Tuesday, April 30, 2013

The Sequester Is Not The Only Budget Problem In The US

Dean Baker is not happy with the sequester.  It will have an impact on the US economy.  The focus on the sequester by Obama, however, obscures the impact of his own budgets which propose large cuts in discretionary spending and entitlements.  The Democratic Party seems to have bought into the GOP strategy of focusing on deficit reduction.  They can't blame the Obama budgets on the GOP.

George Will Deny's Global Waming Again

George Will has been global warming denier for some time.  He, along with David Brooks are the most frequently appearing conservative pundits on TV talk shows.  This article describes the latest version of global warming denial by George Will.  It also tears apart his theory with some nasty facts which destroy his argument. 

OECD Economist Defends Austerity Strategy

According to OECD fiscal consolidation ( AKA austerity) is working in Europe.  The problem in Europe is poor communications with the public.  Leaders have to do a better job of describing the successes of fiscal consolidation.  The beatings will continue until morale improves.

Fiscal consolidation worked in Germany because it has an export based economy.  Its not possible for every nation in the eurozone to export its way out of trouble by reducing wages and prices to become more competitive.  Current account surpluses must be balanced by negative current accounts.  Moreover, it is a good idea for some nations to spend less and save more.  On the other hand, its a bad idea for every nation to do the same thing.  That strategy reduced aggregate demand in the eurozone and has led to a eurozone wide recession.

France Cuts Defense Spending In Response To Budget Crisis

This article outlines the reductions in defense spending in France.  The government has to choose between spending cuts which affect its sovereignty over foreign policy and financial constraints dictated by slow economic growth.

Austerity:The History Of A Dangerous Idea

Mark Blyth wrote a book with the title of this post.  He traces the idea of austerity back to the development of liberal economics in England.  There was a tension within the movement from the beginning about the role of the state in the economy.  It was understood that the state played a critical role in the economy, but that if the state were allowed to become too powerful it could overwhelm the economy.  The latest version of that tension was developed by Austrian economists who believed that booms and busts in the credit cycle were responsible for the business cycle.  They believed that the state should not attempt to mitigate the recessions that followed credit booms.  It should step aside and allow the creditors to who made bad investments to be liquidated.  This review of Blyth's book provides a commentary on this history.  The comments that follow the review are very interesting.  The debate is between those who believe that economists, and their ideas, are responsible for the austerity policies that have been adopted in many western nations, and those who argue that powerful interest groups choose the ideas that they want to pursue for their own self interest.

Sunday, April 28, 2013

Will Japan Fix Its Number One Problem?

Noah Smith praises Japan's new premier for doing what he said that he would do with monetary policy.  He wonders what he will now do with the problem that lowers Japanese productivity and keeps its population from growing.  Gender inequality is cited as Japan's biggest economic problem.

Paul Krugman Defends Himself Against The Ignoramus Strategy

This article by Krugman was inspired by a rant on TV by a venture capitalist about him.  The VC argued that his theories about the economy were too complicated.  In response, Krugman boiled down his theory about our current economic problems into five simple points.  You can decide whether Krugman's ideas are too complicated for VC to understand.

How Well Does The Market Value CEO's?

When JC Penny announced that Ron Johnson was going to be its new CEO its market capitalization increased by $1 billion.  After one and one half years of poor performance under Johnson, its market cap increased by $350 million when it was announced that Johnson would be leaving the company.  When JC Penny announced that the CEO who Johnson had replaced would be rehired its market cap increased by another $700 million.  If we use the stock market as the most efficient way to measure the value of a CEO we would have to explain why it was worth $1 billion to hire Johnson, and worth over $1 billion to fire Johnson and replace him with the CEO who preceded him.  It would appear that the stock market is not an efficient measure of what a CEO is worth to a business.  The market believes that CEO's are capable of rescuing a firm in a bad business and that weak CEO's are responsible for business failure.  They are rarely as important to a firm as the market believes.

Saturday, April 27, 2013

This is Paul Krugman's response to the Rogoff and Reinhart defense of their research that led to the conclusion that debt above 90% of GDP led to slow growth:

"OK, Reinhart and Rogoff have said their piece. I’d say that they’re still trying to have it both ways, on two fronts. They deny asserting that the debt-growth relationship is causal, but keep making statements that insinuate that it is. And they deny having been strong austerity advocates – but they were happy to bask in the celebrity that came with their adoption as austerian mascots, and never to my knowledge spoke out to condemn all the “eek! 90 percent!” rhetoric that was used to justify sharp austerity right now."

I like this response by the German economist Wolfgang Munchau in the Financial Times even better:

"The Harvard economists' tragedy is not the misuse of Microsoft Excel but the misuse of Microsoft PowerPoint"

Their well publicized Excel error produced bad arithmetic but the real damage was done by all of the presentations that they made which reinforced the 90% threshold message in their study.

Disclosure Rule By SEC May Mitigate Citzens United Ruling

The SEC is considering a rule that would require public corporations to disclose their contributions to groups like the US Chamber Of Commerce that use the money in political campaigns.  It is being resisted by corporations and by the Chamber of Commerce.  They argue that is it would be a rule against the freedom of speech.  Apparently, freedom of speech means that corporations should be able to speak in political campaigns without disclosing their speech to shareholders and to the public.

We will have to wait and see how the SEC will respond to an initiative that has wider public support.  It will be a test for the new head of the SEC who recently selected its new head of prosecution from a law firm that has been a legal consul to the large corporations affected by the new rule. The revolving door between the SEC and the law firms that defend large corporations has been a problem in the past.  Lawyers with SEC experience often take high paying jobs in the law firms that defend corporations after their tour of duty in the SEC.

Austerity Has Become A Bad Word In Europe

The struggling nations in southern Europe have seen their economies stagnate under the austerity regime.  The European Union has also lost popularity during the economic crisis.  Several important leaders have begun to soften their tone about the importance of budget cuts and tax increases.  They no longer use the word austerity.  It has been replaced by "fiscal consolidation".  Wordsmanship may not be enough, however, to turn things around in Europe. The tendency has been to make modest adaptations to new realities.  That has not been a winning approach during the worst recession since the Great Depression.

Friday, April 26, 2013

Are We Approaching The Limits To Growth?

This article summarizes some the arguments against the assumption that global economic growth can be sustained at high levels.  It argues that economic growth over the last 30 years has been based upon unsustainable levels of private and public debt.  It also touches upon the limits to growth via population growth, which is high in poor countries and low in richer countries, and through rising productivity.  It also touches on the problems or resource scarcity.  It even raises the argument that Malthus made about the inability of food production to keep up with population growth. 

Environmentalists have been arguing for a policy of zero economic growth in order to save our planet. Its unlikely that politicians will attempt to sell that idea to the public.  It is more likely that it will be imposed upon us by nature and by other factors that we are unable to control.  Unplanned reductions in economic growth may be worse than more thoughtful approaches to limitations on growth.  

Thursday, April 25, 2013

What's Driving Stock Prices Upwards In US?

