Thursday, February 28, 2013

How Government Redistributes Income Upwards

We have lots of people who are very concerned about government programs that redistribute income from the rich to the poor.  Very often they are the same people who spend lots of money to encourage government redistribution to themselves.  This article describes some of the ways that taxpayer money is redistributed to rich "moochers".

Why It's Smart To Be Reckless On Wall Street

Scientific American has expanded into a new market.  This article is written by a PhD in physics. He was one of many mathematically trained scientists who followed the money and developed mathematical models that were useful to Wall Street bankers.  His article explains how the incentive system on Wall Street can encourage some individuals to exploit the system while exposing the banks, and our economy, to high risk. We are lucky that more traders do not exploit an incentive system in which the potential gains from taking risk outweigh the potential losses to the traders.  The system also encourages management to hire employees who are smart enough to exploit the system.

Are High Debt To GDP Ratios The Cause Of Slow Growth In Japan And Italy?

The answer to the rhetorical question raised by Paul Krugman is no.  They had many economic issues prior to the increases in their debt to GDP ratios above the 90% limit that has become widely accepted by "serious people".  It has become widely accepted because it is commonly repeated by "serious people".  Krugman reminds us that a weak economy can be the causal factor in the correlation that exists between the 90% threshold and a nation's economic problems.  Krugman is not surprised that serious people do not understand that correlation does indicate the direction of causality.  He is disappointed when trained economists accept the wisdom of serious people as an economic law.

Jeff Sachs Accuses Obama Of Being A Deficit Hawk

President Obama's budgets calls for large cuts in non-defense discretionary spending.  He has also extended the Bush tax cuts to 99% of the population.  That is consistent with his campaign promises not to raise taxes for those with incomes below $250,000.  It is inconsistent, however, with his rhetoric on the need for government investments that are essential for our future.  There is no money available for those investments.

The Implications Of Government Debt In The US

Robert Solow is a Nobel Laureate in economics.  He explains the implications of government debt in the US that non-economists can easily understand.  One of the differences between the US and distressed countries in the eurozone is that the US has a central bank that can purchase government bonds.  This enables the Fed to influence the interest rate on government bonds.  When the Fed purchases large amounts of government bonds, the price of the bonds increases along with the increase in demand for the bonds.  The interest rate is inversely related to the price paid for the bond.  Interest rates in the US have been influenced downward by Fed policy.  The Fed has been keeping interest rates low for several reasons.  It hopes that low interest rates will encourage investments that will have a positive effect on unemployment; it also wants to keep mortgage rates low in order to support a distressed real estate market.  Central banks run the risk of encouraging price inflation when they purchase government debt.  Inflation rates have not risen in the US.  They have been well below the Fed's target rate of inflation.  The Fed believes that it can curtail price inflation, should it occur as a result of its policy, but it is one of the risks to its policy.

Around half of the US debt is held by foreign investors.  Most is held by foreign central banks.  Countries that have trade surpluses with the US use their surplus dollars to purchase US bonds.  Other central banks also hold dollars in their reserve accounts.  Those dollars can be used to purchase commodities denominated in dollars, and they can also be used to protect their currencies from attack from speculators.  Their dollar reserves enable them the purchase their own currencies to maintain their price level when speculators attempt to benefit from a drop in the value of their currency.

The remainder of the US debt is held by US households and businesses.  The debt is an asset to the bondholders.  The interest paid on the debt remains in the US and it is spent in the US.  One of the problems with this arrangement is that government can finance its spending by borrowing instead of through taxation.  This gives government an incentive to cut taxes without cutting its spending.  That is what has been happening in the US.  We have financed military expansion at the same time that we have cut taxes that primarily benefit those with high incomes.  This worked under Reagan and Bush because it was supported by their political party.  They tend to be more concerned with budget deficits and government spending when Democrats are in office.

Sugar Causes Diabetes, Not Obesity

This article reports on a study that links sugar to the incidence of diabetes.  The amount of sugar in the diet was related to the incidence of diabetes even when it was controlled for obesity.  The normal weight group had a higher incidence of diabetes when sugar consumption increased.  More sugar might increase one's weight but obesity is not the causal link to diabetes.  It will be interesting to see what government's do with this information.  The FDA has traditionally been an advocate for the food industry that it is supposed to regulate.  The food industry makes its decisions based upon factors other than the health of the public.  It is not much different from the tobacco industry that did everything that it could to fight the scientific evidence linking tobacco consumption to disease.  For that matter, much of the resistance to government actions to reduce carbon emissions is funded by industries that benefit from carbon consumption.

Wednesday, February 27, 2013

An Enlightened Republican Position On Income Inequality

Sheila Bair is a lifelong Republican who was the head of the FDIC under George Bush.  I have recommended her book Bull By The Horn as an excellent insider's view on how we responded to the financial crisis.  If we had more Republicans like Sheila Bair we would be in much better shape than we are today.  Its hard to disagree with anything that she writes in this article about income inequality and what should be done about it.

Who Are The Moochers?

Mitt Romney claimed that 47% of American's are "moochers".  They are dependents of the state which they do not support with taxes.  He lost the election but he got almost half of the votes from a very divided society.  This article tells the other side of the story.  The growth in inequality in the US, and the decline in social mobility, is not an accident.  The state determines the rules of the game and the rules are being written by the very rich, who have also become dependent upon the state for a variety of subsidies.  It used to be a fairer game in the US and it is much fairer in many other rich countries.  This version of the story usually falls on deaf ears in America.  That is the nature of our division.  It is not surprising that the story is rejected by those who benefit from the game.  Many of them believe that they won a fair game, and that the moochers are just sore losers.  Unfortunately, many of the less well off agree with them.  They anticipate becoming one of the winners.  The rules of the game are invisible to them.

Everyone agrees that a society cannot be perfectly equal.  We are not equally gifted by nature and by nurture, and it is important to have an incentive system that encourages everyone to work hard and to invest in their future.  Everyone benefits when we have a fair game.  That is why it is important to understand the rules of the game and to make them more fair.  We have been going in the wrong direction.  Too many Americans have simply given up on the game.

Tuesday, February 26, 2013

Stock Market Responds To Election In Italy

The elections in Italy have caused considerable worries in Europe and elsewhere.  A coalition government will have to be formed between parties that have very different ideas about how to govern the country.  Italy may have to deal with political gridlock in a very difficult economy.  Eurozone markets were down over 2% and interest rates rose on Italian debt.  Markets in Britain, Asia and the US were also down.  Italy is faced with the difficult task of restoring growth while it is also attempting to implement unpopular structural reforms.

Monday, February 25, 2013

The Cost Of Being Poor

There are around 3 million users of payday loans which have extremely high interest rates.  Many states have banned these loans since they exceed interest rate limits that have been set by the state.  Unfortunately, many of our big banks have enabled the payday lenders to operate.  Many of the lenders have incorporated in friendly international locations.  This article describes how the big banks enable the payday lenders to circumvent state laws.  They have an incentive to do so because they collect fees for overdrafts etc.  They have not cooperated with their customers who request their bank to stop withdrawals by payday lenders when they attempt to close their account with the payday lenders. 

Edmund Phelps Discusses Income Inequality

Edmund Phelps is a Nobel Laureate in economics.  I had expected more from him than he offers in this article.  He argues that income inequality is primarily due to a lack of innovation in the US.  We had less inequality earlier in our history when innovation and productivity were higher.  Inequality has increased as innovation and productivity has slowed down in recent years.  His solution, therefore, is to find ways to increase innovation and productivity.

