Thursday, May 30, 2013

State Spending On Higher Education Since The Recession

State spending on higher education is down 28% since the beginning of the recession.  That represents over $2,000 per student.  The cuts in spending vary considerably by state.  Arizona and New Hampshire have cut spending by more than 50%.  There is a graph which shows the percent change in spending by state.  Some of the belt tightening by states is due to recession related drops in tax revenue.  On the other hand, some states are cutting income taxes and also cutting spending on education.  There seems to be a disconnect between our need for a better educated workforce in the brave new high tech economic world,  and public funding for higher education.  I guess we can import the necessary labor from poorer countries that have increased access to higher education.

Wednesday, May 29, 2013

Paul Ryan Admits That GOP Will Not Negotiate A Budget Deal Without The Leverage It Gets From Debt Ceiling

Paul Ryan admits that the GOP will not negotiate with the democrats on the budget until the fall.  If they negotiate now they will not be able to get the agreement that they want, and the democrats can blame the failure on them.  If they wait until the fall, when the debt ceiling must be raised in order to avoid a government default on its debt, they will be able to use the leverage from the risk of government default to get a better deal.  This puts the democrats in a bad position.  They must either give the GOP what it wants, or they will get blamed for letting the GOP kill the economy that it has taken as a hostage in the budget negotiations.  This is American democracy at work in our modern age.  The political party that has the majority in the Senate, and holds the presidency, is unable to govern.

Another View On How To Reduce Corporate Tax Avoidance

Joe Stiglitz suggested that raising the taxes on capital gains and dividends would be one way to compensate for the taxes lost by the growth in corporate tax avoidance.  They are the ones who benefit from lower after tax profits so it makes good sense to raise those taxes.  We could also do what is suggested in this article.  We could tax corporate revenues instead of profits.  That would be complicated but it would end the use of tax havens in which corporate profits escape taxation.

The exploitation of tax havens by global corporations, however, is only one of many problems that accompany the rapid pace of economic globalization.  The nation state is becoming less relevant in a global economy.  Unfortunately, the nation state is the only democratic form of government that we have to manage the global economy and it is not up to the task.  Corporate control over the nation states has never been stronger.  They are faced with a difficult choice.  The can team up with their corporate clients, and do what they can to serve their interests, but eventually that will lead to political reaction.  We are seeing much of that today in many countries. The alternative is to strengthen international organizations which might do a better job of managing the global economy.  That will not be easy to do, especially when most nation states have adopted the strategy of teaming up with their domestic corporate interest groups.  It would also put technocratic institutions, that are removed from democratic control, into very powerful positions.  We are at a very dangerous point in which our existing institutions have become less able to serve the interests of their body politic, and in which there are no good alternatives to the nation states.  Without a good plan to deal with these problems we are likely to get political chaos and government system that develop in response to chaos.

Why Has Growth in Income Inquality Led To Lower Taxes For The Wealthy In The US?

Everyone knows by now that the share of income going to the top 1% in US has grown significantly since 1975.  The US has experienced more growth in equality than that experienced by most large economies.  It is unique, however, in another respect.  Growth in income inequality is also correlated with lower taxes paid by the top 1%.  That has not been true in many other rich countries.  That raises a question about how to explain that result.  Conservative economists use supply side arguments to explain that result.  Lower taxes on the rich increase their productivity, which leads to an increase in their income.  Apparently, they refuse to work hard when taxes are high.  Its also possible that their higher incomes and lower taxes are better explained by greater influence over government tax policies and the effects of deregulation.  Changes in executive compensation are also an important factor.  Corporate executives and many money managers receive much of their income in the form of capital gains or dividends which are taxed well below the rates on ordinary income.  The US political system and the corporate governance have been redesigned to serve the interests of the elite.  The links between Wall Street and our large corporations is much more like it was in the "Gilded Age".  Both groups have also increased their influence over government through their lobbying efforts and by funding US election campaigns which become more costly to finance every year.  This does not surprise most of us.  The more interesting question is to explain why elites in many other countries have not achieved a similar result.  The American system is probably the model to which elites in other countries aspire.

There Is No Problem With The American Republic

The basic message in this article is that the basic structure of government still exists.  The question is whether the machine will be directed by an elite or whether citizens will be active in the operation of government.  Both systems work. Most of us have decided to let the elite operate the machine of government.   History is full of examples of what happens to republics when its citizens take the easy way out.  Disintegration takes time but the direction of change may have been already set in motion.  The elite get even more aggressive when they sense passivity on the part of its citizens.  Unfortunately, the groups most actively pursuing more citizen control of government are unwitting tools of the elite.

The Real IRS Scandal

The GOP has making lots of noise about the IRS targeting of right wing groups that were seeking tax exempt status.  It looks as if the IRS was correct in targeting those groups.  They were primarily engaged in political activity.  The IRS was doing what it typically does to detect tax evasion.  They were using key words to target those who had a higher probability of cheating.  We would probably be much better off if we did more to limit tax exemption for organizations that are primarily in the business of advancing ideological and political interest groups.

Portugal's Struggle To Recover

The Financial Times provides an excellent analysis of the economic problems in Portugal.  Its economy expanded when it joined the eurozone by gaining access to cheap credit.  Private citizens and the government used cheap credit for their purposes.  Consumption grew rapidly by the use of credit cards and government programs were also stimulated by access to cheap credit.  The credit bubble is over and the economy is shrinking.  Small businesses have been hit hard by limited access to credit and by decreasing consumer demand.  Government has increased taxes and cut spending as well.  Exports have picked up, but not as fast as the decline in consumer demand and fiscal contraction.  Structural adjustments are necessary but there are many obstacles that will limit  economic in Portugal.  The situation in Portugal is worse than it was in the US during the Great Depression.  Portugal has few of the advantages, however, that were available to the US to expand its economy.  Several countries in the eurozone face similar problems.

Swiss Government Will No Longer Require Its Banks To Obey Secrecy Laws

The Swiss government had been preventing its banks from disclosing the names of US citizens who have been evading US taxes by using the banks as tax havens.  The government decided that it was in the best interest of its banking industry to let its banks cooperate with US tax authorities.  Each bank will be free to decide what it wants to do but they will no longer be required by the Swiss government to conform to bank secrecy laws.  This is a big step in the move by governments to limit tax evasion by its wealthy citizens.  This will affect tens of thousands of US citizens who have been evading taxes by using Swiss banks as tax havens.  This will create a boom for tax accounts and lawyers who will be needed by US citizens who have been using Swiss banks for evading US taxes.

Tuesday, May 28, 2013

Joe Stiglitz On Globalization And Tax Avoidance

The Guardian provides Joe Stiglitz with a platform to inform the public about the ways in which multinational corporations have effectively lobbied to create corporate tax policies which enable them to take advantage of tax havens.  He discusses some of the ways in which nation states can end the race to the bottom that has been going on for many years.  As a last resort, nation states can deny market access to corporations that continue to use tax havens to avoid paying their share of taxes to governments which provide them with the means to be successful in the global marketplace.  Apple and Google, for example, are totally dependent upon the Internet which was created by government.  Their intellectual property rights are also defended by government and they abuse that privilege by transferring those rights to tax havens so that they can avoid taxes.  The government is an important partner to our multinational corporations, but they have let their partners get away without paying for the support that they provide.  They will continue to do so unless the public does what it is supposed to do in a democracy.  Their ought to be an international protest movement in which citizens refuse to pay taxes until corporations pay their fair share.  In the US every citizen can file for a tax extension.  If millions of citizens file extensions to protest corporate tax policy the government might get the message.  Things like this may be the only way to combat the influence of lobbyists who fund our political campaigns.