This red line in this graph shows S&P index stock price.  It tracks very well with the level of stock buybacks and dividends since 2001 when the dot.com bubble burst.  During the bubble, investors were purchasing stocks in expectation of earnings growth.  Since then, the market has been driven by corporate buybacks and dividends.  Money that might have been invested by S&P firms is being used to reward shareholders.  That has been good for shareholders.  They gain from stock price appreciation and from dividend payments.  Many firms are borrowing money at low interest rates to reward shareholders with buybacks and dividends.  The interest is tax deductible.  It would be better for the economy if corporations used their cash to expand operations. 

The Economic Argument Is Over

This commentator declares victory for Paul Krugman in the economic debate he, and others, have been having with the Austerians.  The political debate, however, has been lost.  That debate depends upon public opinion and the public has been convinced that government debt is like household debt.  It also believes that saving is good and that borrowing is bad.  The leaders in the Democratic Party have been unwilling to challenge public opinion.  They recognize that public opinion is created by the media which is controlled by the Austerians.  They don't really care about government debt.  They only care about who pays the taxes, and who benefits from government spending.  They also want to weaken the regulatory branches of government that limit their freedom to plunder.  That is how they define economic freedom.  Democracy is the enemy of plutocracy when it really works to limit their freedom.

Wednesday, April 24, 2013

Koch Brothers Plan To Turn Print Journalism Into A Version Of Fox News

The billionaire Koch brothers plan to purchase eight newspapers.  That will give them access to two of the largest news markets in the US: LA and Chicago.  Along with Rupert Murdoch, who owns Fox News and the Wall Street Journal, right wing billionaires will have more weapons to align public opinion in the US with radical right wing opinion.  That is one of the miracles of the market place.  Everything is for sale.  Newspapers don't make a lot of money but the Koch brothers don't need anymore money.  They are more interested in power.

Paul Krugman Does Not Plead Economic Ignorance

Paul Krugman believes that we know how to fix our economic problems but that we are intent upon making them worse.  We know what to do when there is a run on the banking system but we were not aware of the growth in the shadow banking system.  There was a run on the shadow banking system and we figured out how to fix it with a very large bailout.  Economics 101 tells us what to do in a recession when we are at the zero bound.  We are not doing that in the US.  We know what an optimum currency should look like and Europe does not look like that.  The knowledge that we possess is not being used very well.  Our inability to use what we know has created a lot of unnecessary pain for millions of people.

Some Macroeconomists Plead Ignorance

The IMF hosted a conference of macroeconomist's to learn more about what can be done to address our economic problems.  There is high unemployment in most countries, but there were few suggestions about how to increase employment.  A Nobel prize winning economist from the US argued that US economic policy was just about right. The Fed has been keeping interest rates low and there was nothing more that could be done. We have had six recent financial shocks to the economy, but the chief economist from the IMF claimed that we don't understand financial stability.  Perhaps the best approach is to continue to do what we have been doing.  That means that we wait for a financial shock to occur and then we try to fix it.  Nobody had any ideas about how to keep the next financial shock from hitting weakened economies that have limited resources to address the next shock.  The fixation on reducing public debt has been counterproductive.  Some troubled economies have been forced to cut government spending and to raise taxes.  Those countries have seen their debt to GDP ratios increase.  Countries like the US and the UK which can borrow at very low interest rates are also cutting government spending and raising taxes in order to reduce their debt to GDP ratios.  The fetish on debt reductions has a higher priority than cutting unemployment.  It will very likely result in lower GDP and higher debt to GDP ratios as well.

Keynes once said that a real practical goal for the economics profession might be to become as good as dentists at solving practical problems.  It looks like the profession has not made much progress towards that goal. Perhaps that is because many economist have forgotten what we have learned from history.  Its almost as if they learned nothing from the Great Depression.

The Preferences Of The Wealthy Are Really Different Than Those Of Ordinary Americans

Scott Fitzgerald believed that the wealthy are really different than ordinary Americans.  Ernest Hemingway explained that they are different.  They have more money.  It turns out that the difference is more complicated than Hemingway believed.  The wealthy have a different perspective on many issues than ordinary Americans.  This article reviews some of those differences.  The preferences of the wealthy line up very well with the budget proposals that have been made by Paul Ryan.  Ordinary Americans  have a much stronger preference for social security, and government supported healthcare than the wealthy.  There are other differences as well and some similarities.  Of course, self interest explains some of the differences but they are more nuanced than naked self interest.  The wealthy don't have much use for government intervention in the economy.  That is their playground, and the government is not invited to play.

Why Has Paul Krugman Made Better Economic Predictions Than Austerians?

Noah Smith has a wry sense of humor.  In this post he portrays Krugman as a cartoon character who has slain all of his various opponents.  They keep predicting inflation and high interest rates in the US.  He tells that that they are wrong, and they have been consistently wrong.  Krugman claims that his secret weapon is a simple Keynesian model of the economy.  Noah Smith argues that he could not have defeated the austerians by only using that weapon.  Smith believes that Krugman understands what has happened in Japan and that he is using Japan as his model.

The bottom line is that Krugman has done a much better job of predicting what will happen in the economy than the Anti-Keynesian's.  One wonders why the Anti-Keynesian's stick to their bad predictions even when they continue to lose their bets.  It may simply be a difference in philosophy.  Some people just hate government intervention in the economy.  They expect that whenever government attempts to fix something it will be broken.  Its also possible that herd behavior is at work.  I was touting Krugman to one of my friends and he was not interested in Krugman's predictions.  Most of his friends hate Krugman, and he said that anyone who is so widely despised must be wrong.

Tuesday, April 23, 2013

Climate Change, Resource Scarcity, And The New World Order

The US intelligence agency added the threat of resource shocks to its list of major threats.  Resource shocks were in the same category as global terrorism, cyberwarfare and nuclear proliferation.  This signals our entry into a new world order dominated by struggles over access to affordable natural resources.  This article describes how the increasing demand for scarce resources driven by population growth, urbanization, and rising demand for industrial production in emerging economies, will not be easily satisfied by growth in the supply of critical natural resources.  To make matters worse, climate change is listed as a threat multiplier.  It will exacerbate the problem of resource scarcity.  Competition for critical resources and rising prices for scarce resources often leads to warfare and political turmoils.  Its hard to imagine how our disjointed, and short term oriented political and economic institutions, will be able to cope with a future dominated by resource scarcity.

Sunday, April 21, 2013

Does A Self Regulating Market Produce Desirable Results?

Brad DeLong is an economic historian.  He gives his answer to this question by reviewing the ideas of some thoughtful economists from the past.  Any article that includes Keynes, Hayec and Polanyi in it will be thought provoking.  I am traveling today and I brought a book by Polanyi with me.  If you are in a philosophical mood, there are some choice ideas about economics in this short article.  You may have to read it twice, but the time will be well spent. There is no such thing as a self regulating market and that is a good thing. Our problem is not to let the market regulate itself.  It is to do a better job of regulating it.  Some of this can be learned from economic history.