He does not believe that government can do much to increase innovation and productivity.  He rejects the use of industrial policy because private investors are better at identifying and funding innovation than government.  He also argues that government efforts to deal directly with inequality, by making the tax system more progressive, will weaken the incentives needed to stimulate innovation.

He believes that banks could do more to stimulate investment in innovative enterprises, but they have other priorities.  Wall Street is also a problem because it focuses management attention on short term performance that will increase their bonuses.  Most of them won't be around to benefit from investments that promote the longer term interests of their enterprise. Consequently, we should not expect many needed changes from the financial sector or from businesses.

Since neither government or private enterprise are likely to provide the innovation and productivity that are needed to stimulate growth and reduce inequality, what does Phelps offer as the solution?  He believes that we need to restore the "ethos" of innovation that had led to growth and greater equality earlier in our history.  He doesn't offer any advice on how we can restore the ethos of innovation.  Perhaps that will be the subject of book that he is writing.  In the meantime we are left with the problem of inequality and the hope that we can figure out ways to inspire more ethos.  Of course, we also have the confidence fairy to rely upon if we can't locate more ethos.

The "True" National Debt

Robert Samuelson claims that he did not write this article to sensationalize the US debt problem.  Of course, that is exactly what he has done.  He has been writing about deficit reduction and our debt problems on a regular basis.  His articles are frequently posted on red state blogs.  Most economists pay little attention to them.  I would like to use his article, however, to make a couple of important points.

He correctly points out that our treasury debt to the public is the most frequently used measure of the national debt.  He took the trouble to indicate that it has increased by over $5 trillion since the recession began in 2007.  Most of his readers will jump on this point as an indication of out of control spending in the Obama administration.  The jump in our national debt is primarily the result of other factors.  Mandatory spending on numerous social welfare programs increase during recessions.  We have also been spending trillions on two "wars" in the Mid-East.  Non-defense discretionary spending as a percent of GDP has not grown faster than trend during the Obama administration.  The other thing that happens during a recession is that income tax revenue declines.  The large budget deficits during the Obama administration are primarily due to a large drop in tax revenues, and increases in mandatory spending due to the recession, and our wars in the Mid-East.

Samuelson then moves to a second category of debt that includes money that the treasury borrows from other government agencies.  That includes several trillion dollars that the treasury borrows from Social Security.  It is able to borrow this money from Social Security because the payroll taxes collected by the federal government have exceeded the amount paid out in benefits for the last 30 years.  Social Security has been operating with a surplus because the government increased payroll taxes during the Reagan administration so that it could meet its obligations when the baby boom generation reached retirement age.  Now that the baby boom generation is reaching retirement age, payroll taxes will no longer provide a surplus from which the treasury can borrow.  Even worse, the treasury will be forced to pay back the money that it has been borrowing from Social Security for over 30 years.  That is what most of the scare tactics about Social Security's solvency are about.  The government has been able to cut income taxes, and borrow money from Social Security for over 30 years, and now government must deal with the impact that this will have on future budgets. The government can raise taxes, cut benefits, or borrow money to meet its obligations to Social Security.  Conservatives don't want to raise taxes, and they don't want to borrow money to pay for Social Security.  They have been working on ways to cut benefits for the last 10 years.

Samuelson claims that government can simply decide not to honor its debt to the Social Security Trust.  He argues that this is unlikely, but that this is an option that government can take.  He is correct. The government can decide to default on any of its obligations to creditors.  It can't default on its public debt, however, and still expect to be creditworthy, but the bonds held by the Social Security Trust are no different from the bonds held by the public.  The government cannot default on its obligations to Social Security and still claim to be creditworthy.

I have ignored the other categories of debt that Samuelson included in his article because they are not really debt.  They are simply guarantees that the government has made on debt held by others.  The notional value of the guarantees are much higher than any potential claims that the government faces. He includes these guarantees because it serves his purpose of sensationalizing the debt issues that he claims that he does not want to sensationalize. This is Robert Samuelson at his best.

A Political Cartoonist Sums Up US Policy On Climate Change

This cartoon not only typifies our response to climate change; it the preferred response of politicians to most tough issues.

An Interview With David Brooks

Ezra Klein interviews David Brooks so that neither of us have to criticize his latest article.  You can be the judge on David Brooks.  He is one of the most respected political pundits in the country.  In my view, Ezra Klein knows a whole lot more than David Brooks about the topic that he wrote about.  I'm surprised that he agreed to the interview. 

Sunday, February 24, 2013

Why A Hedge Fund Manager Is Buying AIG Stock

AIG was the largest insurance company in the world prior to its collapse during the financial crisis.  It had to be rescued by the government which became is biggest shareholder.  The government has sold its shares of AIG stock so now it is not constrained by government restrictions on executive compensation.  That means that AIG's management will behave like other executives.  The hedge fund manager believes that AIG management has been under reporting its earnings with the intention of reporting higher future earnings after the departure of the government.  He predicts that its stock price will double as a result.

The hedge fund manager may be right or wrong in his prediction about AIG's stock price.  He is right, however, in his reasoning.  Managing the stock price, and increasing the value of executive stock options is what investor capitalism is all about.

The Verdict On George Osborne And Britain's Economic Policies

Simon Wren-Lewis is a highly regarded economist at Oxford.  He usually sticks to economics without venturing into politics.  In this article he explains why he believes that Britain has been wrong to follow the advice of George Osborne on monetary policy.  He argues that Britain's economy will suffer from another dip into into recession.  This could have been avoided if monetary policy had been used to prevent the recession.  He argues that George Osborne has put political objectives and ideology ahead of the best interest of his country.  He believes that Osborne is using budget deficits as an excuse to shrink the size of government in the UK.

Tom Friedman Claims That Mexico Will Become The Next Superpower

I don't know what they fed Tom Friedman, or what he smoked, on his recent trip to Mexico, but he has decided that Mexico will have a larger economy that China or India in the 21st century.  He argues that Mexico will have lower wages than China, and he was impressed by the use of technology in Mexico.  Twitter is used to improve communications.  They probably use Facebook extensively in Mexico as well.

Some might wonder about Mexico's economic future given its high crime rate.  US citizens have been warned against travel in Mexico by the State Department.  Friedman is not concerned about drug wars and crime in Mexico.  The three political parties in Mexico have decided not to fight with each other.  They have agreed to a "grand bargain" that he urged the Republicans and Democrats to adopt.  I'll bet that they also have Twitter accounts.  That should solve their governance problems.

My brother works in Mexico and he loves the country and its people.  It would be great if Mexico could solve its political and economic problems and provide a decent standard of living for its hard working people.  However, competition with China on wage rates is not the best path to a better standard of living or governance in Mexico.

Fiscal Policy And Economic Growth In Eurozone

Paul Krugman used the IMF's measure of fiscal policy and plotted it against growth in GDP.  The result   is not surprising.  There is a strong relationship between the degree of austerity and the decline in economic growth.  Ordinarily, that would prove to most people that austerity has been the wrong medicine in the eurozone.  On the other hand, the desire to punish countries in the periphery for their "profligate" ways has required the imposition of austerity on them.  A dose of punishment and a belief in the confidence fairy has been a deadly combination in the eurozone.  Unfortunately, the disease has been contagious.  It has been used for political purposes in the UK and in the US by politicians who have used budget deficits as an excuse to shrink government.

