, many of the policies advocated by the left would not resonate with many voters.  Unionization, for example, and higher minimum wages would not attract a lot centrist voters. It is more difficult to make a compelling case for greater equality than it is for decreasing unemployment.  Politicians on the right won the last election by convincing the electorate that budget deficits are bigger problem than high unemployment.  They even sold the public on the idea that deficit reduction was the best way to increase employment.  Perhaps the real problem for the left is that they do not control the media which are the primary means by which public opinion is created.  Lewis does not address that problem but it is a major problem in most countries. 

Robert Samuelson Tells US That Budget Deficits Are Our Most Important Problem

The Washington Post editorial board believes that we need to reform entitlements in order to reduce the risks of unsustainable national debt.  Robert Samuelson has been given a platform to make that case for the Post.  In this article, he argues that the recent bipartisan budget deal is an example of what is wrong with governments.  It does not go far enough in addressing our budget problems because governments typical avoid making hard decisions.  They prefer incrementalism, and the current budget deal is a classical example of incrementalism.  The bold steps that government should take to reduce our fiscal imbalances only occur during crises.  Samuelson has done his best to convince us that we need a smaller government in order to avoid financial disaster.  He prefers to wear a blindfold that prevents him from seeing the real problems in the global economy that confront us today.  He should read Larry Summer's article which is posted below.  I doubt, however, that he would appreciate the impact that economic stagflation would have on the budget problems that he worries so much about. He understands what his job is at the Post.

Larry Summers Makes The Case For Insuring Against Stagnation

In this article, Larry Summers restates his rationale for suggesting that we may be in for a long period of economic stagnation.  He then makes the point that stagnation is not inevitable.  It is a contingency that we should take steps to insure against.

Some may believe that it is not necessary to insure against stagnation.  They may point to the signs of recovery in the US as one reason to be unconcerned about stagnation.  Summers makes the case that there is a global shortfall in demand despite the signs of recovery in the US.  He also argues that the economy may not recover simply because the worse effects of the financial crisis are behind us.

Lastly, he argues against the use of asset bubbles to stimulate economic growth.  Asset bubbles are only natural given the low interest rates that have been necessary during the recovery.  They increase the risk of financial instability and provide another reason for insuring against stagnation.  He doesn't go into much detail about what should be done to insure against stagnation but he views the basic problem as a demand shortfall, and that implies looking at policies that will stimulate worthwhile consumption and investment in infrastructure.

Sunday, December 15, 2013

Inequality As Our Most Important Economic And Social Problem

Paul Krugman has been primarily concerned about the depressed state of the economy and the failure of government to adopt countercyclical fiscal policies to reduce unemployment.  In this article, and in a second article, he argues that rising inequality has become the defining problem in economics.  He looked at the impact of rising inequality and determined that rising inequality has been more damaging to most Americans than the depressed economy.  For example, in 1979 the bottom 90% received 66% of the income.  Today the bottom 90% receives only 50% of the income.  That represents a bigger loss of income to the middle class than the effect of a depressed economy.  He has joined Joe Stiglitz and other progressive economists who have decided that the focus on inequality is not a diversion.  It is the right direction in which to move the economic discussion.  Moreover, he now believes that rising inequality has contributed to slow economic growth, and that it has increased the political power of those who favor government policies that contribute to rising inequality.

Krugman understands that any efforts to alter the trend towards rising inequality will be met by a rising refrain from those who led the class warfare against the middle class.  They will call any effort to reduce that trend class warfare.  There is only one kind of class warfare in the vocabulary of most plutocrats.  It is when the middle class attempts to reverse the trend that they engineered for the last three decades.

The plutocracy has a similar response when government attempts to use monetary and fiscal policy to end recessions.  They tell us that fiscal policy will turn the US into Greece, and that monetary policy will create the kind of inflation that exists in Zimbabwe.  The good news is that progressives have dealt with the same  counterclaims for years.  The bad news is that right wing media are supportive of right wing counterclaims and nobody likes fiscal irresponsibility or inflation.

Saturday, December 14, 2013

World's Largest City East And West Over Time

This article has a graph that shows the centers of population in the world over a long period of time.  Tokyo has had the largest population in the East and it is estimated to hold that title in the near future.  Mexico City replaced NYC recently and it is estimated to continue to lead the West in the near future.  I thought that it might be interesting to look into the past and connect population concentration to history.

Is This A Picture Of Runaway Government Spending?

Paul Krugman posted this graph to make an important point.  Total government spending which includes state and local government has been in a sharp decline for the last three years.  It is part of the reason for a slow recovery, but it also suggests that governments are not investing as much as required on infrastructure, education, R&D etc.  Unfortunately, the graph tells a story that is the opposite of what most people believe.  They have been told repeatedly by the usual suspects that excessive government spending is a major problem.

Friday, December 13, 2013

How Tobacco Companies Use Trade Agreements To Prevent Poor Nations From Discouraging Consumption

The kinds of laws that exist in the US to discourage cigarette consumption might help poor countries to limit their number health problem.  Tobacco companies get more than half of their revenues from emerging market countries.  Consequently, they are doing what they can to prevent these countries from using the same methods that are used in the US to warn consumers about the use of tobacco products.  They are threatening to sue the poor countries by arguing that existing trade agreements will impose sanctions on them if they take steps to discourage consumption.  Many of the affected nations lack the legal resources to fight these efforts by the tobacco companies. 

Curiously, we have been paying a lot of attention to the struggle in the Ukraine to enter into trade deals with Europe that will discourage corruption in its government.  The Ukraine government is being used by the tobacco companies to argue that efforts by governments to discourage tobacco consumption are in violation of international trade agreements.  Its easy to understand why many in the Ukraine do not trust their government. 

What Drives Economic Growth?

In his Presidential Address at the 1938 meeting of the American Economic Association, Alvin Hanson coined the "secular stagnation" term that has been recently revived by Larry Summers.  Tim Taylor summarized the Hanson speech in this article.  Hanson described many of the factors which stimulate economic growth but he highlighted the key role that is played by business investment.  He argued that business investment is driven primarily by the expectation of profit opportunities.  Low interest rates are not a sufficient motivator of business investment.  Moreover, the expectation of high profits is greatest when new industries are formed.  In turn, these are often dependent upon developments in science and technology.  Hanson's prediction of secular stagnation was based upon the assumption that new industries were not forthcoming. 