Saturday, April 20, 2013

The Stupid Cruelty Of The Creditor

It used to be customary in the UK to put debtors who failed to pay their bills in prison.  That was not good for either party.  A debtor in prison is less likely to pay back the creditor.  Moral hazard was reduced by the threat of prison, but that did not enable creditors to collect payment from those that defaulted.

This article argues that the penalty being imposed on Greece by creditors is much like putting the country in prison.  The debtors and their children are suffering and the structural changes imposed on Greece are making it less likely that the creditors will be repaid.  Economic growth is necessary for debt repayment.  There are examples from recent history where debtor nations were allowed to eventually repay debts after their economies had the opportunity to recover.

Paul Krugman Attacks Tyler Cowen's Defense Of Reinhart And Rogoff

Tyler Cowen, who is the Director of the Mercatus Center at George Mason University, and the host of one of the most popular economic blogs, offers a unique defense of R&R.  He argues that some pandering is necessary to maintain one's prominence in the media market.  R&R may have overstated their position by concluding that economic growth declines when sovereign debt exceeds 90% of GDP, but that helped them to attract public attention to their work.  Paul Krugman explains why that is a very weak defense of R&R.

Tyler Cowen's defense of R&R is also a defense of himself.  The Mercatus Center is funded by the Koch brothers.  It takes libertarian positions to attack climate change proposals and other progressive ideas that are not appreciated by contributors to the Mercatus Center.  He is very good at adapting libertarian philosophy to his purposes.  In other words, he operates much like R&R.  They are very smart people who have adapted to the real world of celebrity.  

The Political Economy of Inequality And Climate Change

Larry Summers responds to two prominent political scientists who argue that political dysfunction is our major problem and that he should stick to economics.  He agrees with them that our political situation could be better, but he argues that the economic problems that we face are complex and that they would be difficult to solve even in a better political climate.  He does not believe that there are easy ways to deal with rising inequality and climate change which are among the most difficult economic problems for which we must find solutions.  He even argues that our system of government, with its checks and balances, does keep us from making better economic decisions but it also makes it more difficult for politicians to make stupid decisions. 

This debate illustrates the difficulty of thinking about politics and economics in isolation from each other.  They are necessarily intertwined.  Economists like to pretend that it is a positive science that is devoid of value judgements.  They pretend that efficiency is its only objective, but it is a mistake to believe that efficiency is an end in itself.  An efficient economy does not necessarily maximize well being.  Moreover, a political system that attempts to maximize well being must also be cognizant of economic means and outcomes.  We need more political economy rather than less.

How Do We Explain What Happened In Boston?

Now that the terrorists have been killed or captured, we are struggling to understand how they could have committed that heinous crime against innocent people.  This article offers a description of Chechen refugees.  Around 20% of Chechens are refugees.  They cannot find peace in their own country, and terrorism is no stranger to many of them.  Many have also succumbed to radicalism within their faith.  Like many others who seek to destroy their imaginary enemies, they have no difficulty finding weapons to empower them.  Let us hope that we can limit the breeding of terrorists, and do more to contain those who seek empowerment through destruction.

Thursday, April 18, 2013

Austerity After Reinhart and Rogoff

The Financial Times provides a platform for economists to explain why the study by R&R should not have been used to make public policy.  The fiction of the 90% threshold, beyond which the debt to GDP ratio can surpass without harming economic growth has been destroyed, but the damage will be hard to correct.  Unlike the US, the UK or Japan, some countries are unable to borrow at affordable interest rates,  and the forces in the US and the UK that are pushing austerity are doing so for political reasons.  They want to lower the progressiveness of the tax system and to reduce government spending on programs that do not benefit the super-rich.  The pundits that used R&R to create public opinion in favor of austerity will find other economists to defend tax cuts for corporations and the super-rich along with cuts to government social welfare programs.  David Brooks, George Will and Robert Samuelson have no trouble finding the necessary help.

The Hollowing Out Of Middle Class Jobs

Manufacturing output has been growing but manufacturing jobs have been shrinking.  Productivity has been decreasing the need for labor, and offshoring labor to low wage countries has also cut the demand for manufacturing labor in most industrial economies.  The loss of manufacturing jobs also leads to lower demand for jobs that support the manufacturing process.  Many of these jobs are high skilled jobs that provided middle class wages.  These are structural changes in advanced economies for which there are no easy solutions.  This article provides data which describes the problem and it alludes to some of the ways to mitigate the problem.

Some economists argue that we are undergoing changes similar to those that we experienced when we moved from an agricultural economy to an industrial economy.  We needed fewer workers to produce that food that was needed, and those workers were able to take higher paying jobs in manufacturing. That led to rising prosperity and less income inequality.  The structural problems that we now face are very different.  There are few jobs available, that pay middle class wages, to those who are no longer needed in our industrial economy.  Most of the new jobs that have been created are in the lower paying segment of the services economy.  Of course we have more jobs in technology areas that require better educated workers, but the number of high skilled jobs that have been created is small relative to the number of jobs lost in manufacturing and in manufacturing support functions.  Moreover, many jobs in technology are also being offshored to low wage countries.  For example, IBM has almost as many employees in India as it has in the US.  Many large corporations have contracted with service companies, like IBM, for information technology support.  IBM and other information technology service organizations can provide those services at lower cost by doing some of the work in India, and by hiring temporary employees, many of whom are from other countries, at lower cost.  There are large numbers of highly skilled information technology workers in the US who cannot find jobs in their field.  They have been replaced by lower cost workers with the same skill set.

Some of the solutions to these problems discussed in this article will only make things worse.  For example, we can lower the cost of higher education by using information technology to deliver many courses that lend themselves to commodization.  That will increase educational opportunity, but it will also eliminate many jobs in the teaching profession.  Moreover, increasing the number of college graduates does not address the loss of jobs due to rising productivity and globalization.  The real problem that we have is that many of our problems are the result of changes in corporate organization and behavior that governments may not be able to address.  Maintaining political stability as these market forces play themselves out is going to challenge our political system.

Wednesday, April 17, 2013

A Shameful Day In Washington

The majority of US senators voted for a bill that would help to limit access to guns.  However, a majority is not sufficient to get a bill passed in the Senate.  Opponents of the bill used a filibuster to keep the bill from moving through the legislative process.  It takes a super-majority of 60 votes to defeat a filibuster.  Four democrats voted with 90% of the republican senators to sustain the filibuster.

80% of the public supported the proposed bill,  and the vote in the Senate was 54 to 46 to end the filibuster.  We have a political system that is designed to prevent legislation, supported by the public, from receiving a vote on the Senate floor.  It is very difficult to get a super-majority on any legislation that is opposed by an influential lobby.  The NRA opposed the bill and it lied about the content of the bill. Many of the senators who opposed the bill probably thought that it would help to limit the criminal use of guns in America. Unfortunately,  many of them have to run for reelection in Red states that oppose gun control.  They give a higher priority to surviving an election than they do to serving the public interest. 