Paul Krugman Closes The Debate With Reinhart And Rogoff

Economic policy makers in the US and Europe used the study by Reinhart and Rogoff to set government debt reduction as its top economic priority.  Subsequently, the study has been widely criticized and R&R have been working overtime to protect their flawed academic reputations.  Paul Krugman, like many of us, is tired of the endless debate with R&R.  He points out that the data do not support the R&R conclusion that there is a threshold ratio between debt and GDP of 90%, at which point economic growth dramatically declines.  The direction of causality is also an issue.  Low growth can cause the debt to GDP ratio to increase, and a high debt to GDP ratio might also contribute to low growth.  R&R were perfectly happy to let policy makers use their study to make economic decisions based upon the conclusions that they erroneously derived from their data.  They should have known better, but they encouraged policy makers to use their research to make bad policy decisions.  Their reputations have been badly damaged for good reasons.  The debate is over.

Monday, May 27, 2013

Wedding News

The weather was lousy over the weekend but the wedding was very successful.  The blending of family and friends was all that was necessary.  My daughter asked her brother to officiate at the wedding and he performed remarkably well.  One would never have known that he had never done that before.  The ceremony was perfectly tailored to the personalities of the bride and the groom and guests were incorporated into a common community that would be supportive of the newly weds.

Multiculturalism And Immigration Is Not Easy Even In Sweden

It is sad to see racial problems elevated in traditionally open societies like Sweden's.  Riots in Stockholm have spread to smaller towns in Sweden and far-right political groups are gaining power in Sweden as well as in other countries in Europe.

A Bad Economy Is Also Bad For Entreprenuers And Small Business

There is a strong sentiment among successful business people that college graduates have a great opportunity to invent their own job.  Those with technical skills, and perhaps familiar with the new social media can invent the next Facebook.  The evidence does not support that hypothesis.  The number of successful new start ups has been declining and the failure rate of small businesses has been exceptionally high.  New business ventures and small businesses depend upon a common ingredient.  They both depend upon demand for their products and services.  Inventing one's job in a weak economy is not a substitute for the lack of job offers from existing businesses.  In a sense, it is another form of blaming the victim.  If you are unable to support yourself it is your own fault.

Keynesians Don't Believe That Fiscal Stimulus Can Solve The Economic Problems In Europe

Paul Krugman argues that fiscal consolidation in the eurozone has made a bad situation worse.  The common currency is the core issue in the eurozone.  It makes it impossible for the periphery countries to deflate their currencies.  Consequently, they are forced to resort to wage and price deflation which is much more painful and politically difficult to manage.  Moreover, fiscal contraction in the core eurozone nations makes things even worse.  He strongly objects to conservatives who argue that he, and other Keynesian's, believe that fiscal stimulus can solve the underlying problems in the eurozone.  He does not know who those Keynesian's are.  On the other hand, it is easy to see why his strong objections to imposed austerity in the eurozone could have led conservatives to argue that Keynesian's believe that fiscal stimulus is the solution to the problems in the eurozone.

Geoengineering: Hubris Versus Humility

This article describes some of the proposals about how we might geoengineer our way out of the problems associated with climate change.  Conservative think tanks, which have previously denied the existence of global warming, are beginning to support geoengineering solutions.  They are being supported by fossil fuel industries and they appeal to wealthy individuals who don't want adapt their consumption pattern.  What good is an infinite supply of money if it can't be spent as one pleases?

Many of the proposals being considered have serious problems.  Most will be difficult to implement, and they will have multiple unintended consequences.  The supporters of geoengineering believe that we are capable of solving any problems with human ingenuity.  Others do not believe that we can reengineer complex planetary systems that we do not fully understand.  The likely consequence of the geoengineering debate is that it will defer necessary efforts to control carbon emissions.

Saturday, May 25, 2013

The Economics Of Climate Change

Martin Weitzman, a distinguished economist from Harvard, provides a cogent description of the economics of climate change.  He summarizes the science of climate change as well as the implications of the increasing rate of carbon emissions. He also outlines the discounting method that economists use to weigh the costs of mitigation against the future benefits that might be received from avoiding the damages from climate change.  He concludes that there is only one rational response to the threat of climate change.  We can't be certain about the costs, or the extent of damages from climate change, but a rational public would insure itself against the possible catastrophic consequences of doing to little.  Stabilizing the rate of carbon emissions is not the solution.  We must cut the rate of carbon emissions or face the consequences of inaction.  The price is small relative to a potential catastrophe.  We should not have to explain to future generations why we did not purchase  insurance against catastrophe.

Friday, May 24, 2013

Daughter's Wedding This Weekend

I will be playing father of the bride this weekend.  Blog posts will be scarce.  Keep your fingers crossed for a break from the rainy weather in Boston.

More On The Corporate Tax Dodge

Corporations have become so skilled at avoiding taxes that governments will have to ramp up their skills to protect their own interests and those of other tax payers.  One of the latest forms of tax avoidance is described in this article.  A large US drug company acquired a much smaller drug company in Ireland.  The company then incorporated the merged organization in Ireland which has a much lower corporate tax rate.

OECD us working on ways to stop this race to the bottom by countries that use low tax rates to attract or retain corporations that have no real interests beyond those of their shareholders and top executives.  Alternatively, governments can increase taxes on the shareholders who have benefited from the corporate tax dodge.  Dividends and capital gains should be taxed as ordinary income.  Individuals might decide to move their residence to low tax states but that is not likely to happen.  France recently raised the tax rate on high income earners and many threatened to leave the country.  Only a few of done so.  John Galt is not what he is cracked up to be.  He really is dependent upon those around him and he actually likes the country in which he has been raised.  He just hates to pay taxes as long as they can be shifted to those with less political power.

Thursday, May 23, 2013

Understanding One Of Our Fastest Growing Industries

The lobby industry is one of our fastest growing industries.  This article provides a good description of how the industry operates and why is provides a lucrative form of employment.  In a sense the lobbying industry is like venture capital.  Lobbyists do not win every battle to pass a bill or to block a bill.  They lose more battles than they win but the return that they get on their investment on winners more than compensates for their loses on losing efforts.  It is also easier to block a bill than to get one passed. For example, the NRA did not pass a new bill in Congress; it prevented a new bill from being passed.  Lobbyists are the real defenders of the status quo.  They are hired primarily to protect those with a vested interests in the status quo.  It is also a very competitive industry.  Lobbyists  compete primarily with lobbyists who have opposing interests to defend.  The winners end up writing most of content in the bills that get passed by Congress.  The most effective lobbyists are those who have close connections with an influential congressman or senator.  They are often former staffers to congressman or senator.  Their value and compensation fluctuates with the influence of the politician that they worked for.  The revolving door between government and industry is an important aspect of the industry.  The rapidly growing suburbs of Washington are extensively populated by one of our fastest growing industries.  The skills that are required for success are not taught in our universities. 

Apple's CEO Answers Questions About Tax Avoidance At Senate Hearing

Apple's new CEO displayed the chutzpa that was characteristic of Steve Jobs at the Senate hearing.  Like most corporate CEO's who are taking advantage of tax havens he said that Apple was doing nothing illegal.  That is correct.  There are loopholes in the tax code that enable multinationals to avoid taxes.  He went further, however, and he denied that Apple was using Ireland as a tax haven.  That is a lie.  Apple has transferred its intellectual property to an entity in Ireland.  The subsidiary collects royalties on the sale of Apple products sold in the US and elsewhere.  The royalty payments reduce profits in localities where its products are sold and Apple pays a 2% tax on its profits in the Irish subsidiary which has no employees.

