The Obama Scandal Business Is Losing Credibility

Darrell Issa has been the CEO of the Obama scandal business.  He has used his committee in the GOP House to manufacture scandals.  They have been given extensive publicity by the cable news network which is the marketing arm for the scandal business.  Unfortunately for Issa most of the scandals that he manufactured have turned out to be imaginary.  Dana Milbank has been covering the scandal business for the Washington Post.  He reviews each of the scandal's manufactured by Issa and declares them to be defective products.  Isssa, in turn has lost his credibility with many in the media who have been reporting on the scandals.  The only marketing organization available to him is Fox News which has nothing else to sell.

The New Religion Of Finance And How It Shapes Corporate Investment

This article, written by a professor from the Harvard Business School, describes the financial metrics that determine executive compensation and shape corporate investment decisions.  There are three kinds of investments that corporations make.  One kind of investment, that he calls empowering investment, creates jobs and builds assets.  The two remaining investment types discourage investments in assets and jobs.  Return on net assets (RONA) is one the ratios that has become part of the new financial religion.  That ratio can be enlarged by increasing profits and/or by reducing assets.  It is easier and faster to reduce assets than it is to increase profits.  That has encouraged many firms to shed assets from their balance sheets.  Instead of investing in revenue producing assets, many firms have contracted with other firms to produce their products.  For example McDonnell Douglas outsourced the production of the DC 10.  This increased its RONA dramatically.  Unfortunately, this also enabled the contract manufacturers to capture the replacement part business.  McDonnell Douglas lost the recurring revenue stream that could have helped it to finance the DC 11 which was never produced.

The new financial religion has discouraged empowering investments that create jobs and grow the economy.   The religion funnels investment into the two remaining investment categories that focus on short term RONA.  The short term focus that prevails in most corporations and on Wall Street has been determined by the new financial religion that is firmly held by corporate executives and financiers.  We can't understand the global economy without understanding the new religion of finance.

Truthiness

This is a video link to Colbert's description of TV news.  He manages to very funny and quite perceptive at the same time.  Truthiness is telling people what they want to hear.  People believe what they want to believe and cable news networks, in particular, satisfy that need.  They tend to reinforce the general belief systems of their target audience.  Colbert is brilliant at turning this into humor.   

The Corporate States

We have a dreary day in the Boston area.  That calls for a little humor to start off the day.

A Legal Blow To Sustainable Development

The Supreme Court has ruled on a case that will it make it difficult for local communities to approve development projects with contingencies on the developer to mitigate harmful effects on the environment.  The 5-4 decision will leave local governments the choice of dismissing the proposal or accepting it without contingencies.  This will prevent many worthwhile projects from being approved or it will be harmful to communities which must absorb the mitigation costs.  This is just another example of a conservative Supreme Court usurping the authority of elected officials.  The court has imposed the standards established in a separate court decision, that it approves of, on local communities.

A World Of Rising Healthcare Costs

Government spending of healthcare is higher in the US than it is in the rest of the world but it is also rising in most other countries.  It represents a growing percentage of government spending everywhere.  Efforts are underway to reduce the growth rate of healthcare spending, but it will continue to represent an increasing share of government budgets.

Another Way Of Looking At The Mankiw Defense of The Top 1%

Noah Smith provides a real life example to illustrate the problems in Greg Mankiw's defense of rising inequality.  It doesn't take an economics degree, or expertise in statistics, to appreciate the problems in Mankiw's defense.  His example shows why most people are upset by rising inequality.  We shouldn't be too critical of Greg Mankiw, however.  He is just doing his job.  His argument will appeal to many of the trustees at Harvard and to conservative students who share his views. 

CEO Compensation Has Outpaced The Average Growth Rate Of The Top 1%

Greg Mankiw dismissed the argument that the rapid rise in CEO compensation is due to poor corporate governance, or what he called market imperfections.  He referred to a paper presented by Kaplan at the NBER in honor of Martin Feldstein.  Kaplan presented data which showed that CEO compensation was similar to that of other high wage earners in the top 0. 1%.  Therefore, the labor market for CEO's and other executives is competitive.  There are no market imperfections.

This article provides a critique of the Kaplan study and shows that CEO compensation has risen faster than the average compensation of the top 0. 1%.  Moreover, there is no direct way of measuring a CEO's contribution to corporate productivity.  Therefore, it is wrong to conclude that the rise in CEO compensation reflects growth in CEO productivity.  In fact, with few exceptions, there is no easy way to link the compensation of most salaried employees to their contribution to corporate output.  What is the contribution of accountants, or corporate lawyers to corporate output?  The link to productivity and compensation is a holdover from an age in which production workers were paid in relation to their output which could be easily measured. 

US Long Term Budget Projections Greatly Improved

Tax increases and reductions in spending have improved the long term debt to GDP ratio substantially.  Most of the cuts in spending come from a decline in healthcare price inflation.  The assumptions in the plan are generally conservative.  It is assumed that Congress will not end corporate tax breaks and that scheduled payment cuts to physicians will not happen.  The debt to GDP ratio is still a concern, but it no longer looks like a disaster.

Divesting From Coal And Investing In Alternatives May Be Good For The Economy

Paul Krugman argues that Obama's new energy plan will increase the cost of electricity but it won't destroy jobs overall.  Spending by energy utilities on new plants or new technologies will create jobs.

Supreme Court Justice Alito's Judicial Temperance Challenge

Dana Milbank covers the Supreme Court for the Washington Post.  It would appear that Justice Alito is judicial temperance challenged.  I thought that his display of intemperance might be reserved for his woman colleagues on the court.  I was reminded, however, by the lack of judicial temperance that he put on display during President Obama's State of The Union address when the president was critical of the Citizen's United decision.