Saturday, February 23, 2013

Its Not Easy To Be An Ethnic And Racial Melting Pot

America is a nation of immigrants.  The Northeast was settled by puritan's who were faced with a wave of immigration from other parts of Europe.  It took a lot of effort and struggle to make the melting pot work in the Northeast.  It worked reasonably well.  The result was Irish-Americans, Italian-Americans etc. etc.  Some of the ethnicity was retained but they were all Americans.

Michael Lind suggests that it has been a different story in the South.  Most of the immigration took place in the North.  Most of the settlers in the South came from the northern part of the UK and the South developed a unique culture.  He describes that culture in this article.  It has been a culture without a lot of hyphenated Americans.  The evangelical protestant whites in the South believed that they were the true Americans.  After the civil war, they were represented politically by the Southern wing of the Democratic Party (Dixiecrats).  The civil rights movement, led by the Democratic Party, gave the Republican Party the opportunity to turn the solid Democratic South into the solid Republican South that we have today.  The party that represented the plutocrats in the North, and farmers in the Mid West, has formed an uneasy alliance with those who still identify with the Old South.  Demographics and immigration are now threatening the culture of the Old South.  The True Americans face an uncertain future in which the white evangelical protestants will be outnumbered.  The South is becoming a melting pot, and it will not be an easy transition for the True Americans. How they deal with the transition will have a huge effect on the rest of our nation.  Politics in the US reflect regional differences more than differences between the left and the right.  The Democratic party is primarily a centrist party that contends with a Republican Party that has been pushed to the right by its transformation into a regional party.

Friday, February 22, 2013

Can The GOP Reenter The 21st Century?

A conservative commentator argues that the Republican Party "has a winning message for a nation the no longer exists".  He urges his party to get over  "Reagan nostalgia" and to move to the center like Clinton did in 2000, and like Tony Blair did in the UK.  He is probably correct in his analysis.  His party is no longer relevant for most Americans outside of the red states.  Moreover, it is making things worse for nation that has serious problems to solve. The country has become ungovernable because of GOP obstructionism.  It will not even let the president appoint his own cabinet.  Its behavior may give its base something to cheer about, but that is its problem.  It has become dependent upon the votes from the most backward segment of our population, as well as financial support from the most reactionary segment of the business class.  A party that is led by these groups is incapable of leading our nation.  It is prevented in many state states from getting good candidates through the primary elections.  The Republican Party has created its own Frankenstein monster.  It can only enter the 21st century by ridding itself from its dependency on the worse elements in its base.  It has to lead its base rather than being led by it.

Economic Outlook For Eurozone Worsens

The Economist is rather gloomy about the eurozone economy.  Unemployment is growing in the southern countries, and it is spreading to France and Italy.  Germany is the only bright spot, but only relative the rest of the eurozone.  There is a real concern about the ability of governments to function properly under these economic conditions.  Austerity has only made things worse, but the bond market limits the use of fiscal stimulus in the countries that need most of the help.

Thursday, February 21, 2013

The Economist's Special Feature On Corporate Tax Avoidance

This special report on corporate tax avoidance by The Economist provides a good analysis of the methods that multinational corporations use to avoid taxes.  Every country in the European Union has its own tax laws.  Consequently, it is difficult for the EU to prevent low tax countries like Ireland, The Netherlands, Switzerland and Luxembourg from providing opportunities for MNC's to take their profits in law tax jurisdictions, even when most of their revenue comes from sales in higher tax countries.  Some states, like, The Netherlands, have a high corporate tax rate, but their tax base provides lots of opportunities for MNC's to lower their effective tax rate.  They take profits in The Netherlands on sources of profit that are taxed at a low rate in The Netherlands.

Although Britain and the US lose tax revenue from many of these tax avoidance schemes, they are not blameless.  They provide opportunities for MNC's to use friendly banks to launder their profits.  State laws in Delaware, and several other states,  also make it easy to set up phony corporations that enable money laundering and tax avoidance.

There have been efforts to prevent the "race to the bottom" in the competition between states to attract MNC's to their jurisdiction.  As one might imagine, the MNC's oppose these efforts, and so do the states that take advantage of their low tax policies.  Public reaction has been the most powerful deterrent so far. Starbucks was exposed for avoiding taxes in Britain.  That led to a public boycott which caused Starbucks to stop using one of its tax avoidance schemes.  The general public in the US knows that corporations use tax avoidance schemes,  but they are not well understood and neither are their implications.

Wednesday, February 20, 2013

Simpson-Bowles Is Not Going Anywhere But It Deflects Attention From Our Current Problems

Paul Krugman knows that Simpson-Bowles has no chance to go anywhere in the US.  Our politics are too polarized to permit any agreement on a grand strategy that primarily affects our fiscal outlook in the distant future.  It is not pointless, however, because it puts deficit reduction, primarily through spending cuts, on the front burner.  Our most important problems are elsewhere.  As long as we have high unemployment, stagnant wages, and large trade deficits, we will continue to have large budget deficits. 

The Cost Of Corporate Tax Avoidance In US

This article (via Manan Shukla) provides some details on the extent to which US multinational corporations avoid taxes by funneling their profits through a small number of low tax nations.  In 2008, which is last date for which information is available, total pre-tax corporate profits were $1.36 trillion.  $938 billion, or 69% of pre-tax profits, came from abroad.  Four low tax nations accounted for 43% of overseas profits.  Those states accounted for only 7% of total investment and only 4% of total employment.  It is pretty clear that they are the result of financial engineering.  Bermuda, Ireland, the Netherlands and Switzerland account for profits that are well beyond the level of business activity in those countries by US corporations.

The total loss of tax revenue to the US from financial engineering is estimated to be between $57 and $90 billion.  To put this in perspective, the budget cuts contained in the sequester, which are intended to reduce the US budget deficit, amount to $110 billion. They wouldn't be needed if we, and other higher tax states, did not permit it to happen.  Moreover,  we should understand that the tax revenues lost by financial engineering shift the tax burden to others.  The exorbitant privilege that we, and others extend to multinational corporations, enrich corporate executives and their shareholders at the expense of the general community.  This raises serious questions about the fairness of the tax system, and the extent to which multinational corporations influence tax policy and tax enforcement.    

A Reaction To Simpson And Bowles New Deficit Reduction Plan

Obama appointed Simpson and Bowles to head up a deficit reduction committee.  They were unable to produce a plan that could muster enough votes on the committee to submit the the president.  Republicans on the committee did not approve of the tax increases.  This put the president in a difficult position.  His base was unhappy with the summary of the plan that was made public and he not assurance that Republicans would support tax increases if he tried to implement the recommendations.  This cost him a lot of support from moderates who believe that something needs to be done about future budget deficits.

A group of CEO's has picked up the ball on Simpson and Bowles.  They have sponsored them to give public speeches about deficit reduction and to come up with a new plan.  Their new plan reduces the tax increases and it increases the spending cuts that were in the old plan.  This article describes the new plan and takes issues with many of the details.

Is Capitalism Consistent With Conservatism?

One of the virtues of capitalism is its dynamism.  Some call this creative destruction.  The old gives way to the new in the pursuit of efficiency and innovations that are required to maintain economic growth.  In other words it can be a very socially disruptive force.  This article describes some of those disruptive forces and it shows how they affect family life and even our planet.  In other words, the disruptive forces that it unleashes affects many of the things that conservatives are supposed to value. 

