Thursday, January 31, 2013

A Description Of Last Quarter's Drop In GDP

Dean Baker provides the highlights on Q4.  One time changes in spending caused most of the drop in GDP.  Durable goods were up because of auto sales.  The cars ruined by Sandy needed to be replaced.  The good news is that spending on healthcare has been growing slower than it has in the past.  That will have an important impact on budget deficit projections if it continues.

Dean Baker Deflates Tom Friedman

I'm getting sick of criticizing Friedman.  Dean Baker shows that Friedman is an empty suit.  Friedman is still doing what he did in 2004 when he wrote The Earth Is Flat.  Most of the time he is harmless.  This time, however, Friedman made the mistake of explaining unemployment and falling wages.  His solution is simple, like his book, but it is very wrong.  I'll let Dean Baker tell you why.

Tuesday, January 29, 2013

Why Obama Should Not Promote A Progessive Agenda

The US contains a multiplicity of interest groups.  Around 25% of Americans claim to be liberals and 35% are conservative.  Moderates outnumber liberals and conservatives.  Therefore, it would be a mistake for the president to promote the liberal policies that he advocated in his inaugural address.  He should attempt to devise a more moderate set of policies that will make conservatives and liberals happy.  In other words, he should use his second term to make the mistake that he made in his first term.  Republicans were not interested in negotiating compromises with the president in his first term.  They behaved as if they had won the election.  They proposed far right alternatives on every policy issue.  They are still doing that today. 

The other thing that bothers me about this article, is that its hard to find a far left idea in the agenda that the president outlined in his address.  Is addressing climate change; investing in infrastructure, and improving access to higher education in order to promote equality of opportunity a set of far left ideas?  Those are the ideas that have enabled us to prosper, and to become a model for much of the world.  It is a sad statement of current political situation, if the ideas that were once shared by the majority of Americans are too radical for our president to promote.

The Financialization Of The US Economy And Unemployment

This is a fascinating article which shows how the US economy has changed since 1980.  Non-financial corporate payouts to shareholders, prior to 1980, was around 40% of after tax profits.  The remainder was available to fund investments.  That pattern shifted dramatically in the 1980's, and it continues today.  In 2008 corporate payouts to shareholders, through dividends and net stock repurchases, exceeded the profits of non-financial corporations.  Many corporations were borrowing money in order to provide payouts to shareholders with dividends, or stock repurchases that have the effect of increasing the value of the outstanding stock shares. 

This pattern was consistent with the concept that purpose of the corporation was to increase shareholder value.  Management compensation also moved in that direction.  Executive compensation was linked to increases in the stock price.  This aligned the incentives of executives with that of shareholders. 

This also shifted the investment function from corporate executives to Wall Street firms that owned, or managed stocks for individuals and other investors.  Wall Street was put in the position of allocating funds to firms or industries that would provide the best returns to investors.  Many argued that Wall Street would be better at allocating capital to its most productive uses than corporate executives.  Wall Street has been critical of firms, like Apple, which retains earnings so that it can allocate profits to innovations that will allow it to grow. They want Apple to use its cash to payout dividends to shareholders, or to repurchase its stock.  The financial industry also favors firms that set higher targets for internal investment projects.  That encourages firms to make fewer riskier investments and to focus on cost cutting to increase profits.  The end result is decreased innovation, and less expenditure on R&D.  It also encourages corporations to lobby government for tax reductions, or other favors that might contribute to corporate profits, and returns to shareholders.

The financialization of the economy leads to unemployment by lowering the level of internal corporate investment on new projects.  Corporate investments focus on increasing internal efficiency, and reducing the cost of labor.  Firms that are not successful in increasing returns to shareholders are subject to attack by private equity firms.  Their mode of operation is to produce a quick return to their investors by borrowing money in order to pay dividends to the private equity company, along with high fees for consulting services.  The private equity firms make money even if the company fails. It also makes money if it can increase profits through cost cutting, and sell the business to a third party.

George Will Offers His View On A GOP Revival

George Will is another smart guy who earns a good living by selling snake oil.  The title of the article is about a GOP revival.  However, the article has little to do with a GOP revival.  Instead of suggesting ways that his political party can help to make government work, he attacks President Obama for putting climate change on his agenda.  Most of the article is directed towards climate change denial.  The rest of the article attacks the president for supporting green technology.  The president said nothing about green technology, or any other approach to limiting carbon emissions.  George Will simply rehashes the GOP message about the failed government investment in a green technology firm several years ago.

The Washington Post is one of our countries leading newspapers.  It is unfortunate that it provides a platform George Will to misinform the public.  His articles are syndicated nationally to small town newspapers in parts of the country that vote for his favorite political party.  His brainpower would be better used if he directed his attention towards fixing the problems in his own party.

David Brooks Argues For An Alter GOP

David Brooks joins Paul Krugman in arguing that the GOP can't get away with a strategy of telling the public one thing, and continuing to do what the public opposes.  He understands that the GOP base is too dependent on the South and rural America.  The current anti-government message of the GOP won't in the areas of the country that are now looking to the Democratic Party for solutions.  He also understands that its hard for leopard to change its spots.  He suggests that the GOP should only slightly alter its anti-government message.  It is not against government.  It is against centralized government that is epitomized by Obama.  That message would sell in the Northeast and other areas that now favor the Democrats.  That would allow the GOP to hold onto its constituents in the South and the rural parts of the western states; it would also make the GOP more competitive in the rest of the country.

Brooks understands the problems with the GOP's dependence on the least educated part of white America. He also knows that globalization and other trends in the economy worry many Americans.  Unfortunately, he does not offer a GOP solution for addressing those problems.  He only offers a modified version of the GOP's anti-government message.  It will become the anti-centralized government party.  Unfortunately, the problems that most Americans are worried about, such as entitlement reform, and the hollowing out of the middle class, will require a stronger voice in Washington.  The GOP strategy of making the country ungovernable from Washington, as long as a Democrat is in the White House,  is also doomed to failure.

David Brooks is very smart and articulate.  Its too bad that his ability is wasted on efforts to fix a broken political party. 

Monday, January 28, 2013

The GOP Is Trying To Change Its Image But Not Its Policies

The GOP has lost successive presidential elections.  It was successful in capturing a good share of the populist market by organizing the Tea Party, but there is more to the populist movement than the Tea Party.  They can't win general elections with only the Tea Party, and the super-rich on their side.  Consequently, they are trying to softer their image as the party of the rich.  It appears that they are more concerned about image change than they are about policy change.  Krugman points out some the discrepancies between what they say and what they are doing.  He tries to explain their behavior by arguing that they live in and information bubble which reinforces their central belief system.  He is not sure that this explains their behavior and I agree.  Oligarchies only tolerate democracy when they can control democratic outcomes.  The policies that the GOP supports, are the policies favored by their political masters.  They can't change the policies, so they can only work harder on marketing them. 