It turns out that Hanson was mistaken about the development of new industries.  For example, the auto industry led to a dramatic rise in economic development.  The sale of automobiles stimulated growth in the rubber and steel industry.  It also led to huge investments in roads and related infrastructure.  Hanson was correct, however, in his understanding of the critical role that business investment plays as a factor in economic growth.  It is the most volatile component of GDP and the slow recovery from recession in the US is related to a weak recovery in business investment.  The graph below, taken from Tim Taylor's article, helps to illustrate the relationship between business investment and economic growth.

It is very clear from this graph, that business investment is very volatile and that it drops rapidly during recessions.  Growth in business investment also triggers recoveries from recession.  Business investment declined during the 1980's and it drove the recovery during the dotcom boom in the 1990's.  The recovery from the 2001 recession was driven by the real estate boom (new residential construction is included under business investment).  The decline in business investment during the Great Recession was greater than that in any of our recent recent recessions.  Business investment recovered more slowly in our current recovery than it has in past recoveries.  It is still well below previous peaks.  This raises the question about secular stagnation.  Where are the new opportunities for expected profits that will drive business investment?  Interest rates are very low but they are a passive force in driving business investment (with the exception of housing).  Large corporations in the US are sitting on a large accumulation of retained earnings but they apparently do not see many opportunities for investment in the US.  We are still waiting for developments in science and technology that will provide the incentive for investment.  The focus in Congress is also less than helpful. Congress seems to be more concerned about cutting federal spending than it is about investing in science and technology which leads to the development of new industries.  Moreover, the cutbacks in total government spending have contributed to the slow growth in GDP.  We are currently dependent upon household consumption which is limited by the accumulation of household debt during the real estate boom.  We can anticipate slow economic growth in the near future.  The question is whether something will happen to stimulate business investment.

A Debate About The Future Of Ukraine

The New York Times selected a number of scholars to discuss the relationship between the Ukraine and Europe and its relationship with Russia.  They have different views on the topic but they were all selected by the NYT.

Thursday, December 12, 2013

JP Morgan Pays A Big Price For Having Madoff As A Client

JP Morgan was Madoff's bank and the government has charged the bank with "programmatic violation of the Bank Secrecy Act in its dealing with the failed Ponzi scheme that Madoff ran for many years.  It could have been worse for JP Morgan.  Regulators decided not to charge the bank with a criminal violation of the Bank Secrecy Act.  This is one of many multibillion dollar settlements that JP Morgan has been forced to make in the last few months.  It is America's largest bank and it can handle the huge fines, along with a $6 billion trading loss, and remain solvent.  However, it played hardball with government regulators and they have returned the favor. 

Wednesday, December 11, 2013

Panoramic View Of Ukraine Protests

Most of us know that there have been large scale protests in the Ukraine by citizens who would have liked to expand economic and legal relationships with Europe.  This link is to three panoramic views of the protests.  A picture is worth 1,000 words.  The scale of the protests is enormous.

Tuesday, December 10, 2013

Tom Friedman Is Still Earning A Great Living By Retelling The Same False Story

Rather than telling us what he learned from his latest trip, Tom Friedman took advantage of US test results in math and science to retell his flat earth story.  The flat earth story is that every nation is engaged in a competition for the high paying jobs that require math and science skills.  Therefore, the only way that the US can remain competitive with the rest of the world is to win the education race. The results from the international PISA tests indicate that the US education is underperfoming in turning out math and science achievers.  This has been happening for a long time so he gets to warn us about this problem annually.

Friedman tells us that it is no longer possible for workers with average cognitive skills to earn middle class wages.  The only high wage jobs in the future will be high cognitive skill jobs that also require imagination.  We need to turn out more Bill Gates and Steve Jobs so that they can create the jobs of the future.  Apparently, he believes that Bill Gates who dropped out of Harvard, and Steve Jobs who did not spend much time in college, are the kind of people that our education system needs to produce. That does not square very well with his flat earth story, and his critique of our education system.  Moreover, it is not clear that any education system could produce more Bill Gates and Steve Jobs.  Our top colleges do produce graduates that are highly skilled in math and science.  Unfortunately, an increasing share of them look for higher paying jobs on Wall Street.  They don't help to create many new jobs.

Friedman also demonstrates his objectivity and his superior knowledge of the flat earth by criticizing Republican and Democratic politicians.  Democrats, for example, don't seem to be interested in turning out the geniuses that we need to compete with the rest of the world.  They prefer to redistribute income from achievers to non-achievers.  They should be more interested in increasing the size of the economic pie.  That is we need more job creators like Mitt Romney has suggested.

Since everyone does not have Tom Friedman's opportunity to earn a high income by telling the same story about globalization over and over again, we need a better understanding of where the jobs will be 10 years from now.  The chart in this link, produced by the Bureau of Labor Statistics indicates that Friedman has a poor understanding of the labor market.  Most of high growth job markets are in lower paying service jobs.  There is not enough demand in high tech fields to restore the middle class jobs that have been lost by the globalization of manufacturing.

Monday, December 9, 2013

US Stock Market Outperforming Rest Of World

This graph shows that US stocks have outperformed the world market excluding the US, since 2009.  Some of the difference is explained by high corporate profits in US corporations and by Fed policies. It is expected that the Fed will give less help to the US market in the near future and that economic recoveries will accelerate in other parts of the world.  That may alter the current trend which has favored US stock price.

Why Are Jobs Scarce And Wages Falling?

Noah Smith links to a study by a labor economists which concludes that unemployment has not been caused by poor education or the use of robots.  It is primarily the result of globalizing the labor market. The law of supply and demand suggests that a huge increase in the supply of a factor of production should lead to greater competition between suppliers of that factor and the price paid for that factor. 

Survival In A Culture of Laissez-Faire

This article, written by a legal scholar, provides an informative history of deregulation in the US.  The role of government in providing for the public good has been systematically eroded over an extended period of time.  We look much more like we did during the "Guilded Age",  prior to the Great Depression,  when businesses had free reign to do as they pleased without worrying about how government might react. Our return to the Guilded Age, is well described as a revival of the culture of laissez-faire which was also the spirit of that era.  The theology of laissez-faire has its own infrastructure.  Temples were created by wealthy donors who hired theologians to transmit the culture of laissez-faire in numerous think tanks created for that purpose. Most were funded with tax deductible contributions by the wealthy. In a sense, the revival of the laissez-faire culture, which limited the role of government in serving the public good, was partially funded by taxpayers.  Economics departments in most of our universities also preached the gospel of laissez-faire, and they helped to transmit it to the rest of the world.  It has become a religion within the business community, but it has also been sold to many in government and to much of the public.  The theology of laissez-faire has been successfully blended into evangelical theology and doctrines of natural liberty which inspires many devotees of the Tea Party.