One of the issues that we face today is the transition that is taking place in the corporation with its focus on shareholder value and the requirement for constant growth in profits.  Rapid changes in the marketplace puts a premium on flexibility and the ability to adapt to change.  US corporations have adapted their benefit programs accordingly.  Defined benefit pension plans have been replaced by defined contribution programs which shifts the risk from the corporation to the employee.  Many are not well prepared to assume that risk, and to make the decisions that are necessary.  A large percent of employees don't even take advantage of the plans that are offered to them, and many do not know how to best allocate their funds to the plans that are made available to them.  Its likely that many retirees will be more dependent on government when they retire.  Their increased dependency on government programs comes at a time when there are concerns about government's willingness to fund them at their current levels.  The corporate safety net is being changed at the same time that government social welfare programs have an uncertain future. 

Monday, February 18, 2013

A Billionaire Hedge Fund Manager May Be A Good Choice For Energy Secretary

This article makes the case for someone with a passion about climate change to head up the US Energy Department.  Perhaps a combination of passion, along with business and political connections, is what is needed.  At least this candidate understands that we will lose the war even if we meet our current targets.  We need to move the goalposts.

Tom Friedman Peddling Nonsense Again

Dean Baker does a great job of educating Tom Friedman on economics.  Friedman, however, does very well for himself without Dean Baker's help.  His stories usually begin with some wisdom that he has picked up during a casual conversation with a taxi driver, or with someone else that he has met on one of his frequent trips around the globe.  This sort of information inspires him to write learned articles on any subject that interests him.  Unfortunately, the New York Times is only one of many sources that is eager to publish his gibberish.  He writes well, and he tells a good story, but he is a writer of fiction.  He tells us that Apple has $137 billion in saved profits that it is not spending because it is uncertain about what government might do.  He doesn't tell us that $82.6 billion of Apple's cash hoard is held overseas and that Apple, along with other multinationals, is waiting to see whether the government can be persuaded to grant a tax holiday which allow it to repatriate their earnings without paying US taxes.  He also fails to explain why Apple, and other US multinationals,  are so concerned about US fiscal budget problems and the cost of US entitlement programs when more than half of their profits come from international sales.

Friedman must also watch the Sunday News shows that give politicians an opportunity to display their "wisdom".  Paul Ryan argued that he was not a proponent of fiscal austerity.  He told the TV audience that his policies were designed to promote economic growth.  They would restore business confidence which would enable us to afford Social Security and Medicare.  Friedman offers his suggestions for increasing business confidence and stimulating economic growth.  Dean Baker points out that our lack of demand has more to do with our trade deficit than with anything else.  Business investment and consumer spending are consistent with historical trends.  Our huge trade deficits, however, are subtracted from aggregate demand.  That is why we have an aggregate demand problem.  We had a stock market bubble, and a real estate bubble, which allowed us to run huge trade deficits without have recessions.  Our trade deficits are not sustainable without finding another source of aggregate demand.  That is not something that Tom Friedman,  and most US politicians, want the public to understand.  They tell us that the trade deficits have nothing to do with budget deficits, or with unemployment.  Unmanaged globalization is great for everyone.  Everything would be fine if we just had a better educated workforce.  They don't explain how our highly educated workforce can compete with other highly educated workers who will do similar things for much lower wages.

Saturday, February 16, 2013

How London Was Chaged By Emulating Wall Street

Michael Lewis tells a great story even when he is reviewing a book written by another person.  This is a review of a book by an English writer who took a unique approach to describing how London was changed by the transformation of the City of London into its version of Wall Street.  The story is about a few individuals who live on a single street in London.  One of them is a banker who has "earned" a million dollar bonus, but can't pay his bills because his wife, who seems to hate him, spends more than he is paid.  Vast sums of money have caused half of the graduates from Oxford and Cambridge to forget what they were taught about how to live in college.  The smell of money is in the air and it seems better to chase after it than to do something that might be more worthwhile.

Michael Lewis remembers what London was like when he was there in the 1980's.  He describes it as a dreary place.  The new London that he describes is as shallow as Wall Street.  The pursuit of money is an end in itself.  One would think that it would inspire a revolt, but there is little outrage.  He suggests that turning back to the dreary socialist London of the 1980's is not an attractive alternative to the Americanization of London either.  Unfortunately, there is not a compelling vision of a future that might replace both of them.


Friday, February 15, 2013

The Flexible Labor Force

This article (via Manan Shukla) is ostensibly about unpaid internships, but it is really about the reality of the global labor market.  Workers are commodities that are leased on the market.  They are no longer purchased.  The term of the lease is up to the employer.  Wages are the largest expense for most firms, and firms need to be able to respond quickly to changes.  They have applied the just in time inventory method to their labor force.  Temporary employees fit this need and they are also less expensive.  Most are not provided with benefits.  This is shareholder capitalism.

The Speech That Was Not Given By Barclay's CEO

Barlclay's new CEO recently gave a speech about turning Barclay's into a moral bank.  The Financial Times decided to have some fun with the silly idea about a moral bank.  This very funny speech is the speech about moral banking that was not given by Barclay's CEO.

The GOP's Rising Star Has A New Face But He Retains The Same Zombie Ideas

The president's state of the union speech was less than Paul Krugman had hoped for.  The GOP selected a fresh face to make the rebuttal to Obama's speech.  Marco Rubio has a pretty face, but his speech included many ugly ideas.  He rehashed many of the ideas that are dear to the heart of the GOP base, but refuse to die despite the evidence against them.  That is why they are called zombie ideas.  Zombies are the living dead.  Therefore, it is impossible to kill them.  Rubio told his audience that the financial crisis was caused by government policies.  Apparently, the origination of bad mortgages that were packaged into securities and sold to investors by Wall Street banks, that misrepresented their quality,  had nothing to do with the financial industry.  Republicans have been lying about the financial crisis for the last four years, and they will continue to lie as long as their base  prefers lies to the truth.  Rubio also told his base that government spending was out of control and that the GOP is the party of fiscal responsibility.  The ghost of Ronald Reagan was also evident in his speech.  Reagan's election campaign included a plan for a balanced budget amendment to the constitution.  Reagan proceeded to cut taxes and increase spending after his election, but the resulting budget deficits have been forgotten.  Its still a good idea, however, for Republicans to be supportive of balanced budgets when they are provided with a pulpit.  Rubio was provided with an opportunity that he could not refuse.

Thursday, February 14, 2013

The Evolution Of The US Corporation

Large corporations rival nation states in power.  EXXON's revenues in 2007 were $373 billion, which is about the size of GDP in Saudi Arabia.  The Blackwater corporation does much of the work for the US military in the Mid-East.  Its reserve army is larger than that of Australia.  They have also provided many of the social benefit programs for the employees that are usually provided by nation states in Europe.  The corporation may exceed the state as the dominant form of social organization in the world.   Some politicians would like to model the organization of the state after that of the corporation.  Some politicians claim that experience as a corporate manager is an essential ingredient for success as a government leader.  Therefore it is important to understand how the mission and structure of the corporation has changed over time.  Gerald Davis, who is an endowed professor in the University of Michigan's Ross School of Business,  wrote an informative book on this subject (Managed By The Markets) which describes how the corporation has been reshaped by the financial industry.  I have summarized his description of managerial capitalism, and how it evolved into shareholder capitalism below.