The US Faces A Recession Made In Washington

The Financial Times is concerned that the US economy will slow down if the political battle in Washington over the budget is not resolved.  House Republicans are committed to spending cuts by whatever means possible.  After winning the presidential election, Democrats are not willing to turn control over the government to the losing party.  If the sequester goes into effect, the US economy will slow down.  Among other things, that will increase the federal budget deficit, since tax revenues will fall below plan.  It will also be harmful to the global economy which is anchored to the performance of the US economy.

Sunday, January 27, 2013

Out Of Control Government Spending Is Not Our Problem

This article from an economist, who was part of the Reagan administration, uses a graph from the Treasury to make an important point.  Our long term primary budget deficits are easy to fix with a modest increase in revenues and Medicare reform.  The primary budget deficit excludes interest payments on the national debt.  Growth in interest payments on the debt is the major source of future budget deficits.  Economists regard interest payments as transfers.  Half of the interest payments in the future will go to our children.  The debt is not making them poorer.  The other half will go to international investors.  Most of it will go to central banks that will not spend the money.  It will be held in their reserve accounts.

The Revolution In Higher Education

Tom Friedman has been glamorizing globalization for years.  In this article he joins the chorus of those who are pushing distance learning.  He personalizes his story by repeating a few of the success stories that he has picked up on his road show.  There is no doubt that technology makes it possible to deliver information to large numbers of students at low cost.  It is also clear that a lot of money is spent at universities on things other than academic learning.  Those who have worked on distance learning, however, understand the strengths and weaknesses.  Tom Friedman only sells the sizzle.  The "revolution" in higher education that Friedman is selling has a long way to go.  The colleges that he mentions in his article are well aware of the problems.  Hopefully, we will be able to remedy many of the problems, and make some form of higher education more available to those who otherwise would not have access to well packaged educational content.  Perhaps some of them will want to discuss their ideas with other students and professors in person.  It could become a good way to increase enrollments for some colleges.

Saturday, January 26, 2013

How Conservatives Defend Against Inequality Data

Krugman lists several of the defenses against data on rising inequality used by conservatives; he then focuses in on the argument that middle class incomes may have decreased, but they have more money left to spend on discretionary items because the cost of satisfying their basic needs has fallen.  One of the "economists" who has used this argument (Boudreaux) works at the Mecatus Center at George Mason University, which is funded by David Koch, and also specializes in global warming denial.  Boudreaux made a recent appearance on CNBC to state his argument.  Krugman's critique of the argument will reach a very select portion of NY Times readers.  CNBC gives Boudreax an audience of millions.  The other author of the "study" is a fellow at the conservative American Enterprise Institute, which is also funded by the super-rich.  AEI will make sure that the conclusions of the study get picked up by the media.

Krugman's critique could also have been stronger than it is.  For example, spending on healthcare is not included in the category of basic spending.  Spending on healthcare is a necessity and it has grown at twice the rate of inflation.  Spending on higher education is also a necessity for many families.  The cost of higher education at public colleges has also risen rapidly over the last ten years as states have cut back on funding. Families are using debt to make up the difference.  The argument that the middle class is better off despite growing income inequality is utter nonsense.  Unfortunately, our oligarchs are able to fund this nonsense, and they have the means to distribute the nonsense  through the media.  I'm waiting for David Brooks, George Will, Robert Samuelson etc. to pick up on that theme.  Right wing "think tanks" provide them with much of their information.

Friday, January 25, 2013

Tim Geithner Speaks For Tim Geithner

This interview of Tim Geithner provides some insights into his thinking about the financial crisis and how to deal with our 10 year deficit problems.  Its pretty clear that he was very concerned about the depth of the financial crisis, and that he was worried about our ability to prevent a global disaster.  He views his position as like that of an emergency room physician who is faced with keep the patient alive and is less worried about what to do after that problem is solved.  He also believes that only modest changes in fiscal policy are needed to provide solutions for the next decade.  That gives us some time to deal with the problems that we face in the out years.  Republicans prefer a plan that fixes the 50 year deficit problem right away.

David Brooks Blames Meritocracy For Income Inequality

David Brooks is a guest instructor at Yale this semester.  Apparently, this has helped him to explain income inequality.  It has also led him to conclude that there is no solution for income inequality.

According to Brooks,  incomes are unequal because elite universities suck up smart people from around the country and they prepare them to take high paying jobs.  Unless one graduates from one of these elite institutions it is almost impossible to get a high paying job.  In other words, meritocracy is the cause of income inequality.  Progressives, like President Obama, want to mitigate inequality by expanding opportunities for people to attend elite institutions.  It worked for him and his wife and they believe it can work for others.  Increasing educational opportunity is not a solution, according to Brooks, because it only reinforces meritocracy which is at the root of income inequality.

The other progressive, or liberal approach to income inequality, is income redistribution.  Washington has been attempting to make the tax system more progressive but that can't work either.  It does not fix the upstream problem of meritocracy which is the source of income inequality.

Brooks concludes his essay by displaying his non-partisan and objective approach to the inequality problem.  He concludes that Republicans don't have a solution, and that the liberal approach of expanding opportunities to enter elite institutions, and become part of the meritocracy, can't work either.  There is no potential solution to the problem in Washington, so we might as well give up on any efforts reduce income inequality.

David Brooks supports his argument about meritocracy as the cause of income inequality by referencing a book which reports that only graduates of elite universities are able to get professorships in our colleges.  It is certainly true that most colleges would like to recruit the most talented professors that they can find, and that many of them graduated from elite colleges.  Colleges are rather special places where academic skills are highly valued.  Academics is the business of a college, but professorships at universities is not the major source on income inequality in the US.

Every nation has elite colleges and every nation has income inequality.  The US has one of the highest levels of income inequality, and one of the lowest levels of social mobility in the industrialized world.  Other nations do a better job of using tax policy and greater access to higher education to increase social mobility and reduce income inequality.  David Brooks should visit some of these countries when he finishes his gig at Yale. He should also look back in US history.  We have had the same elite universities pumping out graduates for years.  How can this kind of meritocracy explain rising income inequality?

Let Us All Praise Timothy Geithner For Saving The Financial System

Steve Rattner was one of the architects of the auto industry bailout.  He has had a long career on Wall Street and he was involved in the rescue of the banking system.  Many would like to bury Timothy Geithner who was one of the architects of the banking system bailout.  Rattner comes to praise him.  The system was on the verge of collapse and Geithner helped to restore it to its former glory.