The Robert's Court Strikes Down Key Element Of Voting Rights Act

The Robert's court decided that the federal government can no longer require specific states to demonstrate conformity to federal law.  Congress had researched the issue and it decided to renew that provision in the voting rights act in 2006.  The Supreme Court looked at research on the behavior of the specified states and it decided that its judgement was superior to the judgement of elected officials.  In other words, the Supreme Court has established itself as a legislative body superior to Congress.  The court also made its decision in the face of numerous precedents that had been established by previous courts.  This decision, along with the Citizen's United decision has reshaped the electoral process to favor the political party that appointed the five justices that affirmed the decision.  Not too long ago the Supreme Court was viewed by the public as one of our most cherished institutions.  That is no longer true.  It is increasingly viewed by the public as an institution that is dominated by a political agenda.  Its agenda is determined by same groups that finance the political campaigns of the political party that appointed the majority of the justices to the court.

Free Market Ideology And The Broadband Market In The US

This article explains why internet service is so expensive and the service is so poor in the US.  The explanation is simple.  The service provider industry is monopolistic, and it is weakly regulated.  Unlike other utilities in the US, which are granted monopoly power by government for good reasons,  Comcast, Verizon etc. are very weakly regulated.  They have managed to escape regulation by spending vast sums on lobbying.  Some of their strongest defenders are "libertarian" organizations which pretend to love market competition.  Their definition of economic freedom is the freedom to operate in their own best interest.

The internet provider industry provides a good example of how many industries in the US evolve into oligopolies.  Of course, Verizon competes with Comcast for new subscribers, but they share a common interest.  They want industry profits to grow and they avoid price competition which would lower the industry profits which they share.  One of their best sources of new revenues and profits is to expand the services that they provide to existing customers.  They can implement new technologies to increase the speed of the service that they provide but this comes at a high cost relative to the cost of speeding up their networks.  They can also sell TV and voice services to their existing customers.  Both of them provide similarly prices packages which include all three of these services.  They both use the same marketing concept to sell their packages.  They offer combinations of services to existing customers at a very low introductory rate.  The rates go up dramatically at the end of the introductory period, and the customer has to take the initiative to alter the package that was purchased.  Software companies operate in a similar fashion.  For example, Microsoft fixes some of the bugs in its operating system and it adds a few new features and it sells the software to customers who have licensed the previous releases of the software.

Around 80% of sales in the US occur in industries that are heavily concentrated, and in which price competition is not the primary mode of competition.  That is what we mean by free markets in the US.  They are markets with very little price competition.  That is very good for corporate executives and shareholders that benefit from monopoly profits.  It is not very good for many customers and workers who now compete in global labor labor market that is price sensitive.

Will Rising Interest Rates Increase Labor's Share of Income?

This article makes two fundamental points:  The first point is that labor's share of income is decreasing in all OECD countries.  Therefore, the problem is not unique to institutional changes in the US.  Secondly, a large percent of decline in labor's share of income is explained by an increase in automation.  Labor is not getting its share of rising productivity as it has in the past.  It follows from this analysis that investments in automation, which are stimulated by low interest rates and tax policy, should be reduced in order to increase labor's share of income.  That conclusion is at odds with economic thinking which assumes that capital investment is good for everyone and that government policies should encourage capital investment.

While automation may be responsible for a portion of the loss in labor's share of income,  and the US is not unique in this respect, we should not leap to the conclusion that institutional changes are not part of the problem.  Many of the institutional changes that have occurred in the US have been taking place in other developed countries.  Multinational corporations and global finance have unleashed forces that can be observed everywhere.  Labor's share of income has been affected by globalization in ways that are not fully understood.  Whats happening in the US is happening in all of the OECD nations.  Some countries have adjusted differently than others, but the phenomenon is global.  There is nothing exceptional about the US because the global economy has been Americanized.

A More Detailed Critique Of Mankiw's Defense Of The Top 1%

Dean Baker, Paul Krugman and others have commented on Mankiw's defense of the top 1%.  Jonathon Chait provides a more thorough attack on the heart of Mankiw's defense.  Mankiw is not very good as moral philosopher, and rising inequality is essentially a moral problem.  Economists pretend to ignore moral questions.  They claim that economics is a science, and that they are not in the business of making moral judgements.  On the other hand, they make extensive use of the concept of utility.  We are supposed to be utility maximizing atoms and the economy is made of up of atoms that are in the process of maximizing their utility.  The free market enables each atom to engage in activities that maximize the total utility available in the economy.  Consequently, utilitarian principles have played an important role in the history of economics.  They have often been used to justify economic policies such as progressive taxation and income redistribution.  The basic premise is that a dollar taken from a wealthy individual, and redistributed to a poor person, provides more utility to the poor person than the utility lost by the wealthy person.  Mankiw makes a weak attack on utilitarianism, and he ends his defense of the top 1% by reminding economists that they should avoid corrupting their science with utilitarian theory.

Mankiw does poor job of attacking utility theory, but he is more comfortable invoking one of the basic assumptions of microeconomics.  He assumes that the labor market is efficient, and that it would be inefficient to redistribute income from productive individuals to those who are less productive.  That assumption allows him to claim that CEO compensation, which has risen dramatically in the US compared with other industrial nations,  is not the result of a corrupted governance system.  The income pyramid is build on a foundation of productivity.  Interference in the operation of the labor market would make the economy less productive.