Managerial capitalism was described in a seminal book by Berle and Means in 1932 (The Modern Corporation And Private Property).  The ownership of the corporation was in the hands of numerous and dispersed shareholders.  Control of the corporation resided in the hands of professional managers.  They believed that the professionalization of management would create a commitment of the corporation, as an institution, to employees, customers, communities, and other stakeholders, including shareholders.  Some economists referred to this development as a departure from the older form or capitalism in which property owners, or capitalists, controlled the means of productions by virtue of their ownership of the means of production.  Shareholders were important stakeholders but the CEO of General Electric stated that the shareholders were only entitled to a return that was equivalent to a risk premium over an investment in a risk free treasury.  The remaining profit would stay in the enterprise and be paid out in higher wages, or lower prices to consumers which would make the enterprise more competitive.

One of the features of managerial capitalism was that the corporation assumed many of the social welfare functions of the state.  They provided pension plans, healthcare insurance and a well defined career path within the corporation for their employees.  The state provided most of these benefits in Europe because the states were relatively mature as the corporate structure was developing in Europe.  The state was relatively immature in the US as the corporate structure developed.  Consequently, the corporation assumed many of the roles of the mature state.  It was also a good way for the corporation to ward off the socialist movements that were underway in Europe.

The era of managerial capitalism lasted until around 1980 in the US.  Many large US corporations were unable to compete with international competitors. They lost market share, and profits were more difficult to maintain as the cost of energy skyrocketed due to the operation of the oil cartel centered in the Mid-East.  Double digit inflation in the US also created a problem.  The Fed raised interest rates in response to inflation, and this led to an appreciation of the dollar relative to foreign currencies. This made US exports more expensive, and imports became less expensive for consumers in the US.  Many corporations attempted to grow by acquiring companies in unrelated businesses.  The era of corporate conglomerates was short lived.  The conglomerates were inefficient and unprofitable.  Their share prices fell and they were attacked by corporate raiders who realized that their assets were worth more than their market capitalization.  New sources of capital were made available to the corporate raiders by developments on Wall Street.  The raiders were able to fund their takeovers by issuing junk bonds that paid high yields to investors.  A market for managerial control of the corporation emerged which managers had to defend against.  They were vulnerable to attack as long as their market capitalization was below the value of their marketable assets.

It didn't take long for corporations to restate their mission.  They no longer had an obligation to multiple stakeholders.  Their primary mission was to maximize profits and to increase shareholder value.  Executive compensation was aligned with their new mission. Stock options were awarded for achieving financial objectives.  Managers had the same goal as their shareholders.  They did whatever they could to increase the stock price.  In essence, the stock price served as the measure of corporate efficiency.  The financial market was the best judge of a corporations worth.  The CEO of Sara Lee argued that Wall Street set the rules by which his performance would be judged.  The market places a higher value on corporations that produce the most profits with the least assets.  He divested most his manufacturing facilities to external suppliers, and he put his focus on brand management.  Nike followed a similar strategy.  Hewlett Packard outsourced the manufacturing of its PC because consumers care more about the brand than they do about who manufactures the product.  HP owns the intellectual property and that is their real asset.  Jack Welch, the widely admired CEO of GE,  made it clear that GE did not have a lifelong commitment to its employees.  He cut 100,000 jobs between 1981 and 1985.  The shareholder was king to Jack Welch and GE was rewarded with higher stock prices under his leadership.  The market decided that GE stock was worth over $60 per share during his reign.  Today its stock price is under $30 per share.  Apparently, the market is not always efficient at setting the price for a business.  Nevertheless, the assumption that market is efficient some of the time underlies the edifice of shareholder capitalism.  Managing the stock price requires actions that please Wall Street.

Wednesday, February 13, 2013

There Is Nothing New About The Issues In US Politics But We Are More Timid About Facing Them

After listening to President Obama's State of the Union Address, it is interesting to read what some of our past presidents said, and did, about these issues.  This will be a good  lesson for the younger generation which has grown up in a much different political and social culture.

The Implications Of Rising Productivity And Labor Practices On Employment And Wages

The increased use of labor saving technology is decreasing the demand for labor in many occupations.  The relationship between employees and the corporation has also changed.  The concept of permanent employment has become archaic.  Our large organizations increasingly use temporary employees to get much of their work done.  Some temporary workers do well in this scheme, but on average, compensation and benefits are worse for most of them.  Job security is a thing of the past.  Everyone is a temporary employee and responsible for managing their own career.  Government has also contributed to the lack of employment security.  Labor laws have been weakened and it has become more difficult for workers to form unions.  There is no good news about wages and employment opportunity in this article.

There many good references in this article for those who are interested in the future of employment and wages.  Part of the problem, however, is the result of our transition from an industrial society to to a services economy.  For example, 9 out of our 12 largest employers in the US are in retail or food service.  Wal-Mart is our largest employer.  It employs more Americans than our 12 largest manufacturers combined. Around 50% of the products purchased by consumers at retail are imported.  This has a dramatic effect on wages because there are few opportunities for most employees in retail organizations to move up on the corporate ladder.  Moreover, the average term of employment ranges between 1.5 years in food services and 3 years in retail.  This contrasts markedly with the organization structure of large manufacturing firms that used to provide most of our employment. To make matters worse, the growth of retail chains, and chain restaurants, has led to a reduction in the number owner operated firms that used to serve local communities. The opportunity to start up a small business to serve local consumer is more difficult than it used to be, and the profits leave the local communities as they are sucked up by the chains.

State of The Union Addresses And Reading Level Over Time

This article (via Manan Shukla) evaluates the reading level in the State of the Union addresses of US presidents.  The reading level has declined dramatically over time.  The audience for these addresses has changed over time.  They used to be primarily for Congress, and not intended for general consumption by the public.  Moreover, they were written addresses until Woodrow Wilson started the precedent of giving them orally.  Our written language tends to be more complex than our spoken language.  The reading level, however,  has declined substantially from the level of Wilson's address.  It probably has more to do with the need to reach a broad audience than to anything else. 

More On The Corporate Cash Hoard

There has been a lot of debate about the motivations of multinational corporations for holding around $1.7 trillion in cash and liquid securities.  This article reviews most of the ideas that are being discussed, and it offers a new idea.  The greatest asset held by many corporations is its intellectual property.  This consists of patents, copyrights, trademarks etc.  It appears that corporations are transferring their intellectual property to tax havens.  For example, if you order a download of Microsoft Word, and pay for it with your credit card, the funds will be sent to Luxembourg which is a well known tax haven.

Multinational corporations are becoming virtual corporations.  The decisions that they make about where they locate their capital, and what functions they provide internally, or outsource to others,  are very carefully made.  Avoiding domestic taxes is chief among them.  Nation states compete with each other by offering the most favorable treatment of taxes and other services to obtain jobs and tax revenues from them.  It is a race to the bottom for the nation states.  This has been going on within the US for some time.  Most large firms incorporate in the state of Delaware because it offers the most favorable corporate legal structures.  Other states compete for the location of physical facilities by offering tax advantages and a "business friendly" environment.  They seldom get back in return what they give up to win the competition with other states.  National and state governments are increasingly in the business of vending laws and services to large corporations.