Frontline Video On Failure To Prosecute Wall Street Excecutives For Fraud

This video (via Manan Shukla) was released Tuesday.  It contains numerous interviews of lawyers and government officials who believe that Wall Street executives were guilty of fraud.  They are called The Untouchables in the documentary because the US Justice Department refused to prosecute a single Wall Street executive for fraud.  There are several explanations for the Justice Department's lack of interest in prosecuting the executives.  The Justice Department, and President Obama claim that fraud is too difficult to prove in court, or that their behavior was unethical, but not criminal.  That explanation seems weak because there was ample  evidence that top Wall Street executives knew that they sold toxic products, that were knowingly misrepresented to their customers.  That is the very definition of fraud.  Its also possible that the government was more interested in rescuing the banking system, and that it was willing to overlook criminal behavior in order to preserve Wall Street, along with several large international banks that were also guilty of fraud.  This was clearly the major focus of Timothy Geithner, who was one of the architects of the financial system rescue plan, and who was appointed by Obama to be the US Secretary of the Treasury.  A less charitable explanation is that our western democratic system has been corrupted, and that oligarchs in the US are just like oligarchs in Russia.  The government works on their behalf.  We define freedom as the freedom of oligarchs from government prosecution for criminal behavior.  Perhaps that is what we mean by a free market economy.  It also implies that we have a two tier criminal justice system.  We aggressively prosecute crimes committed by the weak, and we ignore criminal behavior by the powerful.  Perhaps that is why the US has the largest per capita prison population in the world.  It is one of our fastest growing industries.

Thursday, January 24, 2013

How Should We Explain Labors Declining Share Of Income?

Classical economic theory attempts to explain labor's share of income in terms of the marginal product of labor.  This is a micro theory that has many problems.  One of the problems is that there is no measure of the marginal product of labor or the marginal product of capital.  It is a theory with undefined concepts.  Paul Krugman attempted to explain the widening gap between labor's share of income and the share going to capital by introducing the concept of capital bias.  Economist's shy away from using Marx's explanation of this gap for a variety of reasons. It is bad for one's career to even mention Marx in favorable terms.  This article makes the case for Marx's labor theory of value as the better explanation for what we are currently observing.

The Conflict Between Political Party Advantage And The National Interest

The conservative government in the UK wants to have a referendum on the UK's membership in European Union in five years.  During that period there will increased uncertainty in the business community.  That will be bad for the struggling UK economy.  On the other hand, it may be good for the Conservative Party because there is growing anti-immigration sentiment in the UK, as well as growing opposition for membership in the European Union.  This is an apparent flaw in democracy.  Winning elections may trump the national interest.  We have been witnessing a similar phenomenon in the US. 

Apple's Market Cap Declines By $50 Billion

Apple had a reasonably good quarter.  It sold 48 million iPhone's and 23 million iPad's, and revenues grew by 18%.  However, investors demand more from Apple.  It's shares fell by 10% after its announcement.  Samsung has proven to be tough competitor for the iPhone, and the margins on the mini iPad are 6% less than the original iPad.  Apple operates in a world of high expectations.  Investors have come to expect miracles from Apple, and they are disappointed when Apple only grows by 18%. 

Wednesday, January 23, 2013

Climate Change Is Back On The Obama Agenda

President Obama listed climate change policy as one his top priorities over the next four years.  His agenda includes several other priorities which, along with climate change policy, will be resisted by Republicans.  His ability to deal with climate change will depend upon whether he has enough political capital to spend on each of his priorities.  He will have to create political capital by selling the public on his priorities.  Republicans will use all of their significant weapons against each of his priorities.

All of the programs that the president cited in his inaugural speech will require funding.  That spending will have to come from the non-defense discretionary spending part of his budget.  Jeff Sachs raises concerns about the presidents willingness to cut back on that part of the budget in his negotiations with Republicans on deficit reduction.  Non defense-discretionary spending has been shrinking during recent administrations and Obama's projected budgets show a declining share for discretionary spending.

Where Do Budget Deficits Come From?

Budget deficits are really simple to understand.  They are the difference between federal spending and tax receipts.  Consequently, they can result from lower tax receipts and/or from spending in excess of tax receipts.  The budget surpluses in the Clinton administration were due to fiscal policy, and from economic growth which increased tax receipts.  Clinton's fiscal policy included tax increases and spending cuts.  Fiscal policy was just the opposite in Bush administration.  Bush cut taxes and increased spending.  Clinton's budget surplus was quickly turned into large budget deficits.  The huge budget deficits in the Obama administration are largely the result of sharp drop in tax receipts, due to recession, and a rapid increase in government spending, largely the result of mandatory spending invoked by high unemployment.  Federal spending, under Obama, has actually declined as the economy has slowly recovered and reduced mandatory spending.

What Big Spending Government?

This graph shows total government spending per capita since 1990.  There has been no growth in spending during the Obama administration.  Cutbacks in state and local spending, due to declining tax revenues, compensated for modest increases in federal spending.  Spending growth in Clinton administration was modest compared to spending growth in the Bush administration. 

Show this graph to your Republican friends who accuse Democrats of being tax and spend liberals.  It is more accurate to accuse Republicans of being borrow and spend conservatives. 

Tuesday, January 22, 2013

A Brief History Of Macro

The Economist does a nice job of describing the evolution of macroeconomics.  Unfortunately, finance did not play an important role in the macro models.  The financial crisis and recession were not possible according to macro theory.  They will follow this article with descriptions of changes that are underway to include finance in macro theory.

Sunday, January 20, 2013

Does Investing In Green Technologies Reduce Climate Change?

This article makes a distinction between polices that reduce the extraction of fossil fuels and the use of green energy.  For example, if we use green energy to provide electricity that will reduce to price of fossil fuels.  That might lead to greater use of fossil fuels in industrial production.  It concludes that investing in green production is essentially tracking in loopholes.

What's Causing The Rise In Income Inequality?

Rising income inequality, and declining social mobility in the US, demands an explanation from labor economists.  Many economists have resisted explanations which challenge economic dogma, or which raise questions about the supremacy of the American economic system.  Some economists have simply denied that inequality has been growing in the US.  Others have looked for explanations that don't raise questions about economic dogma, or about the American way of life.

Economic dogma assumes that the market price is always right.  There are many examples of this approach. For example, it has been used to justify the rapid growth in CEO compensation.  If CEO compensation is growing faster than it has in the past, it must be because the labor market for CEO's has changed.  The job requires more skill than it has in the past, and there is a small supply of individuals who have the skills demanded by the market.  Therefore, the market has placed a premium on those rare skills.  There are many problems with that explanation.  For example, it does not explain why the CEO labor market in the US is different from the CEO market in other advanced countries.  The compensation premium for CEO's in Europe and Japan has not grown as fast of it has in the US.  This suggests that the CEO market in the US may be different than similar markets outside of the US.  The US CEO market may reflect successful rent seeking by US CEO's, and weak governance by Boards of Directors.  It may also reflect changes in the US culture which are supportive of the CEO reward system that has developed in the US.