The Senate hearings are not very meaningful.  They bring attention to the problem of tax avoidance by multinational corporations but there aren't many politicians who really want to change the corporate tax system.  And even fewer politicians want to be critical of the American genius represented by our high tech firms.  Microsoft, for example, employs a similar strategy to avoid taxes. It has transferred its intellectual property to another tax haven and takes much of its profits in the tax haven.  Corporate tax avoidance is a booming industry that attracts some of our best lawyers and accountants to the industry.  Many Americans may applaud their genius, but it may dawn on some that the taxes avoided by multinational corporations are shifted to them, or that cuts in popular government programs like education are partially due to corporate tax avoidance.  Some may even be clever enough to ask why their governments spend resources defending corporate intellectual property rights when they used to avoid domestic taxes.  That of course, would surprise our politicians who need corporate campaign contributions to run their election campaigns which depend upon a misinformed public.

Stock Markets React to Growth Slowdown In China

China has been one of the global engines of growth.  Global stock markets reacted to signs that the Chinese market is cooling off by selling off.  The Japanese stock market was hit hardest.  Its leading index fell by 7.3%.  Some of that may be due the slowdown in China but it also reflected concerns about the domestic economy.  The Japanese index had grown by over 30% since its central bank initiated aggressive policies to battle persistent deflation.  Some profit taking was bound to happen but investors are nervous about the state of the global economy and it does not take much to spook the market.

Wednesday, May 22, 2013

Is Austerity The Biggest Threat To The Euro?

The eurozone economy has been contracting for six consecutive quarters and its unemployment rate is at 12.1%.  Core economies such as France and Italy have rising unemployment and even Germany has been experiencing slower economic growth.  Austerity measures have been used to save the euro but those policies may be the biggest threat to the euro.  The ECB has not been able to use stimulative monetary policies that have been used by the Fed and the EZ Stability and Growth Pact requires core economies like France and Italy to hold their debt to GDP ratios to 3%.  Consequently, fiscal policies are not available to compensate for the absence of an aggressive monetary policy.

It is easy to forget that the problems in the EZ in most of the member states were not caused by public sector profligacy.  Bad debts in the banking sector were shifted onto public sector balance sheets.  Private sector profligacy is the root cause of the economic problems in most of the EZ nations.

The push for austerity in the EZ has different roots than those in the US.  The GOP has been pushing austerity in order to attack social welfare programs.  That has not motivated austerity in the EZ.  It has been motivated by the mistaken idea that the troubled economies can export their way out of difficulty.  That of course is impossible.  Current account surpluses and deficits must sum up to zero.

The failures of austerity in the EZ goes beyond the bland statistics of negative GDP growth.  It has been a human calamity could have been avoided.  Social mobility has been impaired in many of the affected states by the use of austerity measures.  Future generations will pay the price for what is happening today.

Why The US Stock Market Rally May Continue

This note from Fidelity Investments connects the performance of the US stock market to the monetary policies of the Fed.  The sectors of the economy that are ordinarily correlated with market rallies are underperforming the defensive sectors.  Investors are looking for relatively safe places to put their money, and the Fed's monetary policies have made US treasuries less attractive.  Defensive stocks will continue to do well as long as the Fed is printing money, or until the Fed's monetary policies lead to unanticipated investor reactions. 

Sometimes A Picture Is Worth A Thousand Words

A Fed President Advices European Central Bank To Adapt US and Japanese Monetery Policies

The president of the Federal Reserve Bank of St. Louis departed from protocol by suggesting that the ECB should be more aggressive in its purchase of securities.  Europe is the largest economy in the world and its recession has been bad for the global economy.  It should be worried less about inflation, which is nowhere in sight, and make an effort to avoid deflation which is very difficult to reverse once it is established.  Central banks have excellent tools that work to reverse inflation.  The raise interest rates and economies slow down quickly.  With short term interest rates close to zero in Europe, traditional  monetary policy is ineffective.  Short term rates can't go much lower.  The US and Japan have adapted their monetary policies to life at the zero lower bound.  They are purchasing a variety of longer term securities to fight deflation and to stimulate growth.

Lessons At The Zero Lower Bound: The Japanese And US Experience

Central banks have historically implemented monetary policy by buying or selling short term bonds.  That effects short term interest rates which tend to influence longer term interest rates as well.  However, when short term interest rates approach zero, as they are today in the US and Japan, central banks have to use other strategies to achieve their objectives.  The Bank Of Japan and the US Federal Reserve are purchasing a variety of longer term securities to implement monetary policy.  The BOJ is implementing a plan to reverse price deflation, and the Fed has the twin goals of a target inflation rate of 2% and a reduction in the unemployment rate.  This speech by the President of the Federal Reserve Bank of New York, describes the experiences of Japan and the US with monetary policy at the zero lower bound. 

Tuesday, May 21, 2013

The Challenges To Effective Climate Change Policy

Martin Wolf, writing in the Financial Times, is worried about the increasing concentration of carbon in the atmosphere.  The concentration is projected to double by the end of this century and the damages to our planet will be substantial.  This is something that we should be worried about but there are many roadblocks to effective actions that might reduce carbon emissions.  Wolf lists all of the major challenges that need to be overcome and each is formidable.  As a whole, the challenges come down to single factor that must be overcome.  We can't expect people to endure privations in order to deal with a moral obligation that we have to future generations.  The challenge is to develop a vision of well-being, that we might strive to realize,  that is not dependent upon increasing consumption of fossil fuels.

CBO Projects $900 Billion Reduction In Federal Healthcare Spending

The Congressional Budget Office's most recent projection of federal healthcare spending is that it will fall by $900 billion below previous forecasts.  That reduction is more than twice the reduction proposed by Simpson/Bowles.  It is still important to make the healthcare system more efficient but drastic cuts to Medicare and Medicaid are no longer needed.

Peggy Noonan Signals The GOP Alternative To The Deficit Scare

The rapidly falling US budget deficit requires the GOP to come up with a new strategy.  Peggy Noonan, who is one of the Wall Street Journal's best editorial writers, can be depended upon to signal strategy directions in her favorite party.  The GOP has three presidential scandals that might replace their out of control federal spending strategy.  Peggy Noonan's recent editorial about the attack on the US Embassy in Lybia is part of that strategy.  She argues that the president decided not to send help to the US Embassy that was under attack because he believed that it would hurt his chances in the election.  Kevin Drum cannot believe that the cynicism of Peggy Noonan and the WSJ has gone that far.  He has no love for Dick Cheney but he does not believe that he, or others in the GOP that he does not like, would by so cynical. 

Why Higher Wages In Germany Would Be Good For Portugal

One of the reasons for imposing austerity on Portugal is that it should reduce wages in Portugal and reduce the cost of its exports.  Portugal (and other eurozone countries) could export its way out of its economic problems via wage deflation.  Paul Krugman suggests that a better strategy would be for Germany to increase its wages.  The euro would fall in value, due to German inflation, and Portugal's exports would increase as a result.  Germany will not raise its wages so that strategy is not likely to happen.  The point, however, is that German wage inflation works as well as Portuguese wage deflation is supposed to work.  Tyler Cowen, thinks that wage deflation in Portugal is the better strategy even though Portugal does not export much to Germany.  Perhaps that is why he is the head of the Mercatus Center at George Mason University which is funded by the Koch brothers.  Conservatives prefer wage deflation to wage inflation.

The Incredibly Shrinking US Budget Deficit

The growing economy is delivering more tax revenues and spending on government funded healthcare has been falling.  This has affected the Republican "starve the beast strategy".  It has used rising budget deficits to justify cuts in government social welfare programs that it has never liked. They used tax cuts to implement that strategy under Reagan and Bush, and the Great Recession caused tax revenues to fall even further.  That created a field day for budget scolds who told the public that the US was on its way to becoming the next Greece.  Interest rates on US debt were going to skyrocket and the Fed's efforts to stimulate the economy by printing money was going to produce hyperinflation.  None of these things happened on the way to becoming the next Greece.  Now the slow process of economic recovery and healthcare reform is improving the US budget outlook today and in the future.  Republicans may have to invent a new game.  They are working hard to find a reason to impeach a president from the wrong party.