Monday, February 11, 2013

Why Policy Makers Should Not Rely Upon Rational Expectation Models

Macro economics has been dominated by the rational expectation theory advanced by Robert Lucas.  Most of the world's central banks use economic models derived from rational expectation theory.  Edmund Phelps won a Nobel Prize in economics in 2006.  In this interview he describes the assumption about expectations in their models.  He explains why the assumptions don't work and argues that it is foolish for central bankers or for Wall Street to use rational expectation models to make decisions.

Fiscal Policy In US Compared With Previous Recoveries

Politicians and pundits on the economy keep telling us that we have to contain "out of control" federal spending in order to cut the US deficit to GDP ratio.  This graph from the Federal Reserve Board of San Francisco tells a different story.  Government spending is well below its levels in prior recessions.  The slow down in government spending has had a negative effect on our recovery.  Slow growth in GDP, translates into slower growth in tax revenue, which worsens our deficit to GDP ratio.

High rates of unemployment in the US are real.  Out of control federal spending is a political fiction.

Why Are Corporations Holding Trillions In Cash?

Tyler Cowen has two answers to this question.  One answer suggests that they are converting their cash into securities and bank deposits that should funnel its way into productive uses.  The other is that perhaps there is a scarcity of good investment opportunities.  His first response is often used by defenders of Say's law which Krugman attacks in the post below.  His second response raises a question about the lack of product demand that restricts investment in additional capacity.  Corporations have excess cash because corporate profits have risen due to lower labor costs.  That leads to falling demand for their products.  In other words, Tyler Cowen has an incomplete picture of the macro economy that explains his "confusion". 

Larry Summers offers a complementary explanation for corporate cash holdings.  He believes that corporations anticipate a change in the tax code that will allow them to repatriate profits from their international subsidiaries at a reduced rate.  Under the current tax code their international profits would be taxed at the US corporate tax rate if they were brought back to the US for investment in the domestic economy.  Summers argues that government ought to make a decision one way or the other so that corporations can make a rational decision about how to deploy their international cash.

Say's Law Is Alive And Well Among Free Market Theorists

Say's law is being revived by some economists to advance the conservative agenda.  If one accepts the assumption that every dollar that is earned will be spent in one form or another, it is not possible to have a general glut in which there is not enough demand to purchase the supply of goods that have been produced.  Say's law presumes that supply creates its own demand.

One of the implications of Say's law is that is impossible to have extended depressions like we had in the 1930's.  Most economists, faced with disconfirming evidence have rejected Say's law.  In this article Paul Krugman criticizes several prominent economists who have invoked Say's law.

One of the reasons why neo-classical economists cling to outdated "laws", is that they believe that markets follow some natural law like those that exist in the natural sciences.  If the "natural" laws of supply and demand were allowed to work without distortions, which arise primarily from government,  depressions would never occur.  In other words, they refuse to believe that economics is a social science, and that economies are human inventions.  Therefore, government intervention into the economy is a violation of natural law.  Everything would work out fine in the economy if government would stop interfering with nature.

Friday, February 8, 2013

Spending Cuts In UK Have Led To Bigger Deficits

The conservative government in the UK is cutting government spending but its budget deficits are growing.  Cuts in government spending will cause GDP to fall unless private spending increases to compensate for lower government spending.  That has not happened in the UK, or in the eurozone countries that have implemented austerity.  The confidence fairy has been missing in action.  Consequently government tax revenues  have been declining along with falling GDP.  The only way out of this trap is for government to implement spending programs that will stimulate economic growth.  

Thursday, February 7, 2013

Conservative Senators Become Keynsians On Defense Spending Cuts

Republican senator John McCain argues against cuts in the military budget.  His argument assumes that cuts in military spending will also affect non-military spending.  In other words, he makes a Keynesian argument against cuts in the military budget and he assumes a high multiplier for the spending cuts.  His inconsistency on the impact of government spending on economic growth is shared by many of his Republican friends.  They oppose Keynesian economics only when government spends money on programs that don't directly benefit their important constituents.  In other words Anti-Keynesian ideology is selectively employed to suit their purposes.  Ideology is a weapon that is used to affect public opinion.  It frequently has nothing to do with any belief system about which politicians like to posture.  Many are simply salesmen who assume that the public is uninformed about the policies that they advocate.

US Budget Deficit Is Shrinking Faster Than Any Time Since WW ll

The US budget deficit for is projected to be 5.3% of GDP in 2013.  The deficit was 9% of GDP in 2010.  The 3.7% decline in the deficit is the fastest decline that we have experienced since WW ll.  Apparently, Washington is more focused on deficit reduction than it is on unemployment.  The economy is only expected to grow by 1.3% in 2013.  The deficit reduction is being driven by major cuts in government spending and by tax increases.  Fiscal policy, therefore, is responsible for the low growth rate projected for 2013.  This is very much like what happened in 1937 when the recovery from the Great Depression went into reverse because of a fiscal policy that was designed to cut the deficit. 

We did not recover from the Great Depression until government spending on the military buildup for WW ll greatly expanded government spending and US budget deficits.  Economic growth following the war quickly reduced the budget deficits and the burgeoning national debt. 

We have long term problems with government spending, primarily on healthcare, that need to be addressed.  The current focus on short term deficits and the lack of action on our real long term deficit problems is a real cause for concern.

Things Serious People Believe

Paul Krugman does not expect much from Republicans but it bothers him that reputable reporters, like Bob Woodward, are given a platform to make comments on the economy that mimic those made by GOP politicians.  Woodward's comments on national TV reflect the confidence fairy hypothesis that Romney used in his unsuccessful campaign.  He argued that businesses have trillions of dollars that they are not investing because they lack confidence in government fiscal policies.  In other words, government fiscal policies, rather than a lack of demand for their products, is constraining business investment.  Apparently, this is the assumption that one must make in Washington, or the assumption that one must make to get a guest appearance on national TV,  in order be consistent with other "serious people".

It is not surprising the confidence fairy is alive and well among serious people.  I have many friends, who are not arch conservatives, who believe in the confidence fairy.  If one is a regular view of CNBC, which is very popular with many serious people, there is a constant stream of commentary that put the blame on government policies for the slow recovery.  The commentary is also less concerned about unemployment and the ability of indebted consumers to stimulate demand than it is about projected budget deficits in 2040.

Will The The New Fiscal Pact In Europe Work?

Elected government officials have a short term focus.  They like to win the next election.  Their electoral chances are enhanced when they can provide popular government programs without paying for them with taxes.  It is even better when they can also cut taxes.  Unfortunately, the policies that improve one's electoral opportunity can lead to budget deficits and fiscal problems.  That is why the eurozone operated under a central rule that limited eurozone total budget deficits to 3% of eurozone GDP.  That policy has not worked so a new fiscal rule has been established which each country must follow.  Structural budget deficits cannot exceed 1% of GDP.  That gives countries leeway to run cyclical budget deficits when revenues decline due to weaknesses in the economy.  This article explores the potential for the new policy to improve fiscal outcomes.

The major problem with the new policy is that government budget forecasts tend to be biased.  A government can forecast increases in GDP and tax revenues that are too optimistic.  Therefore, when the budget deficit fails to meet the structural budget deficit limit, they can argue that the budget deficit was caused by cyclical factors that were unexpected.