Does High National Debt Cause Slow Economic Growth?

Reinhart and Rogoff tried to answer that question by looking at historical data.  They found a correlation between national debt and slow economic growth.  They concluded that high national debt caused low economic growth.  They also concluded that growth was particularly constrained when national debt reached 90% of GDP.  Deficit hawks loved this result.  Pundits and conservative  politicians argued that it was imperative to prevent national debt from reaching the 90% threshold established by R&R.

One of the problems with their conclusion is that correlations do not determine the direction of causation.  It is quite possible that low economic growth causes high national debt.  Nevertheless, the conclusions from the R&R study were widely accepted.  A new law in economics had been established.  National debt exceeding 90% of GDP would lead to low economic growth.

A new study found many several mathematical and methodological problems in the R&R data.  It showed that the impact of national debt on economic growth was much lower than that reported by R&R.  It also raised questions about the direction of causality.  R&R admitted some of the errors in their study but they defended their conclusions in an article published by the Wall Street Journal. Paul Krugman criticizes their defense in this article, and he tests the direction of causality by plotting the data by country.  He found that the relationship between national debt and economic growth was primarily determined by the correlation between debt and low growth in Japan and Italy.  It is well understood that economic growth in each of these countries has been affected by powerful factors other than national debt.  Low population growth and demographics in both of these countries is having a large impact on economic growth.  It is more likely that rising national debt has been caused by low economic growth in Japan and Italy.

Economists will be debating the validity of these studies on the relationship between economic growth and national debt for some time.  Unfortunately, this is not simply an academic question.  The R&R study was used to defend austerity programs in Europe and the US.  Politicians used the R&R study to conclude that reducing government debt would produce economic growth.  The R&R study encouraged the belief in expansionary contraction.  The damage has already been done.

Banker Bonuses Capped In Europe

The EU voted to cap banker bonuses.  They cannot exceed base salary in most cases.  Banks will respond by raising base salaries, but the new law should reduce excessive risk taking in the industry.  Bonuses were linked to performance, and performance was linked to risk. 

Tuesday, April 16, 2013

IMF's Map Of Global Economic Growth Rates In 2013

The IMF reduced its GDP growth forecast for 2013.  The map below shows anemic to low GDP growth in most parts of the world.  South America, China and parts of Africa are exceptions to that rule.

Why Home Prices Might Rise In Land Constrained Areas

This article rebuts Robert Shiller's claim that real home prices have not appreciated in the US.  Shiller takes the position that construction productivity is improving and that existing homes are less desirable over time to make the case against housing as an investment.  The value of a home, however, is also dependent upon changes in the value of the land on which the home resides.  In many metropolitan areas there is a scarcity of land.  This limits the development of new housing to meet the needs of an expanding population.  In highly desirable metropolitan areas, land prices will rise.  Increases in the value of land will cause real home prices to rise in those areas.  On the other hand, land prices will fall in less desirable areas and real prices will fall in those areas.  That has happened in many rust belt cities that have become less desirable as a result of economic decline and lower employment opportunities.  Location is an important variable in the determination of home prices. 

The IMF Is Critical Of Fiscal Policy In The UK and US

The IMF has a well earned reputation for championing fiscal responsibility.  It has recently been critical of austerity measures during the recovery from recessions in Europe and the US.  It argues that monetary policy has been helpful but that its effects have been counteracted by the focus on fiscal contraction.  The IMF report singled out fiscal policy policy in the UK and the sequester in the US as prime examples of the improper use of austerity in weak economies.

How Europe Got In Trouble And The Problems Of Recovery

Paul Krugman provides a brief summary of the successes and failures of the common currency regime in the eurozone.  The common currency union helped to fuel the real estate bubbles in the eurozone.  The bursting of the bubble created problems for banks and sovereign borrowing costs escalated. Costs and prices had also risen faster in the boom countries.  This made them less competitive.   It was not possible for the troubled nations to depreciate their currencies under the common currency.  Painful structural reforms were imposed to improve competitiveness and to contain sovereign debt to GDP ratios.  The medicine has not improved the debt to GDP ratios and there has been no economic recovery in the problem countries.  The ECB has provided some support by providing liquidity but fiscal policy has been counter productive.  The common currency worked well during good times but its problems have been exposed by recessions.

Eurpean Central Bank Study On Comparative Household Wealth Creats Bombshell In Germany

The ECB study showed that median household wealth in Germany is much lower than median household wealth in the countries that Germany is supporting with financial assistance.  This was reported in one of Germany's leading newspapers and it has created a furor.  German's don't understand why they should bailout nations that are wealthier than themselves.  This article describes the ECB study, and the reporting in the German press.

Germany Is A Very Wealthy Country But Its Wealth Is Unequally Distributed

The average household wealth in Germany is much higher than median household wealth.  Moreover, the ratio between average and median household wealth is higher in Germany than in other eurozone countries.  That means that German household wealth is more unequally distributed than it is in other countries.  Average household wealth in Germany is higher than median household wealth because the median is a less distorted by distribution extremes than the average.  For example, if Bill Gates walked into a room the average wealth would increase dramatically.  Median wealth would hardly change at all.  Another reason for the low household wealth data in Germany is that home ownership is the largest source of wealth for most households.  Home ownership in Germany is less common than it is in most other eurozone countries.   Germans have much higher median incomes than households in other eurozone countries but real estate wealth is also less equally distributed in Germany. The median household in Italy and Spain is land rich and income poor.  The unemployment rate is also much higher in Italy and in Spain.  Germans are much better off than than those in other eurozone countries.  That does not mean that they should relish the idea of bailing out the banks in those countries, and the governments that are in financial trouble.  They should do so only if they believe that protecting the euro is in their interest.  That is a tough calculation to make.

Monday, April 15, 2013

Scapegoating Germany For Problems In Eurozone Is Counterproductive

Germany is being blamed for many of the problems in the eurozone.  This is part of a renationalisation that has been taking place in the eurozone.  German's have been asked to provide financial support to nations that have done a poor job of managing their economies.  They wonder why they should continue to do so.  The nations that have benefited from German financial support blame Germany for imposing painful structural reforms on them in return for support.  The renationalisation of the eurozone is the opposite of what is needed to save the euro.  There needs to be greater political and economic integration rather than disintegration.

Some Establishment Republicans Support Carbon Taxes

This article describes the carbon tax proposal recently published in the WSJ.  It was written by two Republican's who represent the old GOP establishment.  It is also getting attention from some conservative think tanks.  It will be resisted, however, by Tea Party populists.  They don't believe in climate change, and they oppose any form of taxation.  It is part of their religious fundamentalism to be against anything that smells like a liberal proposal.