Another approach to the inequality problem is to focus on skill differences in the general workforce.  Some argue that rising inequality is primarily driven by changes in technology.  Those with technical skills are rewarded with a wage premium. Again it assumes that he market price is always right. It also assumes that there has no change in the relative bargaining power between labor and management.   This explanation fails explain why income inequality has grown faster in the US than it has in other advanced economies that use the same technology. It also suggests that the rate of technological change in the last decade is dramatically different from the technologies used in the recent past.  More importantly, it has the advantage of shifting attention away from the top of the economic pyramid where most of the growth in income has occurred.  It also fails to address the implications of globalization on the labor market.  The supply of labor has increased, while the demand for labor has been relatively constant.  Moreover, the price of labor is much lower in less advanced economies.  Lower labor costs increase corporate profits, and rising profits increase the share of income going to top management and corporate shareholders.

Joe Stiglitz Explains How Inequality Is Holding Back The Recovery

Stigltz wrote an excellent book on the cost of inequality.  In this article he connects inequality to our slow economic recovery.  Around 93% of our growth in income has gone to the top 1% which saves most of their income.  Middle income households, which spend most of their income, have less real income than they had in 1996.  Consequently, the growth prior to the Great Recession was based on credit.  The bottom 80% of households spent 110% of their income.  The middle class has less money to invest in their future.  They have to borrow to educate their children, and they cannot afford to invest in new businesses.  Government tax revenues have also fallen because of stagnant income growth in the middle class.  Those in the top 1%, which has received most of the growth in income, are able to avoid taxes by using loopholes that government has provided for them.

There are lots of reasons for growing income inequality but none of them are inevitable.  We elect governments to shape our economy, but our government listens more to those who fund election campaigns than it does to ordinary citizens.  The Obama administration had to overcome many political obstacles to roll back some of the Bush tax cuts went to the top 1%.  They have done nothing to reduce the loopholes that benefit the top 1%,  and those who earn most of their income on capital gains and stock dividends.

Saturday, January 19, 2013

Has The GOP Attempted To Benefit From High Unemployment And Budget Deficits

The Great Recession led to high unemployment and budget deficits always increase during recessions.  This article describes the actions taken by the GOP to take advantage of the recession.  It argues that Republicans blocked, or attempted to block, many efforts to reduce unemployment.  It then accused Democrats of failing to produce a more rapid recovery from the recession, and it used rising budget deficits to demand cuts in government spending on social programs.

This is not a new story.  This article, however, provides specific examples of GOP behavior which supports the contention that the GOP placed party interests over the national interest.  It served the interests of their Tea Party base, and corporate profits have reached historical highs during the extended recovery.

Blaming Your Husband's Infidelity On His Mistress

I posted an article by David Brooks yesterday in which he pleaded with Obama to propose policies that he had already proposed, but which were shot down by the Republicans.  Brooks would like Obama to propose some new policies which the Republicans can support.  He believes that this would help to restore the GOP's reputation.  He is worried that right wing radicals in his party have given his party a bad name, and that Obama might propose wedge issues that would increase the divide between Republican moderates and right wing radicals.  In other words, David Brooks is blaming Obama for the actions taken by right wing radicals in his party.  That is like "blaming your husband's mistress for his infidelity".  The radicalization of the GOP seems to be driving moderate GOP pundits crazy.  They are being forced to blame Democrats for the problems in their party.

Friday, January 18, 2013

Has Timothy Geithner Given The GOP An Election Issue?

Now that Timothy Geithner is stepping down from his job as Secretary of the Treasury,  commentators are writing about his legacy.  Simon Johnson has not been one of Geithner's supporters.  He believes that Geithner allowed the "too big to fail" banks to become even bigger.  Moreover, the Obama administration failed to prosecute bankers who committed fraud. 

Johnson suggests that Geithner, and the Obama Justice Department, may have given the GOP an issue that would have lots of public support.  The Wall Street banks are not very popular with the public.  The government has been criticized from the left, and from the right, for its bailout of the big banks.  Sheila Bair, a Republican Chairperson of the FDIC, was very critical of Geithner in her book, and Peggy Noonan, a conservative writer for the WSJ, was very critical of the bailout.  The GOP could have turned this into an issue that would resonate with the public.  The special treatment that government has provided for systemically important banks has given them a competitive advantage over thousands of small banks that cannot borrow money at the same rates as banks that are protected from default by the government.

Unfortunately for the GOP, it has lost  opportunity to take advantage of the administrations favored treatment of the Wall Street bankers.  They successfully weakened efforts to reform the banking system in return for campaign contributions from the banks that went to Romney in the 2012 election.  They have also supported the banking lobby in efforts to weaken the new agency that is supposed to protect consumers from predatory banking practices.

The US Is Number One In Spending On Pharmaceuticals

This graph shows per capita spending on drugs in several regions of the world.  With the exception of Japan,  which holds a strong second place position,  the US spends more than twice as much per capita than its other competitors in the spending race.  Prices for similar drugs are higher in the US, and we consume more of them.  We should remain number one for decades.  Its too bad that our spending on drugs does not make us any healthier.

David Brooks On The Next Four Years

During the election campaign, David Brooks encouraged Obama to come up with some big ideas for moving the country forward. He believed that Romney was more likely than Obama to come up with the big ideas that we needed.  Now that the election is over, and the man with "small ideas" won the presidency, Brooks has changed his tune.  The time for big ideas is over.  The best thing that government can do over the next four years is to learn how to crawl.  Government should focus on small changes that Republicans and Democrats can agree upon.  Perhaps they can recover the lost art of governing in the process.

Brooks does not believe the Democrats will decide that it time to learn how to crawl.  He is worried that they will become predators, and attempt to finish the job of destroying his weakened political party.  It is time for Democrats to take pity on the GOP and keep it from self-destructing. 

Thursday, January 17, 2013

What Is An MBA Worth?

This article (via Manan Shukla) gives a thumbs down answer to that question.  We are graduating more MBA's in a period in which they are in lower demand.  Consequently, salaries are lower for new graduates and some have difficulty getting a job. Most MBA programs are designed to prepare graduates for middle level management jobs in large corporations.  Only a few of these programs prepare graduates to be an entrepreneur, or to work well in a start-up.

The top five MBA programs attract a lot of recruiters, and most of their graduates will get a good return on their investment.  Most of the second tier MBA programs don't attract recruiters and they may not be as good of an investment as they were many years ago.

Lessons From The European Commission's Labor Report

This article summarizes the 500 page report from the EC.  Among other things, the report is critical of fiscal consolidation programs that have made matters worse in Europe.  There are six lessons from the report that are highlighted and discussed.

Wednesday, January 16, 2013

Tom Friedman Tells Obama How To Save The Country

Tom Friedman tells us that Obama ran a campaign centered on raising taxes on the rich.  He offers his view on what the president needs to tell Americans in his upcoming national addresses.  Friedman's views on the bold changes that are needed, suffers from several problems.  In the first place,  he is wrong about the president's campaign promises.  Raising taxes on the rich was only one of the was that he proposed to deal with deficit reduction. He also showed a willingness to negotiate with Republicans over cuts in spending. Moreover, the president agrees with the argument that Friedman makes in this article, and which he has been repeating ad nauseam since he wrote The Earth Is Flat.  The president offered several proposals for improving education and for increasing access to higher eduction.  Obama also proposed many investments that we need to make in order to make the US more competitive in the global economy.  In other words, President Obama's ideas are pretty similar to Friedmans.