Research has shown that forecasts provided by non-government organizations are less prone to forecast bias.  If governments were bound to follow the forecasts of independent forecasters that would limit the problem of government forecast bias.  Governments, however, have other tricks that they use to disguise fiscal problems.  One trick is turn over the operation of a government enterprise to a private contractor.  That has the effect of reducing government spending on a one time basis.  It has no recurring impact when they pay a profit making enterprise to provide the same service.  Another trick is to provide temporary tax cuts to stimulate the economy.  The problem with that tactic is that temporary tax cuts tend to become permanent.  We are witnessing that problem in the US after the expiration of the Bush tax cuts.  Long range forecasts of budget deficits were lower than they would have been if the tax cuts were deemed to be permanent when they were enacted.

Damaging Facts Revealed In JP Morgan Lawsuit

When an individual purchases an used car, the dealer who purchased the car or took it in on trade knows more about the quality of the car than the purchaser.  Consequently, consumers pay less for used cars than they otherwise would if they were fully informed about the quality of the car.  That has prompted automobile dealers, and manufacturers,  to certify the quality of some of their used car inventory.  Consumers will pay more for a certified car from a dealer and/or a manufacturer with a good reputation.

Investors purchased mortgage backed securities from banks that were "certified" for their quality by rating agencies from banks that had good reputations.  As we know the rating agencies failed in their quality control.  We are also learning that many banks misrepresented the quality of the securities that they sold to investors.  Dexia is Belgian/French bank that lost $774 million on the mortgage backed securities that it purchased from US banks.  Fannie Mae and Freddie Mac lost over $200 billion on securities that they purchased from banks.  The losses suffered by investors on mortgage backed securities provided the profits and bonuses that were enjoyed by bankers who sold those products.  The investors are trying to recoup their loses by suing the banks.  Lawyers representing Dexia have found incriminating evidence that the banks misrepresented the quality of the securities that they purchased.  Internal emails indicate JP Morgan, and banks that they purchased during the financial crisis (Washington Mutual and Bear Stearns),  overrode internal and external quality control procedures which found flaws in many of the mortgages that they packaged into securities.  They also hid that information from the rating agencies that "certified" the quality of the securities.

We are learning that many banks operated like unsavory used car dealers during the securitization mania. Most individuals who get stuck with a faulty used car don't have the financial resources to sue the dealers that sold them the junk car.  Banks like Dexia, and other investors like Fannie Mae and Freddie Mac, have the resources to recover their losses.  The potential losses to JP Morgan, and other banks who survived the financial crisis, with government help, are staggering.  These potential losses are like a black cloud over the banking industry.  It has affected their stock price and their lending practices.  Most of the banks have been working hard to build up their reserves to protect against further legal claims.

Investment Banking Leader Loses Job Over LIBOR Scandal

The RBS claims that the head of its investment banking unit was not aware of the LIBOR manipulation that led to multimillion dollar lawsuits against the bank.  On the other hand, somebody in management had to take responsibility for the illegal behavior.  They see no reason for disciplining more senior executives above the head of the responsible division.  RBS may have difficulty finding a replacement for its investment banking unit.  It has trimmed down its investment banking operations and it expects cut it further in the future.  RBS is over 80% owned by the government. Loses in the mortgage backed security business led to a government bailout of the bank.

Wednesday, February 6, 2013

Royal Bank Of Scottland Fined $616 Million While Traders Laugh

The trader who were manipulating the LIBOR interest rate sent emails to each other celebrating their ability to fix the interest rate.  The emails were used as evidence against the RBS in the civil suits initiated by US and UK government agencies.  I'll bet that the traders are also free market advocates along with the senior executives in the bank who knew what they were doing.  The RBS shareholders, also paid a high price for their actions.  The directors, who are supposed to look after the interests of the shareholders, failed to their job as well.  Corporate governance in the banking system is a joke.

Monday, February 4, 2013

Federal Reserve Research Raises Questions About Underwriting Of Securitized Corporate Loans

It is well known that banks lowered their underwriting standards when they originated mortgages and sold them for securitization.  This study by the Federal Reserve Bank Of New York, reports that corporate loans which were originated and sold for securitization defaulted at around double the rate of corporate loans that were originated and held by the banks.

Justice Department Files Suit Against S&P For Mortgage Rating Fraud

The Justice Department filed a civil law suit, which has a lower standard of proof than a criminal suit, against S&P for the ratings that it put on at least 30 mortgage backed securities.  The DOJ offered a settlement to S&P of around $1 billion to settle its case.  They turned down the settlement which is about equal to its parent company's earnings last year.  Its stock price fell by 14% after the announcement.  Investors must expect similar problems for Moody's which was also involved in rating mortgage backed securities.  Its share price fell by 13%.  The financial crisis would not have occurred without the extraordinary number of AAA ratings that the rating agencies put on mortgage backed securities. 

Robotics And Hollowing Out Of The Middle Class

This article describes the employment issues that we face as smart machines are used to replace manufacturing workers.  The use of technology is also spreading to other areas.  One economist joked that Harvard will become a dating center.  Higher eduction will be done over the Internet.  Only a handful of top professors will be needed to provide the lectures.  Middle tier colleges will soon disappear as online education is used to teach less privileged students.

A discussion between the head of the US Autoworkers Union and Henry Ford is cited in this article.  Ford told the union leader that he would not be able to collect union dues from the robots.  The union leader replied that Ford would not be able to sell cars to the Robots.  This must have made an impression on Henry Ford.  He was criticized for raising the pay in his workforce.  He replied to the criticism by arguing that this enabled his workers to purchase his cars.  That argument does not have much force in today's world of multinational corporations.  They can sell their cars anywhere in the world.  

It appears that rising productivity will allow us to produce more of the output that people desire with fewer workers.  Those who manage and own these organizations will benefit from rising profits.  Most of the solutions that are being proposed by governments fail to acknowledge the implications of rising productivity described in this article.

Is The Advance Of Technology The Cause Of Income Inequality?

The concept of technology bias is being used by some economists to explain growing income inequality.  This argument leads us to blame the victims for growing income inequality.  The well educated have the skills that are in demand in the "labor market", and they are receiving most of the income.  Those with low incomes are being punished for their failure to invest in education.

There is some truth to that argument because we expect that better educated workers will receive higher pay.  The problem with that argument is that most of the growth in income has gone to the top ,01%.  A lot of highly skilled, and well educated workers, have been left behind in the process.  They earn a decent living but it does not compare with the income gains that have been extracted by others.  For example, CEO used to earn about 40 times the pay of the average worker in their firm.  Today they earn over 400 times the wages earned by the average worker.  Its hard to believe that this can be explained by a widening gap in technical skills. 

Ideology As The Weapon In Our Current Civil War

The Dodd-Frank bill, that was written in response to the financial crisis, has left the implementation of the bill to banker friendly agencies like the Fed and the Treasury.  The consumer protection agency was intentionally designed to be independent of those agencies.  The banking industry does not want an agency that vigorously protects financial consumers.  It has purchased the support of the GOP to neuter the agency.  Senate Republicans are able to use the filibuster to block the nomination of a Director to lead the agency.  They use familiar ideological weapons to sell their obstructionism to the public.  They know, for example, that many consumers of financial products are not sophisticated consumers.  Republicans, however argue that consumers are the best judges of the products that they purchase.  There is no need for the central government to take away their freedom of choice.  Our current civil war is being waged with ideology.  This is the weapon of choice where the public cannot be coerced by the use of more lethal weapons.