Obama Ready To Announce Climate Change Initiative

The president's plan will put a focus on the use of coal by electric utilities.  The plan will not require action by Congress.  The EPA will be instructed to implement the plan and modify the standards for new plants.  It will also create new energy standards for many household appliances.  The plan will allow the president to meet the emission goals that he agreed to at the Copenhagen meeting.

The Koch brothers, along with other libertarians who defend their right to pollute the environment,  will put pressure on the GOP to block the EPA from implementing the plan.  They will get a lot of help from their friends in the media.

A Glimpse Into The Foreingn Intelligence Survelliance Court

Requests for government surveillance must be approved by FISA.  The operations of the court are a well kept secret.  However, it almost never rejects a government surveillance request.  All of the judges on the court are appointed by the Chief Justice of The Supreme Court.  All of its current members have been appointed by Chief Justice Roberts.  The rulings by the court actually make law and the courts decisions alter our interpretation of the Constitution.  Chief Justice Roberts stated that FISA is a very unusual kind of court.  He stated that courts usually operate in more public fashion.  FISA makes law but its deliberations are not available to the public.  This article provides an overview of FISA.

The Good Old Days Are Gone

Paul Krugman provides a graph that shows spending on enriching activities for children.  Spending on childhood enrichment has been rising steadily by families in the to top 20%.  It has been flat or falling for the bottom 80%.  He used that information as another counter to Greg Mankiw's defense of the top 1%.  Children who are lucky enough to have parents in the top 20% have real advantages over kids from the bottom 80%.  Those advantages translate into future income advantages as well.

Many believe that the rise in inequality is the result of market forces that are beyond our control.  This article suggests that the rise in inequality was the result of policy changes that have carefully pursued over the last 40 years.  We may be experiencing inequality by design.  Many believe that it got started by an article written by Lewis Powell to the US Chamber Of Commerce.  Powell was concerned about public opinion in the US which had a dim view of our free enterprise system.  He urged executives to take specific actions to reverse the unfavorable trend in the 60's.  It became a blueprint for restoring corporate control over public opinion and the political system. 

Greg Mankiw's Defense of The Top 1%

Greg Mankiw is a professor of economics at Harvard and the Chairman of its economics department.  He has also authored several popular economics textbooks.  He was also the head of George Bush's Council of Economic Advisers and an economics adviser to Mitt Romney's presidential campaign.  Therefore, it is not surprising that he is critical of attacks on the top 1%.  In this paper, which will be published in top economics journal, he explains why we should not be concerned about income inequality or by those who claim that there has been a decline in economic opportunity. 

This post is followed by two short critiques of Mankiw's defense.  The good thing about Mankiw's defense of the top 1% is that he has done a thorough job of building the defense.  Conservatives will appreciate Mankiw's defense and his critics have been provided with a good target.  It is better to attack a good defense of the top 1% than a weaker defense.

Greg Mankiw And The Gatsby Curve

Paul Krugman finds some faults with Greg Mankiw's defense of income and opportunity inequality.

Dean Baker Criticizes Mankiw's Defense of Inequality In Income and Opportunity

Dean Baker has been a critic of government granted monopolies as a source of income inequality.  He explains why patents and copyrights are unnecessary sources of economic rents.  He also argues that creativity would exist without outsized rewards for creative output. 

Is The Link Between Labor's Share Of Income And Rising Inequality Similar In Canada And The US?

Canada and the US are different in may ways but the similarities are stronger than the differences.  This article provides some interesting analyses of the differences between the US and Canada.

Have Profits Become Disconnected From Investment?

Paul Krugman believes that the structure of the economy is changing.  We can still learn from the past, but this time it may really be different.  The big change in the economy is that profits are rising in the absence of increased production.  The profits come monopoly rents.  The link between profits and investment in new capacity has been broken.  Apple is a good example of this change.  It has an enormous sum of retained earnings which keeps growing without making additional investments.  Its profits come from the intellectual property, which it has created, and from the brand image that it has created.  It employs a relatively small number of smart people in the US to develop the intellectual property and to market its products.  Most of its production has been offshored, and its manufacturing value added is small relative to its non-production value added.  This contrasts remarkably from the time when GM employed around 1% on non-farm workers in the US.  GM's value added from producing cars was high relative to the rest of its value added. 

The financial services sector provides another example.  It earns around 30% of US profits but it employs a relatively small number of people.  That is why compensation per capita in the finance sector is much higher than it is in other sectors.  The high profits come from proprietary investments and from monopoly power.  It is a very highly concentrated industry.

Krugman does not mention other industries but the same pattern holds.  For example, your cable company and your cell phone company can add a new customer to its network almost zero cost.  Once the network has been put in place, and the fixed costs are amortized, no production is required to increase profits.  Moreover, they can increase profits by adding new services for existing customers.  At some point network capacity will need to be increased but the same pattern will follow after the cost of new capacity has been amortized.  This is also a very concentrated industry that enjoys monopoly profits.

These structural changes in the economy explain some of the problems that industrial nations are facing.  Rising inequality is partially explained by the rising share of income that comes from profits and the falling share of income that goes to wages.  As wages fall, so does aggregate demand, and the need for more employees.

The US Fed Acts, The Rest Of The World Reacts

The Fed believes that the US economy may no longer need supportive monetary policy.  It signaled that it would cut back on its purchase of securities which has kept US interest rates well below their normal level.  While that might mean good news for the US economy, it sent a message across the globe that credit will become more expensive.  It also raised concerns that the move may be premature and that the US economy, faced with contractionary fiscal policy, may slow down.  In a sense, the Fed has been acting as the central bank for much of the world which depends upon sales in the US.  The global markets have responded.  Stock prices fell in most of the world, and the price of US treasuries fell, which in turn will drive up mortgage interest rates and imperil the critical US housing market.   What happens in the US doesn't stay in the US.  The economy is indeed global.  What happens in the US, and increasingly in China, affects markets everywhere. 