The other problem with Friedman's suggestions is that they are wrong.  He argues that businesses are not investing in the US economy because they are worried about the nations fiscal problems.  He believes that businesses would invest in the economy if the president could pass a credible bill that would reduce long term investments.  In other words, he believes in the "confidence fairy" that has been used by conservatives to promote austerity measures in the US and Europe.  Businesses invest when they see an opportunity to earn a profit on their investments.  They won't invest unless they see a pick up in demand for their products and services.  Much of their investment is in international markets. They see opportunities to reduce costs by locating overseas, and they enhance their access to international markets with those investments. Unmanaged globalization, has been responsible for lower wage growth, and much of the unemployment in the US.  This is one of the reasons for weak demand by consumers in the US.  They have been financing consumption with debt.  This problem will not be fixed by improving education in the US or by investing in infrastructure. 


Public Education In America

This article (via Manan Shukla) describes the evolution of public education in America.  It one time, higher education in America was viewed as a public good.  The majority of Americans received their education from universities funded by state governments.  Funding for higher education declined by 26% between 1990 and 2010, while tuition and fees more than doubled.  This occurred during a period when median family income was also declining.  Consequently, students and their families have financed their education with student loans.  The average student graduates with $25,0000 in student debt.  Since the average earnings of college graduates aged 25-34 have declined by 24% over the last decade, many students have had problems paying off their debt.  This has created problems for many students who have faced financial hardships.  Unlike other debts which can be discharged through bankruptcy, student loans cannot easily be discharged in bankruptcy court.  Some of the  problems faced by graduates who cannot afford to pay down their debt are described in this article.

The transformation of public education funding raises many questions that are explored in the article. The implication is that higher education is no longer regarded as a public good.  It is regarded as a private good that must be funded with private income, or personal debt, just like other commodities purchased on the market.  The total amount of student loan debt in the US is now greater than credit card debt which is used to purchase consumer commodities.  Education is regarded as a private investment in human capital that will produce a return on the investment similar to debt taken on by entrepreneurs who borrow money to start up a new business.  The quantity of student debt serves another purpose in the economy.  Most of the loans are sold and packaged into securities which are sold to investors. This has contributed to the financialization of the US economy just like the securitization of sub-prime mortgages had done.  Transforming the debt of families who borrow to fund their education, and their purchase of homes, into securities which are sold to investors became a source of fees and income to firms that package and sell the securities.  The securities are also used by hedge funds and investment banks as collateral for short term loans that are used to fund longer term investments which have a yield greater than the short term interest that they pay to fund their debt. 

Monday, January 14, 2013

The Wall Street Journal Cares Little About Facts

The Wall Street Journal has been a consistent denier of global warming.  It has also been leading the charge against social welfare programs in the US.  Jeff Sachs critiques recent WSJ articles on each of those topics.  It published an article on global warming that uses a single year in which the globe did not warm, to conclude that the globe is not warming.  Among other things, it ignores the fact that 10 of the warmest years in history have occurred in the last 15 years.  The WSJ has taken a position against global warming, and it has no problem finding intellectual prostitutes who are willing to help them.  It uses a familiar rhetorical device to make its case against social welfare programs.  Everyone knows that Europe is having economic problems.  It found someone willing to argue that Europe's economic problems are the result of its generous social welfare programs, and that the US should not make the same mistake as Europe has made.   The only problem with that argument is that IMF data on European states with the most extensive social welfare programs shows that they are doing better than the US on many relevant measures.  The WSJ ignores facts that it does not like.  It prefers to rely upon the prejudices of its readers to support its positions.  Many of its readers believe that Europe's economic problems are related to its social welfare programs, so its easy to get them to make the leap to the conclusion that the WSJ editors want them to make.  The WSJ simply reinforces their belief system.

 The US is fortunate to have a mostly free press.  In many countries the press only reports what the government wants its it to report.  In the US we have a different problem.  People like Rupert Murdoch can purchase media outlets like the WSJ, Fox News, and yellow journalism outlets in the UK and Australia.  Those who own the media are free to report what they want.  Moreover, the media in the US are financially dependent upon advertising revenue. They have to consider the reactions of their advertisers when they make content decisions.  In some ways we are worse off in the US.  Smart people in countries without a free press understand that the limitations of the media.  Few in the US understand the factors that shape the content that they receive from the media.

Paul Krugman Applauds Japan's Break From Fiscal Orthodoxy

The new Japanese government decided to do something to get out of its deflation spiral.  Its central bank has kept interest rates low and the government has decided to increase spending.  Japan has used a little bit of monetary and fiscal policy in the past, but it was not politically possible to do what was necessary to stimulate growth and end deflation.  The immediate reaction to Japanese policy has been positive.  Japan can still borrow at very low interest rates, and the market is now expecting a little bit of inflation instead of deflation.  The yen has fallen in value, but that is good for Japanese exports.  We will have to see whether the government can stick to its guns.  Its economy has been stuck in low gear for more than a decade.  Perhaps its departure from "economic orthodoxy" will work.  We do know that whatever else it was doing did not work.

The US has some of the same problems that Japan has had.  We were told that investors would stop buying US treasuries, and that interest rates would rise when the Fed pushed monetary policy to its political limits.  Interest rates are still low, but that does not stop the Fed's critics from warning us about pending doom.  We are also told that government has to cut spending, or that we will suffer the same fate as Greece.  Anyone who compares the US to Greece should have their head examined, but that has not stopped very serious people from being seriously stupid.  They would rather have high unemployment, which has little impact on their ability to find high paying employment.  Their worst nightmare is that government intervention in the economy might work.

Saturday, January 12, 2013

More Data On Rising Productivity and Stagnant Wages

The long term pattern that used to exist between productivity growth and wage growth has been broken for more than a decade.  Corporations have been able to capture most of the growth in productivity in higher profits.  Most of the wage growth has gone to the top 1% which receives one third of its income from capital appreciation.  College graduates are not immune from this trend.  Over the last 12 years 70% of wage earners with college degrees have seen a decrease in their real wages (corrected for inflation).  The average decline in wages for college graduates over that period has been 3%. 

The Structure And Risk Profile Of The Shadow Banking System

This article provides an in depth description of the very complex shadow banking system that is about equal in size to the traditional banking system.  It explains the securitization process that was at the center of the financial crisis.  It also explains the process by which collateral can be leveraged in the system.  Efforts are underway to reduce the risks inherent in the system while preserving some of the market needs that it satisfies.  The article contains useful graphics, that describe the system, but it is not for everyone.