The Great Depression ended the Guilded Age, as well as the doctrine of laissez-faire,  the apparatus of government was used to restore the economy following the Depression and also in preparation for a world war and its aftermath.  The revival of laissez-faire served two purposes: it was important during the cold war which was viewed as a battle of economic theologies,  and it was also part of an effort to establish a new partnership between government and business interests.  Government could best serve the public interest by interfering less in the operation of the market economy.

The Great Recession, which was made possible by government deregulation created a new problem for the theology of laissez-faire.  The temples that sermonize on the theology of laissez-faire have been put on the defensive.  Much of their effort is devoted to preventing a reaction from the public which might lead to a greater role for government in serving the public interest.  President Obama's recent speech about rising inequality and its impact on social mobility was a step in that direction.  He signaled several ways in which government might restore the American dream of upward social mobility.  Although his speech was rather light on the role that deregulation has played in altering the American dream, the the temples of laissez-faire will have their work cut out for them.  It is a more difficult product to sell during hard times.  It is also harder to sell laissez-faire when even business leaders recognize that government has a big role to play in addressing the problems of climate change.  Attacks against the theology of laissez-faire are not an attack on the market economy.  Government has an important role to play in market economies, and it may need to play an even larger role in order to deal with many of the problems that we face.  It is important to distinguish between an idealized version of a market economy, and the utopia promised by laissez-faire theologians, and the real economy which must also serve the public interest.  Part of the public interest may consist of preventing the self-destruction of the market economy.

What To Do About The Long Term Unemployed?

The Great Recession ended officially about 4.5 years ago.  However, we still have a large number of long term unemployed workers.  Congress is set to make a decision about extending or ending unemployment benefits for those who have been unable to find jobs.  Paul Krugman discusses some of the arguments about this issue.  Some arguments have been with us since governments first made unemployment benefits available.  On the other hand, how we deal with the long term unemployed raises some new questions.

The historical argument against unemployment benefits, favored by conservatives, is that they reduce the incentive for the unemployed to seek employment.  That is, unemployment is voluntary.  If the government did not reward voluntary unemployment, there would be no unemployment problem.  That argument is also consistent with the assumption of classical economists that the economy tends toward full employment, unless government intervenes in the operation of the market.  Krugman takes us through that argument, and concludes that most labor economists disagree with that conclusion.  There is such a thing as involuntary unemployment, and the majority are unemployed because there are fewer jobs available than the number of workers seeking jobs. There may be some skill mismatches, but its very likely that we have more employable workers than the number of unfilled jobs.

That takes us to the problem of what we should do about the long term unemployed. Krugman would like Congress to extend unemployment benefits, but he does not believe that Congress will decide to do so. The Republicans are opposed to extending benefits, and the Democrats are not willing to make an extension a precondition for a budget agreement.  He places the primary blame on Republicans who believe that unemployment is voluntary, and he accuses them of callousness.  He may be making the mistake of confounding the attitude that conservatives typically have about unemployment during a downturn in a normal business cycle, with the unemployment issues that we have been facing in our current business cycle.  This is not a typical downturn in the business cycle.  If we are in a period that Krugman and Summers have labeled as "secular stagnation", we may have to figure out how to deal with an economy in which jobs have become much more scarce than the number of employable workers.  In my view, we should be discussing that problem rather than blaming conservatives for being indifferent to the problems of the unemployed. 

Sunday, December 8, 2013

Paul Krugman Argues That Secular Stagnation Seems Probable Without Help From Monetary Policy And Trade Policy

Krugman chops his way through some some numbers and comes to the conclusion that the positive factors that supported the Great Moderation have disappeared.  Household debt was growing at a 2% rate during the GM and that will not continue; the CBO forecasts that potential GDP will be 1% less than during GM as well. These declining demand factors will cause fixed investment to decline by 2% of GDP.  Real interest rates were 1.9% during the GM and they will have to be negative to offset the factors that limit growth in demand. We will continue to be in a liquidity trap.   The good news is that the US current account deficit averaged around 3% during the GM.  If we could eliminate the trade deficit we could avoid stagnation.  He argues that low interest rates and a higher inflation rate should cause the dollar to weaken and that should eliminate the trade deficit.

Krugman's recipe for escape from stagnation will be difficult to achieve in a post industrial society.  We have a trade surplus in services but services are small percentage of international trade.  The majority of tradable goods are industrial products.  Moreover, around 50% of our imports are by US firms which resell them in the US.  They have lots of reasons for offshoring production that would not be strongly affected by a weaker dollar.

George Osborne Declares Victory For Austerity In UK

The UK economy is growing again.  The champion of austerity in the UK used the occasion of positive growth to argue that his austerity plan worked.  This article reviews the evidence and disputes Osborne's victory celebration.  It argues that procyclical fiscal policy delayed the recovery and that counter cyclical monetary policies implemented by the Bank Of England was responsible for the recovery.  Low interest rates have produced a revival in the real estate market. 

Unlike a sporting event in which the final score is understood by everyone, it is not easy for the public to determine whether Osborne's declaration of victory is legitimate.  He selected his scorecard wisely, and many will cheer his victory march.  They will not remember that the austerity measures were implemented to reduce the level of public debt in the UK.  The debt to GDP ratio reached a peak at 70% prior to the implementation of austerity.  It is forecasted to rise to 80% by 2015-16.  Austerity has increased the level of public debt rather than reducing it.  That will give the conservative government a perpetual justification for more more austerity.  Many believe that the real purpose of austerity is to reduce government spending on social welfare programs. 

Demonstrators In Ukraine Are Not Giving Up On Protests

Rumors that Ukraine leaders have made a deal with Putin, as precondition for entry into Russia's custom union, have inspired protestors to escalate demonstrations.  This article provides more background on the protests in Ukraine.  The protesters prefer a deal with Europe which would make corruption more difficult in the Ukraine.  The oligarchs who benefit from corruption would prefer a deal with Russia, but many business leaders believe that ending corruption would be better for the economy and for a more democratic form of government.