Why Major Corporations Prosper And Small Businesses Suffer

Corporate profits and stock prices of the largest US corporations have grown substantially in our current economic environment.  They have been able to grow their revenues and profits in international markets while cutting jobs in the US.  Their stock prices also benefit from government policies which keep interest rates low and encourage investors to put their money in the stock market.  Government policies work fine for them.  Their primary concern is to lower their taxes even further and to encourage cuts in social welfare programs.  Small businesses are more dependent upon consumer demand in the US.  They don't benefit from rising stock prices and they can't cut costs by using lower cost labor overseas.  Both of our political parties are pro-business when it comes to our largest corporations.  Neither of them care much about small businesses.  Moreover, most of the public does not make a distinction between large multinational corporations and small businesses.  They believe that what is good for large corporations is also good for small businesses.

Bitter Medicine In Europe Has Political Risks To The Euro

This editorial describes the political problems that are arising in Europe.  Structural reforms have not solved the problems of weak demand and high unemployment.  In fact, they have made things worse.  It will be hard for European leaders to reverse the course that they have taken because there is little public support in Germany for providing the support that is needed to save the Euro.

Replacing Corporate Taxes With The Payroll Tax

Ronald Reagan increased the payroll tax in the 1980's.  It is a regressive tax because the tax rate decreases as income rises.  The payroll tax accounts for about one third of federal tax revenues.  The regressive payroll tax replaces the income lost from the corporate tax which used to be a major source of federal tax revenue.  We would have not budget problems if corporations contributed the same share of federal tax revenue that they paid before the policy changes made in the Reagan administration. 

The major argument that has been made in defense of corporate tax cuts is that they encourage investment.  There has been no change in the rate of corporate investment since the tax cuts.  The primary beneficiaries of the tax cuts have been corporate executives and shareholders. 

Joe Stiglitz Explains How The US Tax System Has Become Less Progressive

Income inequality in the US has increased while the tax system has been made less progressive.  This is a double whammy for most Americans.  Their share of income has been decreasing while their share of the tax burden has been increased.  Most of the tax loopholes benefit the super-rich.  They are not available to the typical millionaire.  We would not be faced with reductions in social welfare programs if these loopholes were closed.  Stiglitz does a good job of identifying the major loopholes that need to be closed.

Sunday, April 14, 2013

A Grim View On The Outlook In Europe

Tim Duy usually focuses his comments on the US and the policy's of the Fed. In this post he turns his attention to Europe.  Austerity has only made things worse for the troubled economies on the periphery and core economies in France and Germany have not been doing well either.  Europe seems to be committed to bad economic policies that are not working, and their leaders don't seem to have any alternatives to the failed policies.  Currency devaluation is not available to the struggling economies and structural reforms have not worked economically, or politically, in the at risk economies.

Did Margaret Thatcher Send Britain Back To The Future?

Martin Wolf, writing in The Financial Times, argues that Margaret Thatcher's perspective on the economy was a 19th century point of view.  It was a view dominated by her desire to limit the role of the state in the economy.  One of the consequences of financial market deregulation has been less spending by business on R&D and innovation which is at the heart of the 21st century economy.  The City of London, which is Britain's Wall Street,  is focused on profit maximization in the current quarter.  CEO's manage the stock price more than they manage for the future.  To do otherwise, would cost them their jobs.  This also mimics the 19th century British economy which was a rentier focused economy.  The wealthy lived off of their investments and finance dominated the economy.

Wolf's description of the British economy after Margaret Thatcher seems much like the US economy after Ronald Reagan.  There has been technical innovation in the US economy, but the share of output and profits going to the finance sector has grown substantially.  The behavior of our large corporations has also been driven by stock price management.  There has been less spending on R&D and less risk taking by large firms.  A larger share of profits has been diverted to dividends and stock repurchases which increase shareholder value in the short term.

Predicting Changes In Home Prices

Robert Shiller is one of the originators of the Price-Shiller index that tracks changes in home prices.  He does not believe that homes should be regarded as investments.  Homes should decline in value because they wear out and become less fashionable over time.  Construction costs have also declined as construction has become more productive.  Homes built in the future will be less expensive to build than the home that you own.  Most of the increase that we have seen in home prices over time is due to inflation.  There has been little real growth in home prices when prices are corrected for inflation.  Of course, home prices are subject to booms and busts.  Prices usually fall back the where they were before the boom when the next bust occurs.  Its hard to predict when the next boom will occur.

Stocks are a better investment because firms will use some of their profits to invest in growth.  Profits should increase over time and that should be reflected in stock price appreciation.  Of course, some firms will not make productive investments but the stock market, as whole, should appreciate over time.  The combination of stock price appreciation and dividend payments provides a better investment opportunity than investing in a home.  We should view home ownership as alternative to renting. 

Saturday, April 13, 2013

What Is The Natural Rate Of Interest?

Tyler Cowen, who is the director of the conservative Mercatus Institute at George Mason University, is unhappy because the Fed has been keeping interest rates too low for his taste.  He claims that current interest rates are below the "natural" rate.  Paul Krugman reminds us that the natural rate of interest  was defined as the rate of interest required to produce full employment.  Since we are not at full employment, the interest rate cannot be below its "natural" rate.  Tyler Cowen must have redefined the natural rate more to his taste.

High Tech Manufacturing On The Rise In US

This article summarizes the research on manufacturing that has been on the upswing in the US.  It is being done in the US to take advantage of lower energy costs, shipping expense etc.  It won't produce the number of jobs that it did before, but each manufacturing job is worth 1.48 jobs because of related activities that support the manufacture.  At least two years of high tech training are required for jobs on the shop floor.  The manufacturing of the future will not be a source of jobs for low skilled workers.  They also account for 30% of productivity growth.

Friday, April 12, 2013

The Shrinking Federal Budget Deficit

The media is full of stories about the federal budget deficit.  Most of the pundits tell us that the sky is falling and that out of control federal spending will ruin the economy and turn America in Greece.  This report from Goldman Sachs tells us that the sky is not falling and that America is not turning into Greece.  It has not been widely reported because it is not part of the conventional wisdom that passes for knowledge.  The federal budget deficit has declined faster in the last 12 months than it has in any period since the end of the Korean War.  Spending is down and tax revenues are up.  Part of the increase in tax revenues is due to economic recovery;  the rest is the result of fiscal policy.  The payroll tax has gone back up and some of the Bush tax cuts have expired. 

Thursday, April 11, 2013

Progress On Tax Havens

France announced an intention to close down access to tax havens by French citizens.  Luxembourg announced that it would cooperate with foreign governments seeking information about secret bank accounts in their country on the same day.  Britain has also moved to make it more difficult to use small islands nearby as tax havens.  It is a bit embarrassed by the number of islands from its colonial empire that are used as tax havens.  The government claims that it has no authority over the BVI and the Cayman islands which are used extensively as tax havens.  All of the media attention on this subject may make it more difficult for the super-rich to avoid taxes. 

Tuesday, April 9, 2013

On The Road Again

I will be traveling for the next two days.  Posts will resume near the end of the week.