Polishing Up The Geithner Legacy

This article takes a critical look at efforts underway to lionize Tim Geithner after he steps down from his job as Secretary of the Treasury.  It makes many good points about Geithner's real legacy.  If one takes the position that Geithner played a key role in rescuing the Wall Street banks, and making sure that it was as painless as possible for bank management, I would have to give him a good grade.  On the other hand,  he had little concern for Main Street, or for those who were sold bad mortgages, or bad securities, by the bankers who he protected. 

Friday, January 11, 2013

An Analysis of Current Deficit Reduction Programs And Those Expected In Next Decade

This analysis indicates that current programs to reduce US budget deficits are weighted toward spending cuts versus revenue enhancement.  That ratio is unlikely to change when Congress replaces the sequester with an alternative spending plan.  Over the next decade, the budget deficit should be under control.  Longer term, spending on healthcare is the greatest threat to budget balance.

Public Opinion On Free Trade And Economic Opinion

Free trade is one of the sacred cows among economists.  A majority of the public disagree with economists about the desirability of free trade.  One of the reasons for the divergence of opinion on the value of free trade is that it may expand total output for a nation, but the benefits will not be equally distributed.  The US has a capital intensive economy and the owners of capital benefit from free trade.  The return on labor, especially unskilled labor, is diminished by free trade.  Government has failed to provide the redistribution of benefits to labor that it promised when free trade agreements were passed by Congress.  It is not surprising that the majority of Americans are skeptical about the value of free trade.

This article was inspired by a post from Noah Smith.  His discussion about the divergence of opinion between economists and the general public goes deeper into the issue.  The comments on Smith's post are also very interesting.

Thursday, January 10, 2013

Some Unintended Consequences Of The Wall Street Rescue

This article (via Manan Shukla) provides a critical review of the government rescue of Wall Street banks during the financial crisis.   Its a long article that rehashes a lot of things that we have learned about the bailout over the last several years.  It concludes that we rescued the banks, but did almost nothing to help out those who got stuck with bad mortgages.  The banking system is more concentrated than it was before the crisis, but the implicit government support for systemic risk banks has encouraged them to take on even more risk today.  Moreover, we have learned that we can't trust the government to tell us the truth.  The government spun a web of lies when it got Congress to approve the rescue, and it lied to Congress and the public throughout the rescue effort.

Europe Versus US In Job Growth

The WSJ, and many others in the US media, warn us about becoming more like "Old Europe" with its extensive social welfare programs which are supposed to be bad for the economy.  While there are some structural reform issues needed in Europe,  job growth in Europe has been better than it has been in the US.  We could do a whole lot worse than to emulate many of the countries in Europe with broader and more efficient social welfare programs than we have in the US.  Moreover, Europe would be a lot better shape than it is today if it were not for the financial crisis that was born in the USA, and transmitted to Europe.

Accounting For Growth In US Budget Deficit

This article does a nice job in showing the major factors that contributed to our growing budget deficits.  We have two basic problems: Tax revenue is down because of the Bush tax cuts and because of the recession and slow recovery.  Spending has also increased faster than plan, but spending growth has been primarily driven by defense spending.  There is a nice graph that shows the huge growth in defense spending.  Few of the budget hawks, however, want to cut the defense budget.

Going forward, growth in the healthcare budget is our biggest problem.  The growth is driven by price inflation and by demographics.  We can't do much about demographics, and neither party has a good plan for reducing price inflation.

Wednesday, January 9, 2013

Corporate Profits At All Time High, Wages At All Time Low

This graph from Goldman Sachs explains why the US stock market is doing well.  Corporate profits as a percent of GDP are at a post WW ll high.  Unfortunately, wages as a percent of GDP have fallen dramatically. 

Megan McCardle And The Koch Organization

This article is about a journalist who serves the interests of the Koch organization.  The Koch brothers fund a number of organizations and publications which promote their interests.  This article describes some of the Koch funded organizations and their inter-relationships.  It provides a good glimpse into how the Koch brothers influence public opinion.  The Tea Party is funded, and organized, by the Koch controlled Freedom Works organization.  The Cato Institute and the Mercatus Center, which operates within George Mason University,  are two of the "think tanks" funded by the Koch brothers.  The University of Florida recently received a grant from the Koch brothers.  In return, the university agreed to let the Koch brothers have a role in the hiring of faculty for its Economics Department. Those, like Megan McCardle, who denies any relationship with the Koch brothers, serve the interests of the Koch brothers by operating as objective journalists or academics.  She is a frequent guest on TV news shows, and her articles are published by a number of respected publications like The Economist. 

Public Services And The Profit Motive

 Americans have been taught to believe that the profit motive, and competitive markets, are more efficient than government in delivering public services.  America is unique in that perspective.  In particular, our reliance on for profit firms for the delivery of healthcare services is much greater than it is in other OECD countries.  The bad news is that we spend much more on healthcare as a percent of GDP  than any other nation and we are not any healthier.  The good news is that there are lots of ways to improve an inefficient system.  One approach, favored by some politicians, is to turn more of the healthcare system over to for- profit providers.  They believe that competitive private market are the best way to increase efficiency.  This article argues otherwise.  It provides several examples in which the profit motive distorts the delivery of public services.  It argues that the best way to cut the cost of our entitlement programs is to get for-profit firm out of the business of delivering public services.

2012 Was Hottest Year In US History

This article describes weather trends in the US.  Ten of our hottest years occurred in the last 15 years, and 2012 was the warmest year in US history.  The changes in the US weather pattern also increased the number of extreme weather events.  The drought which hit the farm belt last summer is continuing through the winter.  That will affect this springs growing season.

Monday, January 7, 2013

The Hoax Of Entitlement Reform

Robert Reich explains whats wrong with many of the popular approaches to entitlement reform and he gives his solutions to the problem of rising benefit costs.

An Argument For Taxing Externalities

Many economists argue that everyone benefits from taxing things that are harmful to the general welfare.  This article explains the logic for taxing heavier autos more than lighter vehicles.  It also explains where the resistance will come from and how to make the case for the tax.

Bank Of America Pays $10 Billion To Fannie Mae And Fannie Mac

Bank of America announced that it will pay $10 billion to Fannie Mae and Freddie Mac for bad mortgage loans that they purchased from Countrywide.  That brings the total cost of legal claims, and real estate losses to $50 billion due to Bank Of America's ill advised purchase Countrywide.  Bank of America has also lost billions from its acquisition of Merrill Lynch.  Investors sued Merrill for damages from mortgage backed securities that were misrepresented by Merrill.  Bank of America shareholders have suffered huge losses from those acquisitions.  Pension funds, who purchased Bank of America stock have also sued the firm for misrepresenting the financial status of Merrill when it made the acquisition.

This article does not mention it, but Fannie Mae and Freddie Mac lost most of their money on loans and securities that they purchased from Bank of America and other Wall Street Banks during the real estate boom.  Their losses were not primarily the result of bad mortgages that they originated to satisfy government officials who wanted them to provide mortgages to the needy.