The Volker Rule Has Been Approved By Five Government Regulators: Will The Banks Hold Up Implentation?

The Volker Rule, is part of the Dodd-Frank act that was enacted to limit systemic risk in the financial system.  It would prohibit banks whose deposits are insured by government from engaging in proprietary trading.  For example, the $6 billion trading loss suffered by JP Morgan would illegal.  The banks of course, don't want to lose the revenue that they receive from proprietary trading.  There are many legal tactics that they might employ to prevent the implementation of the Volker Rule.  This article describes the pros and cons of the legal tactics that the banks might use to prevent implementation of the Volker Rule.

Saturday, December 7, 2013

The Battle Between Progessives And Centrists Within The Democratic Party

A lot has been written about the battle between moderates and the more radical Tea Party element withing the GOP.  This article is about the reaction by centrists within the Democratic Party to populist policies advocated by the more progressive wing of the Party.  The WSJ published the reaction by a centrist group known as the Third Way that attacked the populist policies of two leading progressives within the Democratic Party.  The progressives within the Democratic Party reacted strongly and the centrists have been put on the defensive.  This might signal that the Democratic Party is becoming more progressive.  In any case, this may signal a debate within the Party about Hillary Clinton's candidacy for the 2016 presidential nomination. Bill Clinton won two elections by taking a centrist position and some believe that his wife would adopt a similar strategy.  Populism is on the upsurge in the US.  It may be a mistake to leave populism in the hands of the Tea Party which has taken a more right wing approach to populism.  A progressive form of populism has been absent within the Democratic Party for too long. 

Physics Envy In The Social Sciences

There is increasing pressure within the social sciences to conform with a textbook notion of how the physical sciences operate.  Academic journals will only publish papers that are consistent with the mistaken idea that exists about how "real science" is conducted.  They require that research be directed towards the verification of hypotheses derived from theories.  There are many problems associated with the direction that has been taken by the social sciences.  In the first place, many theories cannot be tested empirically, but they may be useful anyway.  In the second place, many policies that are not derived from theory can be tested empirically. Empirical research can be very valuable in the absence of theory.  This article is primarily about the direction taken by the political science profession.  It also pertains to much of what happens within economics. 

Capitalism's March Towards Global Collapse

The failure of the Warsaw meeting on climate policy indicates that governments are not able to take the actions that are necessary to keep us from destroying our planet.  Environmentalists are free to create their own industry, that informs us of our folly, but that does little to disrupt the system.  That is because expansion is the central problem solving solution of an economic and societal system faced with finite resources.  Warnings from environmentalists may even provide a signal that the party may be coming to an end.  That may only encourage some to enjoy the party as long as it can last.  This article in Der Spiegle argues that is necessary to alter the incentive system that is at the root of capitalism to preserve the only planet that we have.  It offers two strategies for altering the incentive system.

The first strategy requires a change from a system based upon profit generation to an economic system designed to promote the common good.  The system would award "common good" points to enterprises.  Firms would be able to benefit from the accumulation of common good points through tax incentives, cheaper loans and preferred access to government contracts etc.  That would reduce their costs and make sustainable firms more competitive versus firms that did not invest in sustainability.  Once enough has been created there would no longer be an incentive to generate surplus.

The second strategy was developed by Bill McKibben in the US.  The basic idea is encourage university endowments, pension funds and other institutional investors to withdraw funding from firms that have not embraced a sustainability strategy.  That would have a negative effect on their stock price, and even investors who did not care about how the firms profits were earned would look for other investment opportunities.  The fossil fuel divestment strategy has been partially implemented in the US.  A more effective implementation would have a profound effect on corporate behavior.  It provides a strong signal that some forms of profit are more valuable than others.

Changing the fundamental incentives that drive business behavior is a radical solution to a problem that governments have been unable to address.  Many will claim that the solutions will destroy the goose that has laid the golden eggs. On the other hand, radical solutions may be necessary to save the goose from destroying itself.

Friday, December 6, 2013

Winners And Losers From Ultra Low Interest Rates

Tim Taylor cites a study by McKinsey which attempts to sort out the winners and losers from Fed policies which are keeping interest rates well below normal levels.  The big winners are the US government which pays out a lot less interest on its debt, as well as non-financial corporations which have been able to borrow at lower cost.  The biggest losers are investors in the rest of the world of who have been receiving lower interest rates on the treasuries that they purchase.  Insurance companies and pension funds are also large holders of US debt which is yielding less than they need to be solvent.  If that continues they will have to invest in riskier assets in order to remain solvent.  (That may be one of the reasons for growth in private equity and hedge funds).

Fed policies have also kept mortgage rates low and that has helped to increase the value of real estate by 15%.  Large holders of real estate have seen their wealth increase as a result.  The Fed's policies have also helped the economy recover from recession.  Its hard to put a value on the macroeconomic effect of Fed policy but it has been very large.  The distribution of benefits from low interest rates are also age dependent.  Younger households have been able to borrow at low rates, but older aged households that borrow less, and are more dependent upon interest income, have done less well under low interest rate policies.

What Can Be Done To Reduce Inequality?

President Obama made an important speech in which he clearly described the rise in income inequality in the US (and elsewhere) and the negative effect of rising inequality on social mobility.  He also indicated some the ways in which he intends to reverse this trend.  Some of the changes that he listed will help to reduce income inequality.  His speech was good, but not great news for those who care about inequality and social mobility.  We would not have heard such a speech from a US President if Mitt Romney had been elected, but most of data on inequality and social mobility cited by the President is old news to those who care about these things.  The real question is what can government do to address these problems.

Robert Reich shares Obama's concerns about rising inequality and decreasing social mobility and he is worried about the political consequences.  This trend cannot go on forever without further polarizing our nation and fostering extremism.  Reich argues that politicians don't like to propose income redistribution as a solution to the problem because it has bad connotations.  He probably understands that many countries in Europe have a similar problem with rising income inequality, but they are much more aggressive in the use of downward income redistribution than the US. He offers an interesting way to frame the debate about income distribution in the US.  The government has many programs which redistribute income to those who are well off.  The list of tax breaks and subsidies provided to the wealthy is lengthy and well understood by those in government.  Reich proposes that we can easily pay for programs that will reduce the effect of market income inequality by ending the tax breaks and subsidies that are generously provided to the well off.  Ending upwards redistribution to the those who not need government help can be used to provide it to the less fortunate who have little defense against the economic and political forces that are responsible for rising inequality.