A Canadian Perspective On Freedom

Freedom is one of the most abused words in the English language.  The Heritage Foundation ranks Hong Kong as the most free nation in the world.  Sweden is regarded as one of the least free countries in the world.  There seems to be little difference, however, between the perceptions that people have about their personal freedom.  The survey reported in this article shows that American's do not have a stronger perception of personal freedom than individuals in other countries.  Freedom, as defined by the Heritage Foundation, is the freedom of business from government regulation.  Perhaps that is why America has  lower social mobility than the nations praised by the Heritage Foundation.  Americans are free to remain in the economic class to which they were born.  The Heritage Foundation works hard to preserve that freedom.  Those who fund Heritage with tax deductible donations are all for that kind of freedom.  It is important to perpetuate a myth of freedom that keeps others in their place.

David Brooks Praises Margaret Thatcher's Conservative Resolve

David Brooks is William F. Buckley's heir apparent to the title of America's most articulate conservative pundit.  He paints an heroic picture of Margaret Thatcher in his eulogy to her.  According to Brooks, she saved Britain from social democracy and revived a struggling nation.

The Other Side Of Margaret Thatcher

There was more that one side to the Gray Lady.  This was not her pretty side.

Monday, April 8, 2013

Economic Problems in Portugal Worsen

Austerity has been imposed on Portugal in order to lower its debt to GDP ratio.  Cuts in government spending have lowered its debt burden but the debt to GDP ratio has increased.  That is because GDP has declined faster than debt has been reduced.  The government continues to support the austerity program that its Constitutional Court has declared unconstitutional.  It has no choice if it wants support from the ECB. 

The situation in Portugal, and in most of the southern nations, has responded well to the medicine demanded by the EZ Troika.  The medicine has not worked, but the Troika cannot admit that it has imposed bad medicine, and the affected governments are not in position to express unhappiness with the prescribed remedy for their economic problems.

The Ideology Used By Republican Governors Against Obamacare

Someone once said that "the poor are perfectly free to sleep under bridges".  That was said in response to those who use the concept of freedom to protect the interests of the privileged.  Republican governors are abusing the concept of freedom to defend their lack of support for Obamacare.  They argue that the poor are perfectly free to live without health insurance.  According to their ideology, Obamacare takes aware their freedom.  Paul Krugman makes a similar argument in this article.   The concept of freedom has been so thoroughly abused by conservatives that I refuse to listen to anyone who uses the word.  That is a pity because it used to mean something worthwhile.

Elegant Economic Models Versus Ugly Models

The macroeconomic models most frequently used by central bankers are not good and prediction and they may not be very useful for making economic policy decisions.  However, they are mathematically elegant and several Nobel Prizes have been awarded to economists who developed the models.  Mathematical elegance appears to have prestige value even when it is not useful.  Some would like the social sciences to be more like physics which is regarded as the real science.

Even in physics, however, elegant models are not very useful in explaining the messier world in which real things get done.  For example, there are no equations that can describe the operation of a nuclear reactor.  On the other hand, crude computer simulations are able to do a decent job of predicting weather patterns.  That may be a more promising path for economists to pursue.  An example is given of a simulation which did a better job of describing the real estate boom than the macroeconomic models that are commonly used to make economic policy decisions.  The macroeconomic models were recently used to argue that the housing boom was caused by central bank policies which kept interest rates low.  The computer simulations found that the interest rate effect was small in relation to the leverage effect.  The ability to purchase a home without a down payment was the major cause of the housing boom.  It opened the market to a huge number of potential consumers who had no savings. 

While this article makes the case for messy computer simulations.  I wonder how necessary they are.  Almost any real estate agent would have made the same prediction.  Cutting interest rates has the effect of reducing monthly payments.  That will expand the market for those who have enough cash to make a down payment.  But it does little to open the market up to the vast number of households with inadequate savings for a down payment.  Moreover, the low interest rates were not as important as teaser loans that artificially lowered interest rates for the first few years of the loan.  It does not require a whole lot of science to explain the real estate boom.

Secret Bank Accounts In Tax Havens Create Uproar In France

As more information about secret bank accounts becomes available there may be some reaction by the public.  A government official in France was caught in a lie about a secret account that he had in Switzerland.  The right wing has been given an opportunity to be critical of the socialist government that promised to clean up government in France.  They have taken advantage of it. However, it may come back to haunt them.  The use of secret bank accounts is widespread and the press is bound to make the public more aware of the ways in which the wealthy avoid taxes.

Mitt Romney's use of tax havens became an issue in the US presidential election.  He argued that they are perfectly legal.  The public seemed to accept that explanation.  As more information becomes available about the extent of their use by corporations and the super-rich even the jaded US public may sense that something needs to be done about tax avoidance.  Governments have not done all that they can do about the problem because so many of their supporters take advantage of weaknesses in the tax laws, as well as weak enforcement of laws that do exist. 

Saturday, April 6, 2013

Adair Turner's Keynote Address At INET

This a link to the video of Turner's address at the 4th Plenary meeting of INET.  It focuses on the link between monetary issues, banking and the problems of inadequate aggregate demand.  The presentation is technical but very well done.  With a bit of effort it can be understood by folks without a background in economics.  He argues that our financial system is inherently unstable.  Debt contracts are very different from equity contracts.  The value of the collateral supporting debt can rise or fall in value.  For example, real estate can rise or fall in value.  Therefore, debt financing is pro-cyclical.  In good times we over value the collateral, and over-issue credit. In bad times we are reluctant to issue credit and over-leveraged households and firms do not demand credit.  When we purchase equity we know that it can rise or fall in value, but the value is not based upon the price of the underlying collateral which is inherently unstable.  Moreover, banks create money when they make loans.  Therefore, the money supply is controlled by private banks which are not well regulated.  He discussed the pros and cons of fractional reserve banking and argued that reserves should be in the 25-30% range instead of 10%, and that capital requirements should be much higher.  This would limit the degree of leverage, but it reduces the risk of deflation and weak aggregate demand that we are have experienced as a result of over-leveraging.

He made a radical proposal about how we should increase aggregate demand.  We should fund government fiscal deficits financed by central bank money.  The US and Japan are doing this with monetary policy but fiscal policy has not taken advantage of lower interest rates.  He suggested that taxes might be cut and financed by printing money.  There is a taboo against this because governments can be irresponsible.  It becomes a political economy issue rather than a pure macro issue.

Friday, April 5, 2013

Interactive Video On How To Set Up And Use A Tax Haven

CBC News in Canada has provided an interactive video that describes how tax havens are used.  Its instructive and interesting to use.  It lets you you select a tax haven and then it provides the options available at that tax haven.  After selecting the option, it takes you through the other steps.  It also provides information about the risks in each of the steps.

Japan's Central Bank Takes A Huge Step To End Deflation

The Japanese central bank has decided to outdo the US Fed in its use of monetary policy to achieve price stability.  Ordinarily, price stability for central banks involves the use of monetary policy to reduce inflation.  Japan has had the opposite problem.  It has been in a deflationary spiral for many years.  The central bank is going to purchase a larger quantity, and a wider variety of financial assets, in order reach a target inflation rate of 2%.  The increase in the money supply may increase output, and it will cut the real cost of Japanese debt.  We are about to witness a grand macroeconomic experiment.  Japan has the third largest economy in the world.  It will be interesting to see how effective monetary policy can be in an economy with deflationary expectations.