The Anatomy Of Greek Oligarchy And The Corruption Of Democracy

This article offers a good description of what happens to Democracy when the state is captured by an oligarchy.  Corruption is rampant, and the state is organized to serve the interests of the oligarchs.  Greece is a democracy in name only.  It citizens can vote but the media are owned by the oligarchs, and the public is systematically misinformed. 

Most of the descriptions that I have read about the problems in Greece tell a different story.  The dominant theme in the US media is that Greece is example of what happens when government provides a too generous social welfare program.  We are warned that we could become the next Greece by taking a similar route.  The real message that we should learn from Greece is that Democracy doesn't work when the state is captured by an oligarchy and when the media are owned by those who serve the interests of the oligarchs.  The social welfare program in Greece is designed to protect the interest of the oligarchs.  We have two social welfare programs in the US.  Programs that serve the interests of the needy are under attack, while the welfare programs that serve the interest of our oligarchs are expanding.  We are told that liberty and freedom in the US is threatened by a democratically elected government.  They will not be happy until democracy in the US looks more like democracy in Greece.

Saturday, January 5, 2013

Democrats Won A Majority Of Congressional Votes But GOP Has Majority Of Seats

This article explains how Democrats won the majority of votes on the last Congressional elections but did not win a majority of seats in the House.  GOP control of more state governments has enabled them to control redistricting in the controlled states.  For example, democrats won more votes in Pennsylvania, Virginia and Ohio but the GOP won the majority of House seats in those states.  In order to win a majority in the House, democrats would have to win more than a 6% majority of the total congressional votes.  The only threat to most GOP incumbents is from Tea Party candidates in congressional primaries.

A Brief History Of Macroeconomics

There has been a lot of debate about the state of macroeconomics since the Great Recession.  This article provides an interesting perspective on the debate.  It argues that much of the resistance to the use of fiscal policy, or strong forms of monetary policy, can be traced back to the Phillips Curve, and to economists centered at the University of Chicago, who developed the concept of the natural rate of employment.  The basic idea of the "natural rate" is that there is a predictable trade off between unemployment and inflation. Efforts to cut unemployment below its "natural rate" would lead to inflation.  Their version of macroeconomics evolved into a critique of Keynesian concepts which held that monetary and fiscal policy should be used to moderate the short term business cycle.  The economy was assumed to be self regulating in the long run.  As long as government allowed the money supply to grow with the level of economic output, government intervention in the economy would only make things worse. These ideas evolved into rational expectations theory, and a strong version of the efficient market hypothesis which assumed that asset prices were based upon rational expectations of future income flows by well informed investors. Under the strong version of rational expectations theory "the price was always right".  There was no need for central banks to take actions to prevent asset price inflation, or to engage in financial market repression despite a long history of asset price bubbles and subsequent deflation's. Moreover, financial markets played a small role in most macroeconomic models of the "real" economy.  Central banks assumed that they could moderate business cycles and provide price stability by managing short term interest rates.  New Keynesian economists made a similar assumption.  Monetary policy replaced fiscal policy as the preferred method of managing the business cycle.

Monthly Rate Of Job Growth And Time To Full Employment

The US has been growing jobs at about 150,000 per month.  If we continue at that rate of growth, we will not reach full employment for a decade.  The graph also illustrates the effect of different growth rates on the time it will take to reach full employment.  The huge loss of jobs, triggered by the financial crisis, created a job deficit that is difficult to overcome.

Friday, January 4, 2013

The Fight For Liberty And Freedom In America

This article describes the funding of Freedom Works that is contained in an internal report (available at bottom of article).  Over 80% of the funding for this "grassroots" Tea Party organization came from wealthy donors. Donations to Freedom Works are deductible from taxes.  Some of the money has been transferred to Super Pac's that used the funds to support GOP candidates in the 2012 elections.  Liberty and Freedom has a special meaning for those who fund Freedom Works.  It means freedom from taxation, and freedom from government regulations that limit the power of the super rich to do as they please.  It also means that Freedom Works is free to pretend that it is a grassroots educational  institute. It has finanical relationships with Glenn Beck and Rush Limbaugh to reach the grassroots with its freedom and liberty message.

Charles Krauthammer Describes The Real Obama

The Washington Posts top neo-conservative war hawk who told us that the US invasion of Iraq would be over quickly because our forces would be welcomed as liberators, offers his description of the "real Obama".  He is the socialist community organizer, and class warrior, that has been hiding in disguise until after his re-election.  He understands Obama as well as he understood public opinion in Iraq, and as well as he understood the nuclear and germ warfare capability of Iraq, and the nuclear ambitions of Iran.  Its hard to understand why anyone gives him a platform on a major newspaper, and on many of the TV news shows.  It certainly can't be due to his ability to interpret the real world, and to predict what might happen given his assumptions.  I guess we need folks who make things up in order to be fair and balanced.

IMF Admits Mistake In Calculating Fiscal Multiplier In Eurozone

The IMF reported that it underestimated the impact of its austerity recommendations in the eurozone.  It believed that a one euro cut in spending would only produce a one half euro reduction in output.  In fact it produced a 1.5 reduction in output.  That is a serious admission. Millions have been harmed by the IMF policy recommendation, and it may be difficult to overcome the policy mistakes that were made.

Why Fiscal Multipliers Are Positive In Recessions

This article does a good job of explaining why expansionary austerity does not work.  It assumes that cuts in government spending will only reduce economic output by less than one.  Moreover, classical economists argue that increasing government spending will only crowd out private spending and that the expansionary multiplier is less than one. They believe that monetary policy can deal with short term issues in the business cycle and that fiscal policy is ineffective and not necessary.

Some believe that monetary policy is ineffective when interest rates are at the zero bound, as they are today in the US and in much of Europe. The private sector is saving money even at negative real interest rates.  We have unused labor, and unused capital.  Government should borrow to absorb the unused savings and spend it on goods and services that will increase output, and employ the idle labor and capital.  In this situation there will be no crowding out, and each unit of government spending will produce more than one unit of output.  In other words, the fiscal multiplier is positive during a recession.  Classical theory may not apply in recessionary periods when we are the zero bound.  Some may even argue that classical theory does not even work in a full employment economy. Frankly, I don't believe that micro theories do a very good job of describing the economic behavior of individuals or firms even in a full-employment economy.  Therefore, attempts to use micro theory as the foundation for macro theory have not been very useful in the real world.  We learn more from our study of economic history than we do from micro or macro theory.  Unfortunately, few graduate programs in economics harvest the information about the real economy that is only available from the study of economic history.

The IMF just announced that it made a mistake in its assumptions about the fiscal multiplier.  That is described in the post that follows.  Unfortunately, much of the harm has already been done in Europe.