A Quick And Dirty Explanation Of Market Failure And Its Application To Political Economy

Mark Thoma provides several examples of market failure that are helpful in understanding several critical issues in political economy.  The basic assumption is that markets are beneficial in some circumstances but that there are many situations in which markets fail to accomplish desirable outcomes.  Market failure justifies government intervention in many markets.  Healthcare provides a good example.  It has few of the characteristics that we associate with competitive markets.  That does not stop many politicians from proposing "market based" solutions for our healthcare problems.  It also provides them with fodder for opposing government sponsored healthcare programs.  They refuse to acknowledge that free markets are not appropriate in many circumstances. This is only one example in which the ideology of free markets is used as a protective cover for those who currently benefit from market failures.  Free market ideology is used to prevent government from intervening in markets that are rife with failures.  Market failures are often the source of economic rents. 

Where The "Confidence Fairy" Comes From, And How It Justified Austerity Progams

This link, to a brilliant economic lecture by Mark Blyth, contains a segment which explains how spending cuts by government are supposed to stimulate economic growth.  According to rational expectations theory individuals will perceive that a reduction in government spending will lead to lower taxes in the future.  Therefore, individuals will conclude that they can spend some of their future tax savings today.  This decision, based upon rational expectations about future taxes,  is supposed give individuals the confidence to spend more today.  Expectations about the future, apparently trump one's personal circumstances today.  The "confidence fairy" is based upon the faulty assumptions in rational expectations theory.  It became one of the chief economic arguments used to support austerity programs.

Rational expectations theory was also used by top economists, like Robert Barro from Harvard, who made a similar argument against the use of government spending to stimulate the economy.  Barro argued that individuals would realize that taxes would have to increase in the future to pay for the increase in government spending.  Therefore, they would save more of their income in order to fund future taxes.  Increased savings today, by rational individuals who can predict future tax increases, will reduce spending today.  Increased government spending, therefore, cannot stimulate the economy.

According to rational expectations theory, the best thing that governments can do to stimulate economic growth is to cut spending and cut taxes.  That is austerity theory in a nutshell.  It will produce the "confidence fairy" and eliminate the lack of confidence that individuals have about the future.

The Surveilance State And Obama's Visit To Berlin

This op-ed provides describes the reaction against the surveillance programs conducted by the US and other cooperative governments against foreign citizens.  The programs are legal in the US but they strongly violate the right to privacy that is more strongly held in Germany than it is in the US and its english speaking allies.  Germany has experienced what can happen to democracy when national security trumps the right to privacy.  The surveillance of protest groups in the US and environmentalists is also legal under current law.  It is not clear that the privacy rights of American citizens are protected by those who oversea NSA and other pubic and private intelligence organizations. At the very least, the government needs to explain how our right to privacy is protected by those who oversea these programs.  It is not reassuring to learn that the Senate Intelligence Committee would not allow a former aide to explain how it operates to protect our privacy rights.

I am pleased that opinion makers like Tom Friedman were criticized for their stance on this issue in this article.  Friedman was one of the leading advocates for the invasion of Iraq. That war accomplished none of the outcomes that were used to justify the war.  Now Friedman tells us that we need these surveillance programs to protect us from another 9/11 which would only lead to stronger surveillance programs.  This argument assumes that the current programs will protect us from another 9/11.  It is not clear that these surveillance programs can accomplish that.  I have come to the conclusion that anything that is advocated by Tom Friedman is a step in the wrong direction. 

Comments On The Recent TED Conference In Scotland

The TED conference this year was atypical.  The global elite usually soft pedals on our most serious issues.  This report on the conference suggests that many of our problems have become too difficult to ignore.  Many of the speakers were more frank in addressing them than has been customary.  Maybe some will be motivated to do something about them.

Eurozone Banks Hold Too Much Of Their Domestic Sovereign Debt

Banks are encouraged to hold sovereign debt because they do not have to reserve capital against sovereign debt which is deemed to be risk free.  Banks in Europe hold a large share of the debt issued by their sovereign.  Many of the banks would be insolvent is they suffered a loss of only 8% on the sovereign debt that they hold.  This is not true in the US.  Domestic banks hold a relatively modest share of US public debt.  Perhaps that is one of the reasons why US banks issued so many mortgage backed securities which were rated AAA.  They used those bonds as collateral for short term debt that they got in the wholesale market.  There was a run on many of the investment banks when they could no longer use the mortgage securities to turn over their debt.  The general problem in the banking industry is that banks have a financial incentive to leverage their capital.

The IMF Urges US To Reverse Its Fiscal Policy Disaster

The US is the world's largest economy and the global economy is extraordinarily impacted by what happens in the US.  The IMF has reduced its forecast of global economic growth because the forecast anticipated that the US would reverse the fiscal contraction agreement that was made in order to get the GOP to raise the debt ceiling limit.  It urges the US to reverse this policy and it also supports the monetary policies of the Fed which have been offsetting the negative impact of US fiscal policy. 

The IMF has finally come to its senses and it has admitted its errors in supporting the push for austerity in Europe.  We are headed in a very bad direction in the US and many other countries.  Unemployment continues to be a problem and it could get worse unless something is done to shift our politics.  The IMF also recognizes the potential harm that might come from the aggressive monetary policy that is being employed by the Fed.  There is a trade off between the potential harm and the real harm to the economy from misplaced fiscal policy.