Apple's Stateless Subsidiaries Which Pay No Taxes

Congressional hearings on the tax avoidance strategies of US multinational corporations focused yesterday on Apple.  It is not unique in its use of subsidiaries in tax havens to avoid taxes but it is one of the best at that game.  It is not only good at the game but its management told Congress that its subsidiaries provided valuable business operations and that they were not set up to avoid taxes.  One of its subsidiaries in Ireland is managed from California and its board meetings are held in California.  It pays no taxes in Ireland or in the US. 

The tax avoidance strategies commonly used by multinational corporations have shifted the tax burden from corporations to individual taxpayers.  The taxes paid by US corporations used to bring in about the same amount of revenue as the personal income tax.  Today corporate tax revenues are a small fraction of total federal tax collections.  The use of tax havens to avoid taxes is not illegal.  The problem, however, illustrates the impact that globalization has on nation states.  Multinational corporations are stateless.  It is very difficult for nation states to regulate the behavior and policies of stateless corporations.  Most of the global economy is controlled and operated by corporations which have little interest in the countries in which they are incorporated.  They operate primarily to serve the interests of their shareholders and their executives who are also large shareholders.  Apple recently borrowed $17 billion to pay dividends to its shareholders and to repurchase its stock, which reduces the number of outstanding shares and makes each outstanding share more valuable.  It could have used some of the $100 billion of profits that it has in international subsidiaries to perform that function for its shareholders.  It would have been forced to pay US taxes on the repatriated funds if it did so.  It avoided taxes by borrowing the money at very low interest rates, and it can deduct the interest paid on its bonds from its US taxes.

Monday, May 20, 2013

Nation States Are Losing The Battle Against Global Corporations

Global corporations are doing everything that they can to avoid paying taxes that support the nation states in which they reside.  They play this game by playing one nation state off against the other.  Its a game in which the nation states race to the bottom and the global corporations win.  One would think that the nation states would band together to resist massive tax avoidance.  Robert Reich writes from London that the opposite is happening.  The nation states are not banding together.  They are playing the race to the bottom game by competing with each other for corporate favors.  Each must believe that they can beat the others at the game. 

The Financial Times And Paul Krugman Described Our Fiscal Problem In The US Ten Years Ago

Mark Thoma hoisted an op-ed by Paul Krugman from the archives which applauded the Financial Times for writing about the radicalization of the Republican Party.  It wrote that the Bush tax cuts would underfund government.  That would give the GOP the excuse that it needed to attack the hated public welfare programs inspired by the New Deal.  Large budget deficits would give them the excuse that they needed to reform Social Security and Medicare.  The richest country in the history of the world could no longer afford social welfare programs.  Cutting taxes, primarily for the rich,  had a purpose beyond increasing the after-tax income of the super-rich. It has been the GOP's weapon of choice for reshaping government.  George Bush followed up his tax cuts with proposals to privatize Social Security.  The new Republican Party is not a conservative party.  It is a radical party that wishes to restore the Gilded Age that is currently portrayed in the most recent film version of the Great Gatsby.  

What Economic Problem Worries Most Europeans?

Public opinion is important very important but the public is very poorly informed.  Inflation is very mild in most of Europe but, with few exceptions, the public views price inflation as one of their biggest problems.  Slow growth and high unemployment is less of a problem than inflation to most Europeans.  What planet do they live on?  I guess it is a planet in which the media worries more about inflation than unemployment and slow growth.

The Financialization Of The Economy Impedes Our Ability To Deal With Climate Change

This article describes two forms of capitalism.  The older form, in which individuals are tied to organizations, necessarily has a long term time horizon.  The executives and owners will be there to receive the returns on long term investments in employees and the enterprise.  In the modern organization individuals are not tied to any particular enterprise.  They expect that they will move from one opportunity to a better opportunity.  Executives and capital are mobile and opportunities are everywhere.  Since the payoff from investments in employees and the enterprise takes place in the long term they do not benefit mobile executives and mobile capital. 

One of the problems with this shift in our commercial institutions is that governments require a long term time horizon to deal with our many of our major problems.  Climate change, for example, requires a long term time horizon.  Unfortunately,  government is heavily burdened by the leaders of institutions that have a short term time horizon.  Problems that don't effect the current quarter, or the current nanosecond in capital markets,  fail to get the resources that they require.

Sunday, May 19, 2013

Ben Bernanke's Graduation Speech At Bard College

The chairman of the US Federal Reserve challenged a pessimistic vision of our economic future by Robert Gordon and others who argue that productivity growth will be less than it has been in the past.
He believes that we have not scratched the surface of advances in information technology.  He also argued that we will continue to see advances in healthcare and in the use of renewable energy sources which will improve our future.  He also suggested that ideas are being generated in more parts of the world and quickly transmitted by modern communication systems.  The flow of new ideas will be much greater than they were in the past.  He concluded by making a case for a liberal education which develops critical thinking and creativity.  That puts him at odds with those who would like to see more emphasis on vocational education.  The ability to rapidly adapt to change is more important than the development of skills that are quickly outdated.

Sony Facing Threat From Large Shareholder

This article provides an overview of film industry economics, but that is not why it has been posted.  An investor, who has become Sony's largest shareholder, is putting pressure on Sony's film division to increase profit margins.  Sony's film division is reputed to have an excellent and stable management team but its profit margins have not risen like those of its competitors.  They are making fewer films and increasing profit margins by milking profits from legacy films that were released in the past.  There is pressure on Sony to follow a similar strategy.  Shareholder value in the short term is maximized by investing less in the future and milking past investments. 

Thursday, May 16, 2013

Why Has The US Financial Sector Grown So Large?

Tim Taylor reviews a recent published study that attempts to answer that question.  It also raises a more difficult question for economists.  Has the growth of the financial sector been good or bad for society?  The study that he reviewed argues that growth in the financial sector has made the economy less stable.  Taylor, like most economists, is uncomfortable dealing with moral questions.  Many believe that economic efficiency is good, and that a more efficient economy is good for everyone.  The path to efficiency, however, has moral social consequences that should not be ignored by economists.  An efficient and larger financial system may not be a public good.  It was deregulated in order to increase efficiency.  Most of the benefit from deregulation went to bankers, and the public has paying for those benefits for some time.

Paul Krugman Reviews Three Books About Economic Policy

The New York Review Of Books gave Paul Krugman a platform to review three books on economic policy.  He took the opportunity to describe how the case for expansionary austerity was made in the Western world.  He then showed how the research supporting expansionary austerity crumbled upon analysis.  Lastly, he describes the morality story that has made austerity so appealing to the public and to policy makers.  He does a good job of pulling all of the pieces of this story together as it has unwound over the last five years.

The Real IRS Problem Should Be On The Table

The IRS got in trouble by focusing on small conservative organizations that applied for tax exempt status.  That was a serious mistake, but it is not the worse mistake that we make.  Many conservative organizations and liberal organizations are primarily involved in political activity but they have tax exempt status.  The rules for granting tax exempt status are ambiguous.  They have to demonstrate that more than 50% of their work is not political and that it benefits the public welfare.  It not easy to distinguish political production from genuine research and public education.  In fact the largest conservative groups, engaged primarily in political activity, were granted tax exempt status.  Groups that receive the 504 designation are able to accept unlimited funds from wealthy contributors without the requirement to reveal the names of their contributors.  That is a part of the infamous Citizens United decision by Supreme Court that should be changed by Congress.  Moreover, many of the tax exempt think tanks that pollute our environment with political or ideological propaganda do not deserve tax exempt status.  The public does not benefit from their "research".  Taxpayers should not be asked to pay for their propaganda.  If the super-rich want to disseminate propaganda they should pay for it themselves.