Similarities Between US Tea Party And UK Euroskeptics

The Tea Party in the US has pushed the Republican Party too far to the right to win general elections.  The Tories in the UK have also pushed the conservative party too far to the right.  Cameron won the general election but his political options have been limited by radical Tories in his party.  This is a difficult problem to overcome because of the way in which political parties select their candidates.  Extremists in both parties tend to be more active in primary campaigns than moderate voters.  Radical Tories and Tea Party members in the US share a common ideology based upon divisive social issues in both countries. 

Paul Krugman Provides His Views On The Political Battle In Washington

Krugman believes that the war between the GOP and Democrats is a war over the preservation of the New Deal and Great Society programs.  The fiscal cliff deal left Social Security and healthcare programs intact, and the concessions made on tax policy by the administration are not significant.  He is more worried about future negotiations over the debt ceiling.  The GOP may hold the administration hostage in order to extract more concessions on entitlements.  Obama blinked the last time when the GOP threatened to maintain the debt ceiling, and they may expect him to blink again.

Some progressives disagree with Krugman's analysis.  They argue that all of the Bush tax cuts, even those for the middle class, should have been left to expire. Making most of the Bush tax cuts permanent will reduce tax revenues to the point that future cuts will be needed in social welfare programs; they will also limit the government's ability to make necessary investments in the future.  They see a future in which government will have to play a larger role in the global economy and it must be paid for with taxes.

Reasonable Republicans (there are not totally extinct) raise other issues.  They believe that Republicans are too willing to maintain social welfare programs at their current levels.  Romney backed away from Social Security and Medicare reform in the last election, and he accused Obama of wanting to cut spending on Medicare. Both parties are afraid of trying to sell entitlement reform to the public. It also seems that neither party is interested in raising taxes on the middle class.  They correctly believe that politicians prefer to provide expensive social programs, and pay for them with borrowed money instead of taxes.  That certainly was the favored approach in the Reagan and Bush administrations. Bush attempted to privatize Social Security, and that is still a Republican dream, but he could not make an effective case for privatization to the public. He also added an expensive drug benefit to Medicare prior to the 2004 election without raising taxes.  That may have helped him to win a very close election that was decided by the Supreme Court.

Almost everyone agrees that our major budget issue is the rising cost of healthcare.  Our current system is inefficient and unaffordable.  Neither party, however, has been able to make the necessary changes.  The Affordable Healthcare Act is a step in the right direction.  It extends government benefits to more people, but it does little to reduce the impact of healthcare price inflation. The ACA could pave the way to essential reforms, but Republicans will continue to use scare tactics to resist real change in the system.

Wednesday, January 2, 2013

A Humorous Quote On The State Of Macroeconomics

The global financial system created problems in the global economy that are not easily explained by economic theory.  Moreover, there has been a battle within macroeconomics about how to deal with the global economic problems that we have created.  I was in the middle of one these discussions when I found the following quote among the comments.  I thought that it was both funny, and closer to the real issues than many of the discussions on this topic.  Some of you may also appreciate the humor.

"Macroeconomics is the attempt to find a mathematical justification for pre-existing preferences about what governments ought to do. Those preferences are usually the result of the economist’s childhood experiences and Minnesota Multiphasic Personality Inventory score."

More Thoughts On The Fiscal Deal

The Administration got part of what it wanted.  The fiscal deal will keep the economy from rapidly moving into recession, but it will not do enough to stimulate growth.  This post raises an interesting question.  Is the president a bad negotiator, or is this the deal that he really wanted?  He has a history of establishing positions from which he rapidly retreats in negotiations with the GOP. 

The GOP House voted to approve the bill but many representatives, on both sides of the aisle, held their nose when they voted for it.  There are strong differences of opinion about taxes and government spending in Congress, and in the nation.  The issue has also been framed as a problem of long term deficit reduction,  instead of focusing on the short term problem of job creation.  We can't easily fix the deficit problem without creating jobs.  We also can't easily reduce healthcare price inflation without making more fundamental reforms to our healthcare system.  We seem to get bills from Congress that nobody really likes.

Lessons From The Longshoremen

In the 1950's there were 35,000 longshoremen unloading ships in NY and NJ ports.  Today there are 15,000 longshoremen on the east and west coasts unloading more tonnage than they unloaded in the 1950's.
The nature of their work has also changed.  They operate sophisticated technology, and they unload, and load shipping containers instead of boxes.  They are more productive, and their work can't be relocated to low wage countries.  They also belong to strong unions.  Consequently, they earn more money than longshoremen in the 1950"s.  They have been able to share in the growth of productivity more than many other laborers in the US whose jobs can be relocated, and who are not represented in wage negotiations by unions.

This could be viewed as a story about the value of unions. At a deeper level, however, it raises questions about rising productivity and the availability of jobs. Productivity will continue to grow in the future, and fewer workers will be needed to produce the economic output that will be demanded.  That will not be a problem for many companies that can sell their products in countries with an expanding middle class.  It represents a real problem, however, in developed countries that will have a shrinking, or stagnant, middle class. Rising productivity in agriculture lowered the demand for farm workers, and they moved to cities to take jobs in the growing industrial sector. The post-industrial economy has not created enough high paying service jobs to replace those that were lost from deindustrialization in developed countries.

A Few Simple Charts That Describe The State Of The Union In 2012

Stephen Rattner provides several charts which provide a picture of the economy, and the polarization of Congress.  There are lots of things that need to fixed, but our political system is becoming increasingly dysfunctional.  Neither of our political parties is blameless, but the radicalization of the GOP, and changes to campaign finance laws, have been the major sources of political dysfunction. The polarization of our political system has also amplified the regional differences in our nation.  Rural America and Urban America no longer share the same value system, and many Americans cannot accept the results of national elections.

One part of the story is the decline in median family income.  Almost all of the growth in income has gone to our wealthiest families. Most families have seen a decline in their standard of living and they are less able to invest in their future or in the future of their children.  Governments suffers from a similar problem.  Tax revenues are growing slower than mandatory spending on entitlements.  Spending on healthcare is the major problem area.  Costs are driven by price inflation and by an aging population. Our political system is not capable of doing much about price inflation.  It is a very inefficient system that is well protected by politicians who serve the interests of those who benefit from its current structure.  Social Security is less of a problem and I have a problem with the way that it is described in this article. One graph shows the spending on Social Security is growing faster than family income.  That is true, but part of the explanation is that median family incomes have been shrinking as well. The majority of income growth has gone to households with incomes above the $113, 000 (2013) cap on payroll taxes

Tuesday, January 1, 2013

Polictical Negotiations And Poker Playing

This analysis of the fiscal cliff deal is similar to others made by progressives.  I posted this one because it describes the administration's poker playing style.  Poker players call it a tight-weak style.  Players with that strategy lose when they have weak hands, and they fail to maximize their potential gain from strong hands. In this case, the administration had a strong hand, but it did not take advantage of the cards that it held.  Moreover, it will be in a weaker position in future negotiations over the debt ceiling. Tight-weak players lose big when they do not hold a strong hand. The implication is that we cannot expect the administration to accomplish much over the next four years.