Thursday, December 5, 2013

US Growth In Q3 Exceeds Expectations

Economists anticipated a growth rate of 3.1%.  The current estimation of a 3.8% growth rate exceeds expectations, but almost all of the difference in the growth rate was due to an unplanned build up in inventories.  That will have an effect on the Q4 forecast which has been reduced below 2%. The assumption is that businesses will have to cut production in order to reduce unplanned inventory increases.

Major US Corporations Have Decided To Assume Carbon Tax In Business Strategies

Exxon has been a major opponent of government actions to reduce carbon emissions.  It even went to the point of funding research which undermined the scientific consensus on global warming.  Exxon now acknowledges global warming, and it assumes that government will eventually price carbon at around $60 per ton.  In addition to its oil business, Exxon also owns a large natural gas business.  A government tax on carbon emissions would give its natural gas business a competitive advantage over coal companies.  Consequently, the Koch family which has interests in the coal business opposes the stance taken by Exxon.  It provides funding to American's For Prosperity which attacks politicians who acknowledge global warming and support efforts to reduce carbon emissions.

The battle between Exxon and the Koch family has a long history. The Koch brothers do not like big oil; they will continue to attack Republican's who support government efforts to reduce carbon emissions.  This will create a wedge within the Republican Party between party members who align with Exxon and the blue chip corporations who are also basing their business strategies on the  assumption of a carbon tax,  and Tea Party aligned Republicans who do not accept global warming and have convinced their base that government intervention into markets is an attack on personal liberty.  The Republican Party has historically been the party of big business.  It will be difficult for the party to deal with rational businesses like GE, Microsoft etc. who have joined with Exxon in assuming a cost of carbon emissions, and the irrational forces within the Tea Party base who will be reluctant to concede that they have been wrong about global warming.

Wednesday, December 4, 2013

The Future Of Economic Growth

The recent discussions about secular stagnation has focused some attention on the causes of stagnation and whether it is permanent.  Brad DeLong reviews several books which suggest that the period of steady economic growth are over and he gives his reasons for being more optimistic about the future.  This is a long article that I will not attempt summarize.  It is well worth the time that it will take to read and digest it.  One of the things that I liked about DeLong's essay is that he redefines the relationship of growth based upon growth in GDP per capita, to growth in well being.  The real purpose of an economy is to increase societal well being.  That is more difficult to measure than growth in GDP but its interesting to see how DeLong has analyzed the difference between growth in GDP and growth in well being.

What Can We Learn From Greece's Success In Cutting Wages And Prices?

Yves Mersch, who is a member of the executive board at the European Central Bank, praised Greece's efforts at deflating wages and prices by imposing necessary, but painful, austerity.  He correctly argued that since Greece is in a monetary union, exports cannot be increased by currency devaluation; exports can only be increased by wage and price deflation.  This article raises questions about the effectiveness of wage and price deflation on export led economic growth in Greece.

Nominal wages have decreased by 23%, and real wages have fallen by 27.8% since their peak in the first quarter of 2010.  Imports have declined as a result of the decline in wages, but non-oil exports have been flat over this period.  Greece has improved its current account, but it has not been able to export its way out of recession.  Growth in exports have been well below the wage induced decline in domestic demand.

Tuesday, December 3, 2013

Why Protests In The Ukraine Are Picking Up Steam

Over 300,000 protesters marched against the repression of smaller protests over the government's rejection of a trade treaty with Europe.  This article and the comments that follow provide more background on the issues in Ukraine.

Is Japan Getting Ready For A Low Growth Future?

Popular opinion in Japan is against the use of nuclear energy.  Japan's macroeconomic policies, however, are geared to revive Japan's stalled economy.  The growth strategy, however, hinges on nuclear energy.  The conflict between energy policy and the growth strategy may signal the end of Japan as a high growth economy.

Where Have All The Savings Been Invested?

Antonio Fatas shows us that the increased savings have not been invested in developed countries.  Investment has slowed down in developed countries even with low interest rates that have been made possible by high savings rates.  Investment has grown, however, in emerging markets.  Their share of global investment has been increasing.  That must be where the best investment opportunities exist.

Monday, December 2, 2013

The Netherlands Has Fallen Into The Austerity Trap

Simon Wren-Lewis is puzzled by the political support from center-right and center-left political parties for austerity in The Netherlands.  OECD has lowered its growth forecast for 2014 to zero and it expects disinflation in 2014 and 2015 to well below the 2% target.  Unemployment was only 4.3% in 2011 but OECD forecasts an increase to 8.1% in 2015.   This is not good economic news and it is a predictable result of austerity measures in The Netherlands.  Austerity is imposed to reduce budget deficits and it leads to higher budget deficits as a result of slower economic growth caused by austerity measures.  It is a vicious cycle but politicians in The Netherlands, like politicians in the UK believe that they will not be taken seriously if they propose the use of fiscal policy to promote growth.

Sunday, December 1, 2013

Ten Photos Of What Pittsburg Pa. Looked Like Before Smoke Control

The government intervened into the marketplace and changed Pittsburg.  This is what it looked like when the coal and steel industry acted on its own behalf.

Wall Street Is Up To Its Old Tricks That Triggered The Financial Crisis

The Dodd-Frank bill was created by Congress to prevent another financial crisis like the last crisis.  Some of the key elements in the bill have been weakened by extensive lobbying efforts in Washington.  Now they can package mortgages with only a 5% down payments into mortgage backed securities that they sell to investors.  Furthermore, they are no longer required to hold a 5% interest in the mortgages that they put into the MBS's that they produce.  The SEC has also decided that it will not determine which rating agency will be used by the banks to rate each MBS.  The rating agencies will have an incentive to provide AAA ratings in order to secure profitable business from the banks.  The banks also want the government to guarantee the MBS's.  Taxpayers will take the hit for any defaults.