Sunday, February 3, 2013

Cod Fishing In New England And The Short Term Versus The Long Term

Technology has increase the yield for trawlers used to catch Cod in New England.  As the supply of cod diminished, new technologies were used locate the remaining Cod.  In order to replenish the supply of cod, it is necessary to limit the amount of Cod available to the fishing fleet.  That creates financial problems for the fishing industry.  There will be less revenue available to support the ship owners, and many fishermen will lose their jobs.  Consequently, the fishing industry is resisting efforts to replenish the supply of Cod.  They would rather deal with the extinction of the Cod supply at a later date, than take the steps today that are necessary to preserve the Cod industry. 

The Scallop industry is thriving today in New England because the industry was forced to accept short term limitations on Scallop fishing.  They had strongly resisted efforts to replenish the Scallop supply when they were initiated.

Saturday, February 2, 2013

Publically Financed Private Charter Schools

This article reports on some studies on the performance of charter schools.  The research tells us what we might expect.  That is, some of them do OK and others do not.  The charter schools that under perform are not being closed down.  That is in violation of the charter that they were granted upon authorization.  This is not news either.  The concept of charter schools, and the use of vouchers to fund for-profit schools with public funds is entirely based upon ideology.  The fundamental premise is that the profit motive, and competition between schools, is only effective way to serve "consumers".  Public education is fundamentally flawed, and they should all be closed down and turned over to private enterprise.

Milton Friedman, and conservative economists centered in the University of Chicago's Economic Department were the architects of the privatization movement in the US.  Its important to understand their ideology because it has been successfully sold, with the help of the US government, to economists and governments in the rest of the world.  The basic idea is that private markets, unconstrained by government regulations, are the best of all possible ways of satisfying individual needs.  The true believers recognize that this is an ideal, and that there are few examples of markets that meet all of the assumptions in their idealized version of a free market.  Deviations from the ideal are regarded as market failures.  They regard government intervention in markets as the major source of market failure.  For example, the Great Depression is not possible in a totally free market system.  Therefore, there must have been a market failure.  Many conservative economists argue that government policies were responsible for the Great Depression.

The aftermath of the Great Depression was a disaster for the true believers in free markets.  The New Deal, that was developed by government in response to the Great Depression, increased the role on government in the economy.  This was, and still is, anathema to true believers in the ideal of free markets.  According the their belief system, the proper medicine should have been even less government involvement in the economy.  Unfortunately for them,  the economy turned around and most of the public came to believe that the New Deal facilitated the recovery.  That has not dissuaded the true believers.  They were provided a new opportunity during the cold war.  Communism, which is an idealized system, much like the system of free markets,  was their new enemy.  Fortunately for the free marketers,  the US government welcomed their assistance in the war of ideas.  For example, Milton Friedman and other economists from the University of Chicago were given the opportunity to inculcate free market ideology in South America.  Over one hundred graduate students in Chile were awarded PhD's from Chicago.  The Ford Foundation and government agencies provided the support and funding for their indoctrination.  The graduates from this program supported the military junta that overthrew the social democratic government of Chile, and they developed the economic plan that was followed by military dictatorship.  The government privatized social security, and it replaced the public education system with charter schools and school vouchers among other things.  It took a military dictatorship to implement the ideal of free markets in Chile.  Predictably, when things went bad in the economy there was a simple explanation for the problem.  Defenders of Communism argued that the ideal of Communism was never realized in the Soviet Union, and that is why it failed. The free marketers from Chicago made a similar argument.  Milton Friedman told the military dictator to work harder to achieve the idealized free market.

The threat of Communism has gone, but the free marketers have a new enemy.  They abhor social democracy.  They had no problems with a military dictatorship in Chile as long as it supported the ideal of free markets.  But democratic governments that regulate the economy;  provide social welfare programs, and deliver public services that could be turned over to private enterprise must be changed.  A democratic government, that does not support their ideal of totally free markets, must be subverted, or captured by private enterprise.  The ideology of free markets is still the religion that is sold to the public in the war against social democracy.  It is primarily an economic ideology, but the concepts of individual liberty, and freedom from centralized government, are part of the ideology that make it appealing to much of the public.  The government is the enemy of freedom, unless of course, when it provides funds to private enterprise, or when it shapes the rules by which the economy operates to benefit those who preach the virtues of freedom.

Friday, February 1, 2013

The Myth Of Inequality As Told By The Usual Suspects

Conservatives from right wing think tanks are arguing that even if incomes are becoming more unequal, consumption equality is more equally distributed.  Therefore, it does not make sense for government to make efforts to reduce income inequality.  Their arguments are presented in the article, as well as several rebuttals. 

Data are also presented in the article which shows that income inequality and poverty are worse in the US than almost all other industrial economies.

Do We Have Income Inequality By Design?

Many economists attribute growing income inequality to the greater use of technology.  They argue that those with technical skills are in greater demand and that has led to higher wage growth.  The greater use of technology has led to the decline in wages for the middle class.  Lower skilled middle class jobs are being replaced by technology.  This article looks at the evidence and it argues that we have adopted political policies which have led to greater inequality.  It provides some examples of those policies, but it does not discuss the connection between growing income inequality and the financialization of the global economy.

The Search For Austerity Success Stories

Many western nations have tried to grow by their economies by using contractionary fiscal policies. They support their actions by arguing that this will increase business confidence and foster growth.  Those who advocate expansionary contraction have cited several countries which have been successful after imposing austerity measures.  Unfortunately, they turn out to be poor examples.  Unemployment remains high in each of these countries.  Iceland has taken a different approach to its problems and it has been more successful in turning around a badly damaged economy.

How The Global Beer Business Operates Like Private Equity

Politicians and many economists extol the virtues of competitive markets.  This article is about the largest seller of beer in the US, and in many other regions.  It has not grown in the old fashioned way by producing a better mouse trap.  It has grown by acquisition.  It owns major brands from Europe and Mexico.  It purchased the maker of Budweiser, and it acquired 50% of the maker of Corona which gives it more than 50% of the US beer market.  It also acquires micro brewery's when their sales become significant.  There are significant advantages that derive from market share in the beer industry.  The advertising cost per barrel of beer is a barrier to entry into the national beer market.  Firms with large market share also purchase shelf space at large beer distributors.  Micro brewers may provide higher quality beer, but it is hard for them to expand beyond regional markets, and they are acquired when the reach a significant size. 

The business model for the firm that acquired the Budweiser brand is much like that of a private equity firm.  It cuts costs in the acquired firm, and it is able to raise prices in markets where it has dominant share. It is willing to give up market share in order to increase increase earnings margins, even when cost cutting includes the substitution of lower quality ingredients for higher quality ingredients.  Its biggest competitor in the large California market is the Corona brand.  It owns 50% of brewery but it competes against a domestic distributor.  It decided that the best way to maintain market share, without lowering its price, is to purchase the remaining share of the Corona brewery.  That gives it control over the pricing policies of the Corona importer in California.  (The government has brought an anti-trust suit against the firm to block the acquisition)

The behavior of this firm provides an another example of the financialization of industries.  This firm has little interest in the product that it sells.  It does whatever is necessary to increase its stock price and the stock options available to the executive team.  It is a financial engineering firm, rather than a product engineering firm.  That means revenue growth via acquisitions, and higher margins through cost cutting. This strategy has worked wonders for the top executives and shareholders.  It is only limited by the number of acquisitions it can make and the size of the global beer market.