Krugman Delivers Another Primer On US Debt Versus Household Debt

The US has a large trade deficit, and a budget that are partially financed by nations that purchase US treasuries with the dollars that we send to them.  The US holds assets in other countries that create an inflow of funds to the US that exceed our payments to foreign nations.  Consequently, the interest that the US government pays out to fund its budget deficits is paid to American households and firms.  Our debt is a source of wealth and income to Americans.  It might be better to fund government spending with taxes, but taxes decline during recessions and mandated government spending on social welfare programs increases.  Recessions would only deepen if government attempted to balance its budget during a recession. 

Private borrowing has increased dramatically since 1980.  Government debt has also increased which is partially the result of tax cuts.  Therefore, the total debt in the US, in relation to GDP,  has increased by 200% since 1980. That has created a problem of overleveraging.  Overleveraged households and firms are less able to spend. 

Krugman does not discuss the increase in household debt and overleveraging.  Some of the increase in debt is the result of stagnant growth in wages and the increased use of credit to fund higher education and household consumption.  Mortgage debt also became a much higher percent of household debt during the real estate boom. 

Thursday, April 4, 2013

The Global Offshore Money Maze

This report (via Manan Shukla) by the International Consortium of Investigative Journalists provides links to several offshore tax havens.  They describe how the system works and they expose some of the beneficiaries.  You won't read about this in your local newspaper.  It seems like everyone is using tax havens and shell corporations.  The British Virgin Islands is a big player in the shell game.

Is Mondragon An Alternative to Our Current Form Of Capitalism?

One almost never hears about Mondragon in the US press.  This is for good reasons.  It has been a very successful alternative to capitalism in Spain.  The US corporate system of capitalism is essentially anti-democratic.  The corporate hierarchy, along with compliant boards, make all of the strategic decisions.  Wall Street also plays a major role in their funding and in their operation.  Corporate management is held accountable for increasing shareholder value and CEO candidates that don't please Wall Street seldom get selected.  Corporations are also highly centralized plan and control systems.  In a sense, they mimic the centralized state systems that capitalists frequently criticize,  but the top management is paid much better. CEO compensation is 300-400 times the compensation of the average employee.  That ratio has grown by a factor 10-20 over the last 40 years.

Mondragon is owned by its employees and they participate in the management of the corporation.  The corporation consists of numerous independent enterprises that are owned by the employees and conform to the general rules of Mondragon enterprise.  One of the rules is that CEO compensation cannot exceed that of the average employee by more than a factor 6.  Job security is also highly valued.  Employees may be laid off by a business, but every effort is made to relocate the employee to a business within Mondragon that needs additional labor.  Mondragon invests heavily in R&D and it has a university that provides courses that conform to European standards.

Mondragon operates in a region of Spain that has a history of cooperative enterprise development.  It is the largest corporation in the region.  During the Spanish Civil War this region opposed the fascist army and it was also undermined by the Soviet Union which was also fighting against the fascist army.  The Soviet's had a different idea about the alternative to capitalism.  They were invested in a centralized economic system operated by the state.  They did not want to see a successful decentralized, employee owned economic system, arise as the alternative to capitalism.

There is no perfect form of organization.  Every organization has its problems and so does Mondragon.  We are well aware of the problems that have developed in our current system of capitalism.  Job security has become a huge problem since businesses have operated primarily to increase shareholder value and executive compensation.  Income inequality has also risen rapidly in most industrial economies.  Instability has also increased due to frequent and severe financial crises that have been difficult to resolve. We also face environmental issues are difficult to resolve under a capitalist system that is based upon a requirement for 3% annual growth. The global economy would double every 25 years under that requirement.  That is not sustainable. We should devote more time  to learning about the strengths and weaknesses of Mondragon. 

Wednesday, April 3, 2013

What Happened To The Internet Productivity Miracle?

We have witnessed to introduction of numerous new products that take advantage of the Internet.  In theory they should have increased output per hour of work (productivity).  That has not happened.  It may have been a false hope or we may yet see the increases in productivity in the future.  However, it would appear that all of the nonsense that is being published about a new economy based upon a highly skilled technical workforce has yet to be realized.  Most of the work that gets done does not require a college education or advanced technical skills.  Education may be more of a sorting mechanism than a specific skill production industry.  In fact, higher education, except in professional schools,  was never regarded as vocational training. 

How Intellectual Property Rights Became A Key Platform Of Free Trade Policy

Intellectual property rights facilitate monopoly.  The enforcement of intellectual property rights has become a critical component of US trade policy.  The protection of monopoly power seems to be inconsistent with free trade policies, but that is only true if one believes that free trade has any real meaning to proponents of free trade. Monopoly would be the preferred industrial structure for most large multinational corporations.  This article provides a description of how the protection of intellectual property rights has emerged as a major component of multilateral trade agreements.

Does Government Health Insurance Lead To Totalitarianism?

Dick Cheney's daughter cited Ronald Reagan's argument against Medicare in her attack on Obamacare.  The basic message is that government provided insurance is a big step away from free market capitalism and it puts us on a path to totalitarianism.  There has been little evidence for this hypothesis since the introduction of Medicare. If anything, we have been moving in the opposite direction.   Paul Krugman reminds us that Liz Cheney's comments on Obamacare are similar to the position that Hayec took in The Road To Serfdom.  She is not any crazier than many conservatives today.  Hayec has become their favorite economist. 

We live in a strange world. Social welfare programs are under attack in many parts of the world.  The super-rich do not want to pay for them since the collapse of communism.  They are devoted to tax avoidance which has become a major industry.  They prefer to justify their "freedom from taxation" by embedding it in a version of libertarian philosophy in which democratically elected governments are the enemy of freedom.  Mitt Romney is the embodiment of this philosophy. He claimed that he lost the election because "moochers" voted for a president who would enable more mooching.  Democracy can't serve the purposes of the super-rich as long we let moochers vote. It only works when the super-rich can manipulate government to serve their interests.  If he had been elected, the moochers would have been punished, and the super-rich would have received more freedom from taxation.

Why Russians Put Their Money In Cyprus

This article argues that Russia has not established a legal system that protects owners of property.  Wealthy individuals and businesses believed that their capital was safer outside of Russia.  They registered their businesses in Cyprus, and money flowed from Russia to their shell corporations in Cyprus.  The money was returned to Russia as foreign direct investment.  The profits were taken in the Cyprus shell companies and were taxed below the Russian tax rate.  The records kept in the shell companies were also not available to Russian authorities. 