Saturday, November 30, 2013

Charles Krauthammer Redefines Honesty At The Washington Post

Charles Krauthammer is provided a platform by the Washington Post to report on politics and world affairs.  He is also a regular on TV news shows.  He is also completely dishonest.  This post provides a good example of his dishonesty.  In 2005 a Republican senator proposed a change to Senate rules that would prevent the Democrats from using the filibuster against judicial nominees proposed by the Bush Administration.  Krauthammer wrote a strong article in favor of the change.  In 2013, the same Charles Krauthammer, used some of the same rhetoric that he used in his 2005 article, to attack Democrats for making changes in Senate rules that would prevent Republicans from using the filibuster to block judicial nominees proposed by the Obama Administration.  In other words the filibuster is a good thing when it used by Republicans, but it is a bad thing when it used by Democrats.  Its understandable that the Washington Post employs conservatives like George Will, Robert Samuelson and Charles Krauthammer to provide a conservative perspective on the news.  It is not acceptable, however, for the Post to employ reporters who are completely dishonest in their reporting.  We don't need another Fox News in America. 

Restore The Draft To Save America?

Dana Milbank considers several of the steps that we might take to improve our government and our society.  Few of them are politically possible, so he turns to an alternative.  He explains why restoring the draft might be helpful.  The draft would require people, who seldom have an opportunity to meet and understand each other, to work together for a common purpose.  It would also make our leaders less likely to engage in wars without purpose if their own children and grandchildren would be put at risk. He used Switzerland as an example of a country whose citizens speak four languages, and is not at risk of attack, which uses mandatory service as a way to build a national identity in a diverse nation.  Richard Nixon ended the draft during the unpopular Vietnam war.  The war protest movement was led by college students who did not want to be forced into fighting a war in which they did not believe.  Many of their parents agreed with them.  Ending the draft took much of the energy out of the protest movement. 

I'm not sure that restoring the draft would save our country but its discouraging to have a veteran reporter from the Washington Post, who understands how Washington works, offer a restoration of the draft as a last resort to develop a sense of a common identity and a national purpose.  Reporting in Washington must be like reporting in a war zone.  The reporters are not at risk, but they sense the futility of the battles between the political parties that are seldom guided by a sense of national purpose.

Why This Recession Is Called The Great Recession

Mark Thoma posted two charts from the Dallas Fed which illustrate how the US economy recovered from other recessions in comparison with the Great Recession.  Our current recovery, after 5.7 years looks nothing like our recoveries from previous recessions.  This one has been really different in many ways.  Industrial production has hardly moved over this period and the other factors are related to weak industrial production.  I guess this is what a post-industrial society looks like.

Friday, November 29, 2013

The President Of The European Central Bank Calls For Greater Unity And Less Nationalism

The ECB has become the bank regulator for the EZ.  Its president defends the bank's interest rate cut by arguing that rates are low because the economy is slow.  The decision of the ECB to cut rates was criticized by leaders in Germany who claim that it was done to remedy problems for specific countries.  The ECB also needs to create a resolution trust that can deal with the problems that might arise from troubled banks in the EZ who may not have enough capital to deal with impaired loans.

Why Putin Discouraged Ukraine Treaty With The European Union

The Ukraine decided not to sign a trade agreement with the European Union that was opposed by Russia's President Putin.  This article describes some of the reasons for Putin's opposition to a Ukraine treaty with the EU.  It also suggests that it may have harmed Russia's position with its neighbors and with the EU.  Moreover, Russian trades more with the EU than it does with its more immediate neighbors which used to be part of the Soviet Union.  Russia exports four times as much to the EU than it does to its immediate neighbors and it imports three times as much.  This raises a question about Putin's motivations for opposing a Ukraine treaty with the EU.

One explanation offered is that Putin views foreign policy in terms of its relations with the US more than he does with Europe.  He may have been encouraged by President Obama efforts to develop his relationship with him by choosing not to intervene in his efforts to form a Customs Union as a trade bloc with its immediate neighbors.  It is also suggested that Putin suffers from the British Disease.  That is, he is struggling with the loss of empire that Britain endured as the British Empire dissolved over time. Nobody really knows what motivates foreign policy in Russia, or the Ukraine, but it is a very important part of the world that is struggling economically and politically.  We should be paying more attention to the economy of this region than we have in the past.  Leaders in the EU were certainly very interested in developing stronger relationships between the EU and the Ukraine.

Why The Ukraine Might Have Decided Against A Trade Agreement With The European Union

The media in the US devotes a lot of space to political struggles in the Mid East.  We are informed less about political problems in Eastern Europe.  The Ukraine is a large country with a population 46 million which finds itself in a pickle between Europe and Russia.  It recently decided against signing a trade agreement with the EU.  This article describes the decision in terms of the weapons available from the EU and those used by the Russian President V. Putin who opposed a Ukraine treaty with the EU. 

President Putin implemented a trade boycott against the Ukraine in August and he has hinted that he might lower gas prices to the Ukraine.  The EU did offer any carrots to the Ukraine and it did not use any sticks that might have influence the decision.  The IMF also refused to provide 160 billion euro loan to the Ukraine.  According to this article, the decision was determined by a motivated Russian president willing to coerce a negative decision and a EU that was not willing to offer any carrots to the Ukraine.  It also suggests that the decision was very unpopular in the Ukraine.  What this article does not discuss is that the Ukraine itself is a divided country.  Some parts of the country are ethnically and politically aligned with Russia, and other parts of the country see a better future in an alliance with the EU.

How A Central Bank Can Deflate A Housing Bubble Without Raising Interest Rates

Gavin Davies, writing in the Financial Times, explains how macro prudential regulation can enable the UK central bank to limit the rise in real estate prices and household debt in the UK.  Ordinarily, a central bank could raise interest rates to achieve that result;  however, that would also cause other asset prices to fall, since the present value of assets is a function of the discount rate.  The central bank does not want that to happen, and it also wants to encourage corporate investment and lending to small to medium enterprises, which has been the weak spot in the economy.  Therefore, it wants to maintain low short term interest rates.  The solution to this problem is to increase the underwriting standards on the issuance of mortgages.  That should discourage households and banks from inflating the real estate market, while maintaining the low interest rates that support asset prices and encourage corporate investment.

It is interesting to note that the Fed, under Alan Greenspan, chose not to use its authority to regulate mortgage underwriting standards in the US.  The decline in underwriting standards led to the issuance of mortgages that were likely to default.  Those mortgages were sold to investment banks which packaged them into securities that were sold to investors across the globe.  The global financial crisis may have been avoided if the Fed had used its authority to regulate mortgage origination practices in the US.