Wednesday, May 15, 2013

Some Exerpts From The PhD Dissertation By The Co-Auther Of The Heritage Study On Immigration

Jason Richwine was employed by the conservative American Enterprise Institute before he was hired by Heritage.  His PhD dissertation at Harvard made him attractive to those think tanks.

Europe Still In Recession And Few Bright Spots In Global Economy

This article provides some detail on economic performance in the eurozone and elsewhere.  France had negative growth in the last quarter and growth in Germany was also weak. Exports and investment spending in Germany were down but consumer spending increased. The struggling economies in eurozone did even worse.  Growth in the UK was close to zero, China and the US showed decent growth.  Japan is showing signs of recovery.

The Immigration Study By The Heritage Foundation Is Part Of A Bad Trend

This article provides more detail on the Heritage Foundation report that has been widely criticized.  It estimated that the current immigration reform bill would cost the government $6.7 trillion because many the immigrants would become dependent upon government support.  It even argued that new immigrants be given an IQ test before being allowed into the country.  The Heritage Foundation's new CEO Jim DeMint, who left his job as a Tea Party supported senator from South Carolina, was very proud of the study.  He hopes that it will help Heritage to raise more funds from his supporters.  More importantly, it is part of a trend among the think tanks.  They are becoming more partisan and more extreme in their research.

Human Capitalism Provides The Explanation For Rising Income Inequality

Brink Lindsey, who is a Senior Fellow at the conservative Kaufman Foundation, has written a book called Human Capitalism which offers an explanation for rising income inequality.  Tyler Cowen who heads up the conservative Mercatus Center funded by the Koch Brothers, announced the release of this book on his blog.  The comments that follow the announcement are as interesting as the abstract of the book which one of the commentators provided. Cowen's blog is one of the more popular economic blogs.  The comments provide some insight into what his followers think about important social issues.

The basic thesis of Human Capital is that our economy has become more complex.  Those who are successful in our new economy possess human capital that enables them to succeed in a more complex world.  They inherited cognitive ability and they have invested in education which makes them valuable in a complex economy.  It follows that they should be rewarded financially for the contribution that they make.  Unfortunately, technology and globalization has eliminated many of the jobs that made it possible for less skilled individuals to earn high incomes.  That has increased the gap between those with human capital and those without it.

Human Capital provides an explanation for rising income inequality that will be well received by the plutocracy.  Those at the top of the pyramid are smarter and more talented than those that have been left behind.  They are being rewarded for their ability and the investments that they have made to prepare themselves for success in a more complex economy.  It is unfortunate that the less talented have been left further behind but there is little that can be done to make the economy less complex so that the less gifted and energetic can be as successful as they have become.  Moreover, there is little that can be done to modify the distribution of income.  It is based upon merit that is unequally distributed and any efforts to change the system would be bad for economic growth and prosperity.  The very smart and highly educated financial engineers who almost destroyed the global economy deserve to be paid princely incomes and to escape prosecution for fraud. The executives of our major corporations earn ten times what their peers earned 40 years ago.  That must be because their jobs have become more complex and they are smarter and better educated than the CEO's from previous generations.  They are also smarter and better educated than CEO's from other parts of the world because they earn several times what they earn.  If guess we are all lucky that we have such talented leaders in our economy.

Tuesday, May 14, 2013

Austerians May Not Want To Waste A Good Crisis

Noah Smith believes that economists in Europe believe that the struggling economies in the eurozone are in trouble because they don't let markets work the way they are supposed to work.  Structural reform is necessary to fix their economies.  The reforms that they propose are much like those advocated by the IMF and World Bank that has been called the Washington Consensus.  Fiscal stimulus might improve things for the short term but it would delay the necessary structural reforms.  They think that the crisis provides an incentive to make the necessary structural reforms.

The Washington Consensus is no longer the single recipe advocated by the IMF.  It now recognizes that the medicine has to be designed to fit the needs of each country and it will vary from country to country.  Spain was doing very well before the real estate bust and it was not overloaded with sovereign debt.  It is almost impossible to implement austerity and structural reforms that might improve the Spanish economy in the long run when it has a 26% unemployment rate.  Unfortunately, the critics of fiscal stimulus have always favored structural reforms in recessions.  They assume that unemployment would not exist if markets were allowed to work their magic.  They don't want to use monetary policy or fiscal policy to prevent structural reforms.  Some countries have no choice.  They can't borrow at affordable rates and they have no control over monetary policy which resides in Brussels or Berlin.  Globalization and a common currency has not worked well for them in the crisis.  It has also created problems for countries like the US which has its own currency and can borrow at affordable interest rates.  Its not easy to maintain a full employment economy with trade deficits that average around 5% of GDP. 

Consumer Sovereignity And The Optimum Allocation Of Resources

John Kenneth Galbraith was the most widely read economist of the 20th century but he never won the Nobel Prize.  This article, that I pulled out of the archives, provides an explanation.  It argues that Galbraith was right about the economy for the wrong reasons.  Its easier to win an economic prize if one is wrong for the right reasons.  Galbraith was critical of the doctrine of consumer sovereignty which holds that consumer preferences determine the best allocation of resources.  They maximize their utility when they purchase products and services.  The market responds to their preferences by producing the products and services that consumers request from them.  Consumer utility is thus maximized and the resources of the society are being used to maximize social welfare.

Galbraith believed otherwise.  He argued that producers determine what is most convenient and profitable to produce and they depend upon marketing to develop consumer demand.  It would be difficult to operate a mass production economy by any other means.  Huge investments must be made to produce new products and they can't be sold in the necessary volume without marketing campaigns that stimulate the necessary demand.  Of course, some heavily marketed products are not successful, but there are few examples of successful products that have not been supported by huge expenditures on marketing which determines consumer preferences.  Consequently, according to Galbraith, consumers spend more money than they should on products without much intrinsic value, and they are less willing to spend money on improving their environment which would provide more intrinsic value than the luxury products that they have been sold by marketers.

Galbraith's attack on the doctrine of consumer sovereignty, and its role in maximizing social welfare, was directed right at the heart of free market economic theory.  They argued that if consumers were purchasing products that did not maximize their utility, competitors would be attracted to the market by the economic profits that were being earned by the producer.  They would provide alternative products that did a better job of maximizing consumer utility.  Competitive markets make it impossible for producers to survive by producing products that do not maximize consumer utility.

Galbraith may have been right, but he was right for the wrong reason, according to free market doctrine.  He might have done a better job of defending his position if he had been aware of research in behavioral economics today which could have been used against his critics.  Individuals make consumer decisions that are heavily influenced by what other consumers are purchasing. Budweiser did not capture 50% of the US beer market by selling a product that maximized utility more than competing products.  They sell their product by showing consumers enjoying their product together.  Other producers do the same thing.  Bud's market share gives it a huge advantage in the beer market. Its advertising costs per barrel of beer are much lower that its competitors because it sells more barrels of beer.  This enables Bud to spend more dollars on advertising than its competitors that shows its target consumer group having the right kind of fun with others drinking the same product. Herd behavior has an important effect on individual behavior.

Behavioral economics also provides an answer to Galbraith's concern about consumer expenditure on luxury products that do not maximize utility.  There has been an escalation of how luxury is defined by consumers.  Consumers are constantly exposed to other consumers enjoying the latest essential luxury good.  It is not possible to remain content with products that used to satisfy the consumer.  There is always something desirable that we don't have which other people are enjoying. Galbraith would be right for the right reasons today.  We do a poor job of allocating resources to maximize individual or social well being. 