More On The Response To Greece And The Auserity Boom

Paul Krugman picks up on how the problems in Greece stimulated the globalization of austerity.  He adds his comments in support of the post on Greece and the IMF's admission of guilt, that was posted here yesterday.

The War On Reality: Life In The Matrix

Eugene Snowdon worked for a private intelligence firm called Booz Allen which is primarily owned by the Carlyle Group which is a holding company for a number of private firms that supply defense related services to the government.  This article provides an overview of the private intelligence industry that sells its services to business firms as well as to the government.  The private intelligence firms boasts that they are better at their work than the CIA and the FBI for whom they also provide services.  Although they are private firms, they have close relationships with law enforcement agencies.  Hackers who attempt to expose their operations face the full force of the criminal justice system.  Attacking them is regarded as an attack against the government.

Private and public intelligence agencies are one extreme of the reality bending world in which we live.  Advertising and public relations are at the other end of the spectrum.  They are less secretive about what they do but their intent is similar.  The basic idea is to shape and distort our reality.  Even though we are skeptical about advertising and public relations, they do shape our reality.  Businesses do not spend billions on things that don't produce results.  I happen to like golf, and I watch a lot of golf on TV.  The networks work with the PGA, and the corporate sponsors of golf tournaments, to convince the public that the PGA and the sponsors are really in the charity business.  They keep a running tab of the charitable funds raised through golf tournaments which is close to $2 billion.  They will probably have a special feature when they reach the magic $2 billion number.  The networks also interview executives from the corporations that sponsor each tournament.  The sponsors also get naming rights.  For example, what used be called the Phoenix open is now called the Waste Management open.  The executives do not attempt to directly sell their products during the interviews.  Instead they tell us how happy they are to support local charities which serve under privileged children.  We are also told that under privileged children who take golf lessons are learning more than how to play golf.  They are learning how to obey the rules of game which develops their personal integrity.  Its no wonder that sponsors are eager to associate their brand with professional golf.  They expect that some of that integrity will be rubbed off on their brand.

The reality of golf, however, us quite different from the image that the PGA and tournament sponsors attempt to create.  Golf is primarily a sport for a rather narrow segment of society.  It is also a drain on environmental resources.  I often feel guilty about my attachment to the sport.  Thanks to the PGA, and the corporate sponsors of golf tournaments, some of my guilt may be assuaged.  It is really about supporting under privileged children and teaching them integrity.  Moreover, one of the features being run on TV during the US Open is about all of the great work that is being done to reduce negative impact of golf course maintenance on fresh water resources.  I guess reality distortion can be good for our conscience.





 

Where Have All Of The Liberals Gone On Civil Liberty?

There has not been much dissent among liberals about the government's intelligence programs. This article describes the responses by democratic politicians.  Top pundits on the left and the right seem to agree as well.  Tom Friedman, purportedly a liberal, and the conservative David Brooks have written op-ed's in the liberal NYT in support of the programs.  We don't know whether these programs really work, and we don't know whether they are subject to abuse by the executive branch, but it is not an issue for most American's. 

Oil Production In US Is Up 14%

This graph shows the annual gain in US oil production since the 1870's.  The annual gain in oil production in the US is the largest in its history.

The IMF Admits That The Response To Greece's Problems Led To A Global Crisis

The fiscal problems in Greece quickly became a problem for the eurozone.  It was important to put the fire out before it spread to the rest of the eurozone.  This was called the contagion problem.  There were two ways of dealing with the problems in Greece.  One was for the other member states to pay down the Greek debt.  That was not feasible.  The other solution was to let Greece default on its debt.  That would create solvency problems for the banks in the rest of the eurozone that held the Greek debt.  It was also part of contagion problem.  A Greek default might increase the risk premium on the sovereign debt of other nations in the eurozone.  Structural reforms and austerity was imposed after the other two solutions were rejected.  The IMF now admits that austerity was the wrong solution for Greece and it became the wrong solution for the rest of the eurozone.  It also spread to the US where conservative politicians warned that the US would become the next Greece unless austerity was imposed upon a fiscally irresponsible government. "Austerity for all" became a global siren call that expanded the Greek tragedy to the rest of the world.  The US was less affected by the austerity siren call than the weaker countries in the eurozone.  It had its own central bank, which acted as the lender of last resort, and its own currency is the reserve currency for the rest of the world.  The rest of the world has not been as lucky.  Many of the nations in the eurozone have been crushed by the imposition of a poisonous medicine.  The UK has also been hard hit by austerity but its central bank has done what it can to support an economy that has been poisoned by the wrong medicine.  The austerity siren in the UK and in the US has been motivated primarily for political purposes.  It will not go away.  It is an attack on systems of income redistribution that are no longer supported by part of the social elite. 

Paul Krugman Asks A Critical Question About The Survival Of The Middle Class And A Democratic Society

Most economists are comfortable talking about the Luddites whose jobs were lost with the introduction of technology into the textile industry.  The poor Luddites were temporarily harmed but the industrial revolution expanded the economy and created new jobs for everyone.  Productivity improved along with the standard of living for workers.  Paul Krugman has finally left the reservation.  He no longer believes that the Luddite story applies to today's economy.  New technologies will increasingly replace highly skilled workers with college degrees.  Increasing the number of workers with college degrees cannot be the solution to that problem.  Moreover, education is not the answer, if it ever was, for rising income inequality.  Income inequality within the class of highly educated workers has been increasing dramatically.  Skill differences are not responsible for rising inequality.  Other factors are the more important cause of rising income inequality.