Wednesday, November 27, 2013

CBS News Removes Reporter And Producer Of Controversial Benghazi Episode On 60 Minutes News Show

This article describes the vetting failures that caused CBS News to present a false account of what happened during the attack on the US Embassy in Benghazi, Libya.  The show featured the story of a contract employee of the embassy who claimed that he witnessed the attack.  The contract employee had previously told his employer and the FBI that he was not present during the attack.  The contract employee had also written a book using the false account of his presence at the embassy.  The book had been published by a subsidiary of CBS News, and it has been withdrawn from the market.  The CBS News reporter also had a conflict of interest.  She had previously taken a position on the attack that was consistent with the information presented by the contract employee on the 60 Minutes News Show.

CBS News was embarrassed by its failure to properly vet a politically controversial account of the Benghazi attack which has been promoted by the GOP.  They removed their reporter and her producer in order to protect the integrity of the reporting on the popular 60 Minutes show.  Its a pity that Fox News which has also featured controversial reporting on Benghazi, using information from the discredited contract employee, has not apologized for its vetting failures.  Apparently, Fox News has no reporting integrity to protect. 

Tuesday, November 26, 2013

Why The Agreement On Nuclear Development With Iran Is Wrong

The GOP criticism of the deal with Iran is not based upon the substance of the deal, which few of the critics are familiar with.  It is a bad deal because it was negotiated by the Obama Administration.  This article in the Washington Post describes the reflexive comments made by the foreign policy experts in the GOP like Michele Bachmann, and George Bush's former press secretary.  Its easy to be a foreign policy expert in the GOP.  I expect that we will be hearing about this from Sarah Pallin before long.  When she was running on the McCain ticket in the 2008 presidential campaign she was asked about her credentials in foreign policy during a TV interview.  She answered that she could see Russia from Alaska.  Most of GOP critics cannot see Russia from where they live but they know that any policy that is made by the Obama Administration must be a bad deal.  Foreign policy is really quite easy to understand.  Some of these foreign policy experts compare the Iran deal with the deal made with Hitler in Munich prior to WW ll.  That would really get their Tea Party supporters fired up if they knew their history.  Its always a mistake to use diplomacy to avoid war.

The Pope Links The Tyranny of Markets To Rising Income Inequality

Many economists have been concerned about rising income inequality.  Some believe that it has led to stagnation and others argue that it has corrupted democracy.  The Pope took this to a new level by stating that the tyranny of a market mentality is inconsistent with the gospel of Christ.   The implication is that the gospel of neo- liberalism is a rival to religious sentiments.  He illustrated the problem by asking why the plight of the homeless is less newsworthy than a drop in the value of a stock index.  He also instructed the church hierarchy to address the concerns of the people and to set examples for others to follow.

It will be interesting to see how the Pope's message is received by evangelicals in America who have linked market ideology and conservative politics to their religious ideology.  The poor are often blamed for their misfortune, and social welfare programs are regarded as immoral handouts to the unworthy.  They have provided a moral justification for poverty and moral support for an economic ideology that refuses to accept the moral implications of the assumptions that underlie it.  Income inequality is simply the result of "natural" market forces that reward everyone for their marginal contribution to production.  Social welfare is also optimized by allowing market forces to operate with minimum government interference.  Externalities are acknowledged but they are regarded as minor problems that are easily managed without distorting the market.  The problems of growing income inequality, and the misery of the "moochers" are not viewed by the Pope as minor externalities.  Furthermore, allowing market forces to operate without concern for the environmental damages that will harm future generations, so that this generation can indulge in luxuries, is a serious moral issue that is absent in a morally blind market mentality.

Sunday, November 24, 2013

The Corporate Incentive Gap And Secular Stagnation

This is one of several articles that attempt to explain the slow growth of many western economies.  This article lays some of the blame at short term corporate incentives.  Households and investors have responded to monetary policy, which has kept interest rates low, by taking on more debt to consume or to purchase assets which have been appreciating.  Household debt in the US is growing faster than GDP or household income.  Households and financial investors are using debt to make purchases but corporations are not using their retained earnings to invest in long term projects.  In the early 70's business investment was 15 times the payout in dividends.  Today the ratio is less than 2.  Corporate profits are at a post war high but they are being used to reward shareholders by increasing dividend payouts, or by stock buybacks which increase share prices.  Corporate behavior is totally consistent with the incentive system that drives corporate behavior.  Why should executives invest in projects which have a long term effect on stock prices when they might not be there to share in the rewards?  It is also the best way to please many shareholders because they have a greater concern about the short term behavior of stock prices than they do in the price of the shares that they hold in the more distant future.

The Focus Now Shifts To Explaining Secular Stagnation

Larry Summers suggested that the US economy may have been in a state of secular stagnation prior to the financial crisis, and that it was obscured by asset bubbles maintained full employment.  He did not bother to describe the path that the economy followed to arrive at stagnation.  This article provides an explanation for the path to stagnation.  It was the unintended consequence of government policies to expand debt financed consumption in order to compensate for negative net exports. 

The comments that follow the article are very interesting.  Some are quite critical, others offer support, and some expand the possible explanations for stagnation.  I think that Summers may have opened up a discussion that may go beyond what he intended.  After all, he was part of the Clinton team that formulated some of the economic policies that may have contributed to secular stagnation.  Paul Krugman praised Summers for introducing the concept of secular stagnation.  His first pass at an explanation, however, had little to do with government policy.  He suggested that bad demographics may have been the culprit.  He reserves his criticism of government policy to inadequate fiscal stimulus during the recession.

Saturday, November 23, 2013

Stages Of Economic Recovery In The UK And Similarities With The EZ and The US

Simon Wren-Lewis provided an excellent description of the stages of recovery from recession.  He examined the recovery in the UK and commented on how government policies affected the recovery.  His analysis also applies to recoveries in the US and the EZ.

The most recent recessions in the UK (also in the US) were created by the central banks in order to correct for rising inflation.  The recessions were easily ended by the central banks by reversing monetary policies to stimulate economic activity.  The Great Recession, with the exception of Greece, was different.  It was created by the banking system.  The banks made bad loans that could not be easily paid back and the credit system collapsed. 

The recovery from the collapse of the credit system was made worse by economic policies in the UK and elsewhere.  Governments decided that budget deficits, which ordinarily increase during recessions, due to lower tax revenue and increased social welfare spending, should be reduced.  They raised taxes and cut government spending.  GDP growth in the UK has been reduced 1.5% annually since 2010 and the European Commission estimates that GDP growth in the EZ has been lowered by 4.5% as the result of austerity measures.  This contrasts with the rate of growth in typical recessions which usually accelerates in the second stage of recovery.