Poll Shows Weakening Public Support For European Union

The Pew poll found much lower public support for the EU in countries that have struggling economies.  The loss of confidence in the EU includes France and Italy which have high unemployment rates.  Surprisingly, support for the EU in Germany remains high despite the fact that Germany has much of the burden of providing financial support to the weaker economies.

Monday, May 13, 2013

Why States Should Invest More In Supporting Lccal Busniness Development

States compete with each to steal jobs from one state to their state.  They provide subsidies to major corporations to relocate jobs but that does not add to the total number of jobs created in the nation as whole.  Moreover, states seldom get a good return on their investments in subsidies.  The taxpayers lose and large businesses win.  This article describes programs in Massachusetts that provide funding to small locally operated businesses.  Government subsidies to these businesses are small relative to those which go to major corporations.  State and local governments should consider redirected some of their resources to they types of small businesses described in this article.

Its Time To Stop Negotiating With A Party That Is Not Interested In Governing

The Editorial Board of the NYT has decided that it no longer makes any sense for the president to play the negotiation game with Congress.  It provides several examples of GOP tactics which demonstrate that the GOP is more interested in obstructing government than it is in developing bipartisan solutions to critical problems that we face.  The list would be much longer if it included GOP tactics that have prevented the president from filling vacancies in many federal offices.  Our system of government does not work under these conditions.  Elections only matter to the GOP when they are placed in charge of the government.    

How Austerity Kills

Many economists argue that austerity has been bad for economic growth.  This article documents the impact of austerity on public health.  It reviews the different ways in which nations have responded to economic crises and how that impacted the incidence of preventable health problems and suicide rates.

The High Cost Of Higher Education And America's Future

Higher education is critical to our nation in several ways.  The future of our economy depends upon a well educated workforce, and our tradition of equal opportunity requires access to higher education for all income classes.  Joe Stiglitz reviews many of the problems in how we fund higher education and how they are impacting the future of our country and the ideals that have made us a great country.

At a fundamental level, the cost of providing higher education is growing faster than median family incomes.  Consequently, many families are faced with the problem of borrowing to provide higher education for their children in order to provide their children with access to jobs that might provide a middle class income.  The burden of student debt affects family formation, home ownership and other things that limit economic growth. It also impacts the quality of life for those whose incomes are not sufficient to service their debt burden.  Access to higher education for many families has become more burdensome than it has been in our past.  Predatory for-profit colleges have also taken advantage of this situation.  They market their product to low income families by promising them access to jobs by completing programs that have been designed for promising occupations.  The jobs aren't there for many of the students who complete their degrees, and most of the students fail to complete their degrees.  They are left, however, with debts that are unaffordable and which cannot be discharged via bankruptcy.

To make matters worse, the cost of attending public colleges, which provide the majority of our college graduates, is rising because public funding has been steadily declining.  This reduces access for low income families and it also affects the quality of education at publically funded colleges and universities.  If this continues the state university systems which have been critical in the development of our nation will be less able to do what they have done in the past.

Sunday, May 12, 2013

Why Hedge Funds Want The Fed To Stop Buying Treasuries

This article is not for everyone.  However, it does a great job of explaining the $6 billion loss that JP Morgan incurred when hedge funds ganged up against the "London Whale".  The hedge funds that have shorted the US treasuries are making a similar bet but their counterparty is not a profit making firm that can be bankrupted like JP Morgan.  The article also provides a glimpse inside of the world of hedge fund managers who play in this casino.  They can earn billions without adding anything to the economy or to well-being.  The comments are also very interesting.  I read it several times in order to fully understand how the game works.

Saturday, May 11, 2013

Co-Author Of Flawed Heritage Study On Immigration Policy Resigns

The Heritage Foundation released a study that concluded that the immigration policy under consideration in Congress would cost government several trillions of dollars.  The libertarian Cato Institute was highly critical of the methodology and conservative politicians have also attacked the research.  The co-author of the study earned his PhD at Harvard.  His dissertation was on racial differences in intelligence.  Heritage knew what they were getting when the hired him for the study.

Heritage Foundation Study Is More Of The Same

The Heritage study on immigration policy has been widely criticized by conservatives and academics.  Paul Krugman reminds us that this is more of the same from Heritage.  They are in the business of providing "research" that supports right wing policies.

The Employment Rate Of College Graduates Has Decreased Dramatically Since 2007

Nobody is surprised that college graduates have a lower unemployment rate than those with less education.  Some argue that our current high rate of unemployment is due to a skill mismatch between the demand for skilled labor and the supply of skilled workers.  That is, we would have lower unemployment if we had more college graduates.  The graph below tells a different story.  The employment rate of college graduates has fallen significantly since 2007.  The decline in the employment rate of college graduates is similar to the decline in the employment rate of high school drop outs.  The supply of college educated workers is growing faster than the demand for college graduates.  The US has a job growth problem and not a skill shortage problem.

Friday, May 10, 2013

German Economist Believes That Italy and Spain Could Look Like Greece Unless Policy Changes

Peter Bofinger is a member of the German Council Of Economic Experts and he is not pleased with what he sees in the eurozone.  Fiscal consolidation is making things worse for Italy and Spain and it is spilling over to France and Germany.  Unemployment in France is over 10% and Germany, which exports 60% of its products and services to eurozone members,  is headed for negative growth.  The banking system has been weakened, and the recession threatens to make them even weaker as more loans become impaired.  He argues that fiscal consolidation should be stopped until the troubled economies get on a growth path.

Thursday, May 9, 2013

Will Today's Austerity Bring Tommorrow's Prosperity?

Keynes had an answer for economists who did not support government efforts to moderate the effects of the Great Depression.  Following David Ricardo, they assumed that the market was self correcting and that the focus should be on the long run.  The Great Depression had lasted for many years and Keynes responded that in the long run we would all be dead.  Many conservatives have claimed that Keynes did not care about the long run because he had no children.  Lord Robert Skidelsky, who wrote a three volume biography of Keynes, wrote this article to clarify the views that Keynes had about the short term versus the long term.  It is well worth reading. 

Some Of Our Most Prominent Economists Don't Understand Economics

Paul Krugman takes a big step beyond the criticisms of Keynes that are based upon his sexual preference.  He lists the misunderstandings of several leading economists who have been critical of the use of fiscal policy.  One is a Nobel prize winner and several of the others have been regarded as candidates for the prize. Most are connected with the University of Chicago in some way.  The economics department at Chicago has a religious belief in a way of thinking the economy that excludes the role of the state.  The macro models that emanate from Chicago have no use for fiscal policy since the models assume that the economy is stable and self correcting.  They have been the major critics of Keynes since Milton Friedman championed the cause of libertarianism.  Keynes believed that the market economy was inherently unstable and that government could play an important role in moderating the business cycle and maintaining full employment.  That fundamental difference is not easily reconciled.

Rethinking Macro Policy

Mark Thoma provides the links to four presentations at the recent IMF conference by distinguished economists who offered their ideas about what has been learned from the Great Recession, and what should be done about it.  I have provided a brief summary of the presentations.

George Akerlof summarized his view of the presentations at the conference by stating that it was like a group of people observing a cat stuck up in tree.  Everyone has a different idea about how to get the cat down from the tree.  He argued that the combination of monetary policy policy and fiscal policy in the US was just about the right thing that should have been done to get the cat down from the tree.  It was much better than the response in the US to the Great Depression.  Economists using standard macro models of the economy did a poor job of predicting the Great Recession by the profession seems to have learned how to fix a broken financial system and to use monetary and fiscal policy to prevent a greater disaster.