The failure of the banking system in Cyprus ended that game.  There are other places where that game can be played.  Tax havens like The Netherlands and Luxembourg are more than eager to replace Cyprus.  This seems to be a growth industry.  Tax avoidance and money laundering are not unique to Russia.  It is just another way in which globalization presents risks to the nation state.  Money has no nationality, and neither do many of our corporations.

Tuesday, April 2, 2013

What Did Economists Learn From The Financial Crisis?

Olivier Blanchard was an economist at MIT for many years and he has been the chief economist at the IMF more recently.  He presented the five lessons that economists should have learned from the financial crisis in London.  They are good lessons to learn, and we could add many more.  He was wise to limit the lessons to five.

Unemployment Rate In Eurozone Hits 12%

The latest numbers from Europe are not good.  The unemployment rate hit 12% for the first time since the EZ was created in 1999.   Germany has been the exception to the rule.  Its unemployment of 5.4% is better than that of the US and much better than nations that have been harder hit by the recession.

The Real Impact Of Obamacare On Health Insurance

This article explains the impact of Obamacare on insurance premiums.  If you already have good insurance through your employer there is little change with Obamacare.  If you do not have coverage that conforms to the standards set by Obamacare, you will get better coverage by purchasing insurance on the exchange.  The premiums will be higher because your benefits will be better.  Subsidies are available to pay for the improved benefits.  The subsidies vary according to one's income level.

Education Level, Unemployment And Income

These graphs (via Manan Shukla) confirm what we already know.  That is, we are more likely to be employed, and earn higher incomes, if we are better educated.  That has been true for a long time.  Consequently, it does not help to explain why unemployment was high during the recovery from the 2000 recession, and during our current recovery from the financial crisis.  Some argue that education level has become even more important because there is less demand for unskilled labor and more demand for skilled labor.  According to this hypothesis, we can remedy the unemployment problem by reforming our education system.  Its hard to argue against improving the education system, or for increasing access to higher education.  That would certainly, over the long haul, be good for social mobility and equality of opportunity.  However, it may not remedy the problem of high unemployment, and it does not address the decline in median household income, and rising income inequality, that have been endemic in the global economy.  The relationship between education, falling wages, and rising income inequality is not obvious.  They are probably better explained by changes in the political economy that have been underway for the last 40 years. 

Living In A Black Hole, Or Life At The Zero Lower Bound

Keynes developed his general theory during the Great Depression.  In a sense, the economy was in a black hole from which it was unable to escape with classical economic theory.  He called this black hole the liquidity trap.  We are in a similar situation today.  After taking on too much debt, many households and firms are paying off their debt instead of spending and investing.  Paying down debt is a form of savings.  Ordinarily, when the supply of savings increases, the interest rate falls.  That should stimulate investment and consumption to absorb the savings.  Unfortunately, interest rates are close to zero, but the level of interest rates would have to be negative to reduce the excess supply of savings.  Since nobody wants to make loans at negative interest rates we hold on to cash.  We are at the zero lower bound in which interest rates can't fall far enough to absorb the excess savings. 

One way to absorb the excess savings is to have a depression.  GDP or national income falls and savings fall with the decline in income.  Keynes did not believe that depression was the best way to deal with an economy that was at the zero lower bound.  He argued that government should borrow the excess savings and increase spending.  That would provide income to households and businesses that would increase private spending.  The goal is to produce a full-employment economy.

This topic has become current because government debt has risen and because the Fed and other central banks have reduced short term interest rates to the zero lower bound (real interest rates are negative when corrected for inflation).  Efforts are underway in many countries to reduce government spending, and some are calling on the Fed and other central banks to raise interest rates.  According to Keynesian theory, the result of those policies would be continuing depression and high unemployment.

Monday, April 1, 2013

The Problem Of Capital Accumulation In Capitalism

This article (via Manan Shukla) has a link to an animated video by David Harvey.  There have been a number of explanations given for our current economic problems.  David Harvey quickly goes through the entire litany of explanations.  He believes that there is some truth in each of the explanations.  However, he argues that there is an underlying problem in capitalism that is behind most of our financial crises.  Capitalism is faced with a need for constant expansion.  It relies upon financial innovations to inflate economies when they get into the doldrums.  The financial innovations often do what they were intended to do.  They inflate the economy, but the innovations often lead to debt crises like those that we have today.  We move the crisis from one geography to another.

David Harvey's analysis is drawn from Marx's critique of capitalism.  Marx devoted much of his life to the study of capitalism and its contradictions.  He was quite good at it.  Harvey has a good grasp of Marx's critique of capitalism.  He does not, however,  have a solution to the problems that are built into capitalism.  Somehow it finds ways of getting around its contradictions, and it is ofter painful for many. Moreover, he does not believe that Marx was able to come up with a superior alternative to capitalism.  He believed that central planning, and state ownership of the means of production would be a better alternative, but complex economies are not easy to plan, and states have not been better at allocating resources to their most productive uses.

Did The US Invade Iraq To Keep Oil Prices High?

This article (via Manan Shukla) argues that the US did not invade Iraq in order to privatize its oil fields.  The US oil companies did not want more oil, they wanted high oil prices.  Iraq had been exceeding its OPEC quota.  The extra oil supply was keeping oil prices down.  The solution was to create a state oil company that would cooperate with OPEC by not exceeding its quotas.  This has kept oil prices high which pleases the oil companies, and the Saudi's who dominate the OPEC cartel.

DSGE Despair

Macroeconomics is essentially about the use of DSGE models to predict the effect of policy changes on the economy.  The models are not very good at prediction, but that seems to have little impact on their use.  They are used by many central banks, and every aspiring graduate student has to become familiar with DSGE models.  They are a badge of the profession.

This article provides a good explanation of the problems with DSGE models and it explains why they are not very good at prediction.  The author was a physics major who just received his PhD from Michigan in macroeconomics.  His views on DSGE models probably encouraged him to take a job teaching financial economics rather than pursuing a career in macroeconomics. 

Is California The Model For The Rest Of The Country

Paul Krugman argues the conservative movement in the US took root in California.  Even when Republicans were in the minority, they had enough votes to block whatever Democrats proposed.  Today, that is no longer true.  The GOP has been marginalized.  It does not have enough votes to obstruct the Democratic government. 

California still has a lot problems but it has had a well deserved reputation for being a bellwether state.  Things that start in California spread elsewhere to other parts of the country.  Perhaps the GOP will become marginalized enough so that it cannot block progressive proposals in Washington.  I wish that were true but the GOP is increasing its power in many states, and lobbyists determine what happens in government more than we would like.

Jeff Sachs Presents A Menu For An Economy With Chronic Problems

Jeff Sachs argues that the global economy presents problems are not easily dealt with by short term stimulus programs.  He proposes a number of longer term projects that are required to deal with the structural problems that he sees in the economy.  Government will have to take a more active role to address the problems that he describes.  That means more government spending rather than less government spending.  Cutting taxes, which is the panacea advocated for every problem by Republicans,  only limits the ability of government to take a more active role in the economy.  That is one of the reasons why he has been critical of the administration for making most of the Bush tax cuts permanent.