If we accept Krugman's analysis we are left with a nagging social question.  How will we retain a democratic society with a shrinking middle class?  He does not see an answer to that question without government programs that redistribute income.  Redistribution programs have been under attack in developed countries.  We are told that they are not affordable.  Taxes would have to be raised on the super-rich in order to maintain a middle class society.  If we increase the tax burden of the rich they will leave the country or stop working.  They like things just the way they are today.  They like a system of democratic government in which the super-rich can purchase politicians, and government officials that protect their interests. 

Is It Time To Bury Supply Side Economics?

Supply side economics is based upon policies that are supposed to encourage capitalists to work harder and to invest their savings in ways that will stimulate growth.  There is little research available to support this theory, and there is some research which shows that cutting taxes for the wealthy, or for corporations, has not stimulated growth.  Economic growth is primarily constrained by demand factors.  Personal consumption is the largest demand factor and it depends primarily on income.  Slow growth in middle class income has limited middle class consumption.  Cutting middle class taxes would encourage more demand and economic growth than cutting taxes for the rich.

Stock Markets Swoon Following Drop In Japan

Japan's stock index fell by 6.4% and that has triggered a global drop in stock prices.  Indexes are down in Europe and US stock futures indicate another drop in the US stock market.  In addition to bad news in Japan the markets are reacting to signs of problems in the rest of the world.  The Fed has hinted that it might taper its purchase of bonds and growth has been slower in many emerging markets.  The World Bank reduced its forecast of global growth from 2.4% to 2.2%.

NSA Disclosures Puts Unwanted Attention On Booz Allen And The Carlyle Group

The employee who revealed information about the National Security Agency's spying programs worked for Booz Allen which is a large government contractor that employs 25,000 people.  It is primarily owned by the Carlyle Group which is a private equity firm that owns a variety of government contracting firms.  This article provides some information about the extent to which government contractors are used to perform government work for profit.  It also provides a glimpse into the ways in which private equity firms work.  The Carlyle Group paid $1 billion to acquire its share of Booz Allen.  It controls Booz Allen and it quickly recovered its investment by funneling dividends, which are taxed at a lower rate than ordinary income, to itself.  The value of the publically held Booz Allen has also increased since it was acquired by The Carlyle Group.  The Carlyle investors have realized a gain of $3 billion on their $1 billion investment and they got their initial investment back quickly from dividends.  This is a pretty typical pattern in the private equity business.  Booz Allen was able to return profits to Carlyle in the form of dividends.  Private equity firms are not dependent upon profits, however, for their flow of dividends.  They often use the borrowing power of the acquired company, or its pension funds, to provide dividends. 

Most of us have heard about the military industrial complex in which the Defense Department and its military contractors have a share interest in growth.  It looks as if we also have an intelligence industrial complex in which the intelligence agencies and its contractors have a common interest in growth.  Both of these complexes benefit from rising public concerns about national security.

Germany Is Outraged Over US Spying

Germany has suffered through two periods in which governments have adopted spying as a method of political control.  It happened under Hitler, and it was used by the secret police in East Germany. Consequently, has done more to protect the privacy of its citizens from the potential misuse of data collected by Google and Facebook.  Angela Merkel has put this on her agenda for her coming meeting with President Obama.  The president is not under pressure from citizens in the US on this issue.  The majority of Americans appear to be more concerned about national security than they are about the potential harm that might come from government data mining practices.  In particular, Tea Party members, who call themselves libertarians, place a higher value on national security than they do on the protection of privacy. 

An Environmental Ecnomist Explains Why He Will Stop Buying Exxon Gasoline Again

This economist eventually forgave Exxon for its role in the Valdez oil spill.  Exxon's actions in  a recent oil spill in Arkansas, however, has caused him to rescind his forgiveness.  Exxon argued that homeowners in Arkansas whose homes were not touched by the spilled oil have suffered no loss in the value of their property.  Therefore, a suit filed by distressed homeowners should be dismissed.  Exxon's legal argument assumes that an oil spill in one's neighborhood has no impact on the value of one's home.  Fortunately for Exxon, the neighborhood, which has been harmed by the oil spill, can not file a law suit against Exxon.  Geographic areas have no standing in a court of law.  It is only liable for the cost of cleanup imposed on the state.

The Dutch Central Bank Is Apparently Unconcerned About Unemployment

The Dutch central bank made its economic forecast and concluded that unemployment would rise in 2014.  Most macroeconomists would not recommend fiscal contraction in the face of rising unemployment.  It is apparent by now that fiscal austerity restrains economic growth during a recession.  Unemployment rises, tax revenue falls, GDP decreases and the deficit to GDP ratio also rises.  The Dutch central bank, however, appears to be unaware of the recent history with austerity in Europe.  It recommends fiscal austerity in order to satisfy the requirement of the European Commission that its debt to GDP ratio must be brought down to 3.5% from the 3.9% ratio that it has forecast in the absence of fiscal contraction.  In other words, it recommends medicine that will increase the debt to ratio instead of lowering it.  Moreover, the central bank, appears to be unconcerned about rising unemployment.  It has a mandate to maintain price stability and, unlike the US Federal Reserve, it has no mandate to maintain employment stability.

Life Insurance Companies May Be Inflating Their Books

Insurance companies are regulated by the states.  The regulator in the New York raised concerns about a common practice among life insurers that may put them at risk.  Many large, publically traded life insurers, seem to be engaging in regulatory arbitrage.  They have opened up shell companies in states with weak regulations in order to have them act a reinsurers.  They then sell policies to them which takes risk off of their books.  The shell companies are not required to hold the same quality of reserves against potential claims as they would have to hold in New York.  This increases their profits and it enables them to raise executive compensation and pay dividends to shareholders.  There appears to be a race to the bottom among states to weaken their regulations to attract shell reinsurers to their states. 

These practices among publically held life insurers is a lot like we observed with publically held banks.  The banks created special purpose entities which held the mortgage backed securities originated by the banks.  That improved the quality of their balance sheets and it inflated bank profits and executive compensation.

The insurance companies deny that they are misusing the captive reinsurers that they created.  However, there are many reinsurance companies that are in business to absorb risks that other insurers would like to offload.  If they sold some of their risk to them they would be offloading risk.  The risk is not offloaded when it is held by a subsidiary of the insurance company.  Its primary function is to improve the insurers balance sheet and inflate profits.

The Unhealthy European Job Market

This article contains some interesting data on the job market in the eurozone.  The number of new jobs created was almost 1.7 million.  84% of the new jobs were created in Germany.  The number of jobs lost was much larger than the number of new jobs.  Around 3.2 million jobs were lost.  50% of the jobs lost were in Spain.  There is a chart that provides data on the job picture in other countries as well. 

Financialization Of The Economy And Labor's Falling Share Of Income

The financial services sector's share of the US economy was 2.8%  in 1950.  It grew to 4.9% in 1980 and it rose to 8.3% in 2006.  The growth in the financial sector has been accompanied by a decline in labor's share of national income.  Labors share of national income was much higher in the 50's-70's and it has fallen by 12% since 2001.  A study by the UN found that financialization explained 46% of labor's falling share of income.  Globalization explained only 19% of the loss in labor's share.

The growth in the financial industry might be a good think if it contributed to a growing economy.  Most of the research on this topic suggests that it does not.  The fees paid to the financial sector appear to skim profits away from the real economy and reduce the level of investment. 

The growth in the financial services sector also contributes to income inequality.  The average income in the financial services sector is 70% higher than the average income in the remaining sectors.  The high wages also attract a larger share of our best educated young people to the financial services sector.  The opportunity to earn large incomes attracts a lot of potential scientists, engineers and doctors into a sector of the economy that does not add value to the overall economy. 

Its hard to determine what to do about this growing problem.  Economists are becoming more aware of the problem, but policy makers in Washington have not paid any attention to it. 

The Tech Industry Responds To Potential Misuse Of Personal Data

The computer industry has developed the applications that let everyone share information with each other.  They don't worry about how Google or Facebook might use the private data that is available to them.  They just sell it to advertisers.  Some worry, however, about the PRISM program that has just been made public.  One concern is that people may be less willing to share information and that will affect their revenue stream from advertisers.  Some also worry about the potential for abuse from government.

The Deficit Hawks Are Dead. Long Live The Monetary Hawks.

The economic blogosphere has helped to defang the deficit hawks.  They have been transformed into monetary hawks who worry about the policies of the Federal Reserve.  Fiscal policy has been short circuited so the Fed is the only game in town that can do something about our employment picture.  The monetary hawks are less concerned about unemployment than they are about the potential danger from aggressive monetary policy.  Many believe that higher unemployment is the new normal.  Just like the heroes in Ayn Rand's novel, they shrug when the issue of unemployment comes up.

Meet The Whistleblower

The whistle blower (via Manan Shukla) who leaked information about domestic surveillance by NSA explains why he did so.  He gave up a high paying job working within the intelligence community to tell his story because he believes that the public should be in a position to decide whether this is the kind of society that they want. The capabilities of our security organizations are improving rapidly along with new technologies.  The behavior of the intelligence organizations are limited primarily by policies that are put in force by the executive branch.  Under existing laws those policies could easily be changed by an executive who believed that it was in the best interest of government to extend its operations into uncharted waters.

He hopes that a better informed public will take actions to deter the expansion of domestic intelligence gathering but he also recognizes that the public may do nothing about the problem.  Many believe that intelligence gathering is only against our enemies.  They do not understand how they might be threatened by a government that has the capability of monitoring all of their communications.  I'm quite certain that this post will be flagged and that everyone who reads the post will also flagged.  Under most circumstances nothing bad will happen as a result.  That could change, however, depending upon the policies put in place by the executive branch of government.

Washington Has Been Closed Down And Political Polarization Is Rising In The States

Robert Reich argues that Republicans lost the presidential election but they have effectively shut down the national government.  The polarization in Washington is even more evident at the state level. Blue states are becoming bluer and red states are becoming redder.  We still have a civil war but guns are not the weapon of choice.  He gives several examples of changes in blue and red states, that are leading to a more divided nation, that lacks a strong national government to bring the nation together.  It is not a pretty picture.

A Very Wealthy Entrepreneur Explains Why He And Others In The Top 1% Are Not Job Creators

Most real businesspersons understand that meeting their payroll is one of their biggest challenges.  That is why they only reluctantly hire people.  They only do so when they can't satisfy demand for their products and services with their existing labor force.  They are not job creators.  The consumers who buy their products and services are the job creators according to this entrepreneur.  He told this story to a Senate Committee looking at income inequality.  It is not a story that many of them want to hear because they have enacted the laws which benefit the top 1% at the expense of the middle class which is the real engine of job creation.  He earns 1,000 times the median family income but he can't spend 1,000 times his income.  The mythical job creators are destroying jobs by funding the politicians who have enabled corporate profits to be at an historical high while the percent of the US population with jobs is at an historical low point.  We won't create jobs by giving more tax breaks to corporations and by shifting the tax burden to wage earners,  and away from those in the top 1% who earn most of their income from capital gains and dividends.  That, of course, is what the Senate has been doing for the last 30 years.

Blair's Labour Government Embraced Mainstream Economic

Simon Wren-Lewis explains why the labour government under Tony Blair reflected mainstream economic thinking.  In fact, it was very much like the Clinton government in the US.  Both of these governments deregulated their banking industries and they both supported globalization and free trade.  Market forces were respected,  but government played a role in dealing with market failures.  One implication of this story is that conservatives in the UK and the US today have moved beyond mainstream economic thinking.  They embrace free market ideologies that are to the right of mainstream economic thinking.  Government is viewed as the problem and not as a solution to economic problems.

Why Healthcare Pricing is So Crazy In US And A Discussion Of Alternatives

We have learned that healthcare pricing in the US involves negotiations between individual insurance companies and healthcare providers.  Consequently, pricing for the same procedure varies substantially as a function of the negotiating power of the insurer.  Prices are also much higher for the same procedures in the US than they are in other countries because individual insurers lack the purchasing power of a single large insurer.  Individual insurers are poor agents for the employers who hire them to purchase healthcare.  The problem, however, reverts back to the employers who hire the insurers.  The employers benefit from the rise in healthcare prices because it helps them in the labor market and they pass the cost onto their employees.  The price that they pay for insurance reduces the cash compensation they provide to employees.  The cost of insurance for a typical family of four has increased from $10,000 to $22,000 per year while cash compensation for the median employee has been stagnant at between $50,000 and $60,000 per year.

One alternative for the current system is to copy the all-payer systems that prevail in Germany and Switzerland.  In those systems and association represents all of the employers in a region and it negotiates prices with a single provider association.  The prices of each procedure are standardized for a region and the prices are much lower than those in the US.

Another alternative is a reference price system.  The insurer would pay the lowest price charged in a region and the insured would pay the difference if a higher cost provider was selected.  This would result in a two tier pricing system in which the quality of the service was rationed by price.  Those with the ability to pay higher prices would receive higher quality services.  This is the more likely evolution of the US healthcare system since it is similar to the pricing of legal services and education in the US.  The ability to pay determines the quality of service provided in those systems.

Editorial On US Electronic Surveillance By NSA

The NYT provides good reasons why we should be concerned about NSA's electronic surveillance activities.  The program is so secret that even Senators on the Intelligence Committee, who defend the program, do not know the details about how it works.  It also appears that the executive branch is free to interpret the Patriot Act, which enables electronic surveillance, as it chooses.  We have to assume that the executive branch will not abuse its rights under the law.  When President Obama was a senator he raised a similar concern himself when the Patriot Act was being debated.

The Social Cost Of Carbon Has Gone Up In The US

The social cost of carbon due to global warming has been raised by the government.  It was set a $22 per ton for 2013 but it was raised to $36 per ton.  The higher social cost is the result of higher estimates of the damages to the environment from global warming.  Rising sea levels and damages to agriculture are responsible for a large portion of new cost estimates.  The EPA will use the new cost figures in its regulation of the environment. 

Silicon Valley Is Not Very Diverse

This article shows that Silicon Valley is less diverse than the rest of the nation.  Asian males have done well, but it is largely a white male universe.

The Share Of Income Going To Labor Is Falling Everywhere

Labor's share of income has been declining across the world, while the share of income going to capital has been increasing.  The implication is that the policies of any single nation are not responsible for the large shift in income from labor to capital.  Since income inequality has also been rising everywhere, labor is being hit with a double whammy.  Its share of income has decreased, and it gets a smaller share of the labor income that is generated. 

Its not easy to determine the factors that have contributed to the global shift of income from labor to capital.  The trend, however, is accompanied by the financialization of the global economy and by the rapid globalization of the economy.  This has been enabled by changes in technologies and communication which are not the direct cause of the shift in labor's share of income.

Austerity Hasn't Worked In Europe Because It Hasn't Been Tried???

The Senate Budget Committee is holding hearing on budget policy. The economy in Europe has been struggling to recover from recession, and austerity is often cited as one the reasons for the weak recovery.  That has made some senators concerned that fiscal policies in the US might have similar results.  An economist from the conservative Heritage Foundation was invited to give his view on the subject.  He presented data which indicated that there has been very little austerity in Europe and that most of the fiscal contraction has been in the form of tax increases.  Austerity can't be blamed for the economic problems in Europe according to his analysis (which depended on data from the OECD).  Moreover,  a more effective austerity policy would be heavier on spending cuts than on tax increases which conservatives believe to be bad for economic growth.

There are many problems with the statistics that were used to reach the conclusion that austerity hasn't really been tried in Europe, and that it was weak on spending cuts and heavy on tax increases.  One Senator (link to video in article)  presented data from OECD which showed that spending cuts were more substantial than tax increases, and he suggested that the Senate was being intentionally misled by the Heritage Foundation's economist.  His measures of austerity in Europe also conflicts with a report by OECD which comes to very different conclusions than those made by the Heritage Foundation's economist.  The OECD report provides an austerity measure for each country.

Republicans have always relied upon economists from conservative think tanks to support their policies.  In order for that to be effective the research must be credible.  In recent years the research coming from conservative think tanks has not been credible.  It has now gotten to the point where even journalists no longer accept their findings.

Home Prices Rising In US At Rapid Rate

This graph illustrates the rapid rate of housing price growth in the US.  The year over year rate of change is almost where it was during