Joe Stiglitz was more critical of the profession and the response to the crisis.  He argued that financial crises are very common and that finance is not considered to be part of the real economy in our macro models.  The models assume that the market economy is stable and self correcting.  Shocks to the economy are regarded as external to the real economy.  Much of the instability in the economy comes from the liberalization of the financial system which must be regarded as part of the real economy.  The economy is prone to instability and it is not self correcting.  The goals of any economy should include growth, stability and a more equal distribution of the output.  That can't happen without fixing the problems in the financial system.  Our banks are to intertwined to fail.  The failure of one bank creates problems for all of the systemically important banks.  He argued that capital requirements should be much higher and that this would not increase the cost of capital as the banks have argued.  He was also critical of the belief that central bankers could effectively manage the economy by the use of short term interest rates.  Our crises require the use of multiple tools to fit each situation and that monetary and fiscal policy needs to be better coordinated.  Interest rates have been kept close to zero by the central banks but fiscal policy has been contractionary.

David Romer began his remarks by stating that the title of the conference was misleading.  The title: Rethinking Macro Policy: First Steps and Early Lessons,  is too timid.  The conference was intellectually stimulating but it did little to address preventing the next financial and macro crisis that is bound to happen.  He described six financial crises that have occurred in the US over the last 30 years.  It is foolish to assume that we can have a stable economy with such a volatile financial system that is central to way modern economies function.  He concluded that we need a radical redesign of our financial systems.  Central bankers do not have enough tools to prevent the next disaster.  He also suggested that it would be good idea to have an independent fiscal authority.  That authority would stimulate the economy during recession and build surpluses during good times.  Politicians have a tendency to use or oppose fiscal policy for primarily political purposes.

Olivier Blanchard, the Chief economist of the IMF, who hosted the conference, provided his summary of the issues and solutions discussed at the conference.  He listed many of the issues and some of the solutions that were proposed.  His presentation was cautious about many of the solutions that were discussed.  He saw strengths and weaknesses in most of solutions and he concluded that the IMF has been left with a clear research agenda.  Perhaps that is why David Romer argued that the conference was intellectually stimulating but that it offered little hope that the next crisis would be prevented.  Economists will get more funding for research that will do little to address the important changes that are required.

Wednesday, May 8, 2013

The Remaining Arguments Against Fiscal Stimulus

We have learned that austerity does not work but the US and the UK are not interested in using fiscal policy to increase employment.  Some argue that the economy is on a path to recovery and that there is no need for stimulus.  Others suggest we don't have any good ideas on where government could effectively spend more money.  Dean Baker examines these arguments and makes some suggestions how additional government money could be put to good use.

The Corporation As Command And Control Economy

Our large corporations are highly centralized command and control systems.  The Soviet Union was unable to make its centralized command and control system work.  Brad DeLong posted this paper that he wrote 17 years ago which attempted to explain why the corporate system has been able to do what the Soviet system was unable to accomplish.  Some his comments are outdated but it offers several of the major arguments that have been used to defend the corporate command and control system.  The comments that follow are also interesting.  His article provides a good starting point for discussions on the strength and weaknesses of the corporate form of organization. 

Tuesday, May 7, 2013

A Video On Some Of The Problems That May Reduce Outsourcing By US Firms

This is a link to a video by Online MBA. Com which illustrates some of the factors that may cause some firms to think twice about outsourcing. 

Carbon Dioxide Level Set To Reach New Milestone

The Scripps Institute of Oceanography reports that the level of carbon in the atmosphere is ready to pass a milestone to 400 parts per million.  There is nothing magic about the milestone and it may recede during the spring as plants absorb more carbon.  It is a warning, however, that the industrial revolution may have created great wealth at the expense of our environment. It is estimated that the level of carbon dioxide in the atmosphere was around 290 parts per million prior to the industrial revolution. 

Corporate Profits As Percent of GDP Are At Historical High

The graph in this post shows that corporate after tax profits as a percent of GDP have fully recovered from the recession.  They are higher than they have been in recent history.  This is the result of growth in profits and also to lower corporate taxes.  Corporate executives and large shareholders have done very well during a recovery with very slow growth in employment and wages.

NYSE Margin Debt Nearing Historical High

This graph shows the strong correlation between margin debt and the S&P stock index.  Investors are using leverage to take advantage of the surge in stock prices.  This is a sign of confidence in the market but it is also a contrarian indicator.  Leverage helps to drive the market upwards but it also depresses stock prices more rapidly when the bubble bursts. 

Austerity And Economic Recovery Can Work Outside Of The Eurozone

When an economy is in recession, and it has its own currency, the currency can be devalued.  That will make its exports cheaper and it will make imports more expensive.  This is painful for savers, and for those who hold assets denominated in the devalued currency, but it can help the economy to recover.  Iceland and Latvia are often used as examples of countries which prove that contractionary fiscal policy does not necessarily prevent a recovery from recession.  Currency devaluation is painful but it can lead to export driven growth.  The troubled countries in the eurozone do not have the option of currency devaluation.  They are forced to use contractionary fiscal policy to reduce wages and prices.  The assumption is that the structural reforms that lead to wage and wage and price deflation will make their exports price competitive and lead to export driven growth.  That has not worked for several reasons.  The structural reforms are more politically difficult to implement and the process of wage and price deflation is more painful to wage earners than currency devaluation which primarily affects savers and asset holders.  Fiscal contraction has not had the intended effect in the eurozone and it does not make sense to use Iceland and Latvia as examples of successful fiscal contraction for countries in the eurozone.

Monday, May 6, 2013

Another Reason Why Conservatives Like Austerity

Conservatives have been telling us that fiscal stimulus is bad medicine for a variety of reasons.  Paul Krugman discusses a new reason in this article.  Fiscal stimulus is bad because governments will not behave responsibly in good times.  They will continue to advocate fiscal stimulus to remain popular. Democrats, in particular, can't be trusted because, according to Mitt Romney, they purchase votes from the "moochers" by providing them with benefits.

It turns out that Republican administrations have a worse record than Democratic administrations in the use of fiscal stimulus to increase our debt to GDP ratio.  Government can cut taxes and/or increase government spending to stimulate the economy.  The Reagan administration cut taxes and increased military spending.  The first Bush administration also cut taxes, which had to be reversed when the budget deficit grew too fast.  Many believe that the tax increase led to his election loss to Bill Clinton.  The second Bush administration also cut taxes substantially and it increased military spending.  The debt to GDP ratio was also higher at the end of his administration than it was after he inherited a budget surplus from the Clinton administration.  This contrasts with the performance of democratic administrations.  All of the recent democratic administrations left office with lower debt to GDP ratios than they had inherited from republican administrations.

The historical data on fiscal policy suggests that republicans use fiscal stimulus more than democrats.  Their preferred use of fiscal stimulus is to cut taxes and to increase military spending.  When democrats are in office the GOP becomes more interested fiscal responsibility.  They don't object to tax cuts, but they attack government spending on domestic programs that don't benefit their major constituents.  They also oppose any efforts by democrats to retain the progressiveness of the tax system.  Deficits are only a concern when the wrong people are in charge of fiscal policy.

The New Head Of The SEC Has No Interest In Regulating Wall Street

President Obama appointed a lawyer who represented Wall Street to head up the SEC.  Her appointment was easily approved by the GOP.  She quickly selected a lawyer from a large firm that specialized in the defense of large corporations.  This editorial raises questions about the recent decision by the SEC to weaken the regulation of derivative trading on Wall Street.  This is more of the same in Washington.  The major banks want weak regulators and that is what they are getting from Congress and the White House.

Sunday, May 5, 2013

We Should Dismiss Keynesian Economics Because He Was Gay

Fiscal stimulus is immoral.  It focuses on the short term and it ignores the long term.  It is the economic philosophy of an effete snob who has no concern for the long term because he never fathered a child.  This is the story that right wing critics of fiscal stimulus use to discredit Keynes.

There are two problems with their story.  In the first place, Brad Delong provides us with the quote that is often misused to discredit Keynes.  It is obvious that Keynes did not favor the short term at the expense of the long term.  He was unhappy with the lack of concern that economists had for the plight of the unemployed.  They believed that markets were self correcting and that market forces would restore employment.  Keynes argued that economists were wrong to dismiss the problems of the duration of high unemployment.  It was not helpful to argue that market forces may take a long time to work their magic.  He provided a well reasoned description of things that government could do to increase employment.  There was no reason to believe that ending the Great Depression would be harmful to the long term economic outlook. Keynes argued that government should run surpluses during good times to prepare for bad times.  The real reason that conservative economists are critical of Keynes has nothing to do with his lack of concern for the long term.  They are really opposed to government intervention in the economy.  Rational expectations theory, and many of the models used to describe the economy, assume that rational agents will anticipate the results of any actions that government might use to moderate the business cycle, and that their reactions will negate the intended impact.  Conservative business leaders are generally less concerned about government intervention in the economy.  They love government subsidies, tax preferences and anything else that government can do to funnel government tax revenues their way. 

The second problem with conservative efforts to discredit Keynes is that they imply that his homosexuality provides the reason for his purported lack of concern for the long term.  Apparently, only heterosexual parents are concerned about the future.  Many of the conservative critics of Keynes are also global warming deniers.  They care little about the state of the planet that we will leave to future generations.  They are primarily concerned about leaving their heirs with large untaxed estates.

This article provides a large number of quotes by those who use Keynes's sexual preferences and his purported lack of concern for future generations to discredit his economics.  Included among them are several well known conservative economists and conservative pundits.

Saturday, May 4, 2013

Expansionary Austerity Survives At The ECB

Mario Draghi is the head of the ECB, and he has been a proponent of the idea that fiscal consolidation can be expansionary.  Recent criticisms of research on the benefits of austerity has chastened him a bit.  He now claims that spending cuts can be expansionary while tax increases may be counterproductive.  It turns out that spending cuts have been expansionary when they have been accompanied by monetary policies that are expansionary.  The ECB has lowered interest rates about as far as they can go in the eurozone.  It can't do much to counter the contractionary effect of fiscal consolidation in the eurozone,  but the head of the ECB believes that spending cuts are expansionary.

Trade Rules That Have The Potential To Mitigate Climate Change

Economic problems in the world's largest nations have taken precedence over efforts to limit climate change.  This article recommends changes in trade policies that would be good for trade and also promote climate change.  For example, China has been subsidizing green energy technologies that will be an important source of future economic growth.  That lowers the price of green technologies and makes them more competitive with fossil fuels.  Instead of using trade policy to punish China for subsidies, the US should compete with China for this market by subsidizing the development of domestic green technology providers. 

Since the use of natural gas is better than the use of coal and oil, we should not put restrictions on the export of fossil fuels.  Trade policies being considered which limit the export of gas are not good for the environment.

Since the development of new technologies is critical in our efforts to limit climate change the protection of intellectual property rights in emerging markets should be reinforced.

We cannot afford to keep climate change on the back burner while we attempt deal with unemployment and other economic problems.  The use of trade policy to increase focus on climate change and benefit industrialized economies as well as emerging market economies may provide a needed stimulus.

The Human Cost Of Climate Change

Andrew Guzman wrote a book on this topic that is reviewed in this article.  Guzman takes a conservative view on temperature change and describes the consequences of that change. That will focus the debate upon the consequences of the target that major nations have already agreed upon.  The actual temperature change will be much higher at the current rate of carbon emissions but the damages done by the agreed upon target for temperature change boggle the mind.  Most of us know that many island nations will be affected by rising sea levels but California may also lose access to fresh water as a result of rising sea levels.  Climate change will also lead to food shortages and fresh water shortages in many parts of the world.  His book describes a grim legacy that we will leave to our grandchildren if we accept our current target for temperature change.  One of the strengths of his book is the detail that he provides on methods that we might use to limit carbon emissions.  They will be expensive but the costs are low relative to the consequences of inaction.

Where Have All The Jobs Gone?

Economic growth used to be related to job growth.  That has not been the case since 2000.  The economy has grown but job growth has been weak.  There are several factors contributed to weak job growth.  We can create more output with fewer workers.  We call that productivity and that is usually a good thing.  Unfortunately, the benefits from productivity are no longer shared with the labor force.   The gains from productivity have predominantly gone to those who don't spend it.  They invest their money in exotic investment products which funnels more money into the money management sector.  This increases inequality and it fosters financial instability. It also has a negative impact on aggregate demand and job growth.

The US has also been running trade deficits annually for many years.  The trade deficits average around 5% of GDP.  There is nothing wrong with global trade, but it has gotten out of control.  Millions of jobs have been lost to globalization. Moreover, a large share of our imports consists of products made for US companies overseas and resold to US consumers.  The decline in US manufacturing also means that we have fewer tradable products to sell in international markets. 

At one time the US had a full-employment policy.  The decline in US manufacturing has been accompanied by a decline in union membership.  Unions no longer provide a political counterweight to the power of business.  Both or our political parties are financially dependent upon support from business groups.  Workers are no longer represented in US politics.  Their votes are needed at election time but divisive social issues are successfully used to obscure economic issues.  The electorate is also sold on the idea the best way to create jobs is to let businesses do whatever they want.  Government interference in the "free market" is responsible for weak labor demand.

The article contains some thoughts on how to restore a full employment economy.  They are interesting ideas but they will fall on deaf ears in Washington.

Details On The Jobs Report

The good news is that jobs are being created.  The bad news is that few jobs are being created in construction or manufacturing and that the number of workers who would like to work full time are working part time.  Fiscal policy is also working against job growth.  The sequester will take its toll on job growth in future quarters.  Deficit reduction has been a higher priority in Congress than job growth.

Friday, May 3, 2013

US Job Growth Beats Expectations

US job growth is keeping up with population growth but many of the new jobs are in low paying service sector.  Government employment continues to fall.  It will be a drag on the economy in later quarters.

The Austerity Delusion

This article by Mark Blyth explains why austerity is so seductive.  This article was behind a firewall when I referred to Blyth's history of austerity in a previous post.  It is now available for those who would like a more detailed view of the economic history of austerity.

Wednesday, May 1, 2013

The Rain In Spain Will Continue For A Long Time

The IMF and S&P have bad news for the Spanish Economy.  Unemployment will remain above 20% at least until 2020.  There is little prospect for growth in productivity and its population is shrinking and aging at the same time.  High youth unemployment will also lead to more emigration.  Credit for businesses is also scarce and expensive.  Spain is in for extended period of low growth and increasing debt to GDP ratios.  It is hard to predict the political response to these problems.  The population is losing faith in its domestic and EU institutions.  There does not seem to be an easy solution to the problems in Spain.  Any solution will be painful and politicians will avoid any source of pain.

Apple Raising $17 Billion Through Bond Issuance

Apple shareholders have been putting pressure on the company to increase shareholder value by paying dividends or by increasing the value of the stock via buybacks.  Apple has $144 billion in retained earnings but $100 billion is held overseas.  Apple would have to pay a corporate tax on the profits held overseas if it were to use that money to reward shareholders.  Consequently, it is issuing $17 billion in bonds to reward its shareholders.  This enables them to take advantage of low interest rates.  They get the added advantage of deducting the interest from their US taxes, while also avoiding taxes on profits repatriated to the US.