In the third stage of recovery, the economy grows faster than trend in order to make up for lost ground.  That has not happened in the UK.  Employment has held up better than output and that is not a good sign.  It means that productivity is lower and so are living standards that depend upon growth in productivity.  If the lower rate of productivity growth in the UK is permanent, it means that living standards in UK will remain depressed.  Its not easy to determine the reason for lower productivity growth but it may be due to the misallocation of credit by the banking system.  That leads us back to the problems in banking system.

Bankers believe that they deserve the large share of income that they receive because they provide the money that lubricates the industrial system.  The CEO of Goldman Sachs echoed that sentiment by claiming that the banks do God's work.  Simon Wren-Lewis disagrees.  He believes that rent seeking is responsible for the rising share of income the gravitates toward the financial system.  The banks were creating bad products that  were sold to poorly informed investors, and they were taking risks to increase profits with the knowledge that they would be bailed out by the government.  They were weakened by the financial crisis and they are not providing credit to higher risk start-ups that may be more productive than the more stable large corporations that they support with credit.  The decline in productivity may be partially explained by the misallocation of credit.  The banks are not doing God's work by allocating credit to its most productive use.

Lewis ends his post on a pessimistic note.  He believes that the banks in the UK have too much influence over government policy.  The UK government does not support efforts in Europe that might make the banks less profitable.  The growth of the financial system is a critical part of industrial policy in the UK.  This is also true in the US.

The Swiss Culture And CEO Compensation

This article describes the elements of the Swiss culture which puts moral pressure on CEO's to be more egalitarian.  When the Novartis CEO demanded a $78 million severance package, which would not upset many in the US, the people reacted.  He gave up his demand for the severance package and retired to a more sympathetic environment in the US, where it is a badge of honor among CEO's to be the highest paid among their peers. 

Friday, November 22, 2013

Youth Unemployment Is Terrible Everywhere

This Chart shows youth unemployment rates relative to the general unemployment rate in several countries.  It is especially bad in Europe but it is higher than the general level across the globe.  This is not good for the future incomes of young people and it is not good for the economy or society.

Paul Ryan, The Poverty Warrior, Seems To Have Learned How To End Poverty From Groucho Marx

Paul Krugman provides some humor to Paul Ryan's approach to poverty reduction.  His logic is much like that of Groucho in this video clipKrugman jokingly disputes the idea that Ryan found his idea in the conservative "think tanks".  Ryan may have got his idea from the comical Marx.

A Successful Medical Doctor Explains How He Has Been A Moocher

Mitt Romney suggested that 47% of Americans are moochers who rely upon government rather than their own initiative to become self sufficient.  Paul Ryan, who was his running mate in the presidential election is basing his "War on Poverty" by claiming that social welfare programs prevent Americans from becoming self sufficient.  If we eliminate social welfare programs everyone will have an incentive to be successful.  I found the quote posted below among the comments following a post on this topic.  It does more to discredit the nonsense about moochers and dependence on government than most of what has been written about this issue.  We are all moochers but in a good way.
Pat S said...
I am a physician and a moocher. As such, I was the beneficiary of about $500,000 (in current dollars) of payments that financed my K-12 education, my undergraduate education, my medical school education, and my residency training. I continue to be the beneficiary of payments from the federal and state government that account for about 40% of my income -- income that the physicians of the 1950's and earlier received in the form of chickens and potatoes, if they received it at all. The grateful taxpayers of the United States have made me, by any standard, wealthy.
It doesn't stop there. My father (the moocher) was also educated in public schools and then in a public university with additional help from the GI bill. The GI bill helped him buy his first house. In addition, he became wealthy as a real estate developer because the interstate highway system, other road and infrastructure building, and GI bill and FHA dollars turned cornfields into land for housing developments and shopping centers. The taxpayers made him rich too.
However, none of this makes me or my dad members of the "takers" in the eyes of Romney, Ryan, and their enablers. We are "makers," because as upper class, well educated people we "deserve" the government help we got that boosted us to success -- just as John Galt deserved all the subsidies that paid for the railroads and other projects he developed, Mitt Romney deserved the government underwriting of the financial industry that helped make him rich, and Paul Ryan and his family deserved the government money from the oil industry and road contracts that made them rich.
It's only the undeserving poor that don't deserve the government money they squander on food, housing, and medical care. They should have picked better parents.

A Classic Example Of Bad Reporting By Bloomberg News

The title of this article suggests that Larry Summers would like to use asset bubbles to create a full employment economy.  Buried in the article is a disclaimer which indicates that Larry Summers did not advocate reliance on asset bubbles to stimulate the economy.  The bulk of the article, however, explains why asset bubbles, which were not proposed by Larry Summers, are a bad idea.

The author of this article is an economics editor for Bloomberg News, which is a reasonably good news source relative to a mediocre press.  He certainly knew better than to accuse Larry Summers of something that he did not claim.  His real intention may have been to discredit Larry Summers for suggesting that the US economy may be in a state of secular stagnation.  It was easier to show how foolish a reliance on asset bubbles would be than to prove that the US economy is not stagnating as Summers suggested. 

We should keep in mind that Larry Summers referred to asset bubbles to make an important point that led him to suggest the possibility of structural problems in the US economy.  If the economy is dependent upon asset bubbles to achieve full employment, there must be structural problems in the economy that should be addressed.  Otherwise, we may be in for an extended period of slow growth and high unemployment.  He never suggested that asset bubbles were a good remedy for a stagnant economy, but the intent of the article is to deny the existence of structural problems in the economy by building a case against asset bubbles.

Thursday, November 21, 2013

US Senate Votes To Limit The Use Of The Filibuster

It requires a super-majority in the Senate to stop a filibuster.  About half of all the filibusters in the history of the Senate have occurred during the Obama Administration.  The GOP has used the filibuster to block votes on presidential cabinet nominees and federal judges.  In essence the GOP has used Senate rules to limit the ability of the executive branch to function during the Obama Administration.  The filibuster can still be used to block legislation and to block Supreme Court nominees.  The action by the Senate will enable elected presidents to run the executive branch without undue interference from the party that lost the presidential election.  It is a victory for whatever remains of our democracy. 

The graph below shows how the frequency of the filibuster increased in recent years.  It was infrequently used before 1970.  It peaked during the Obama Administration by a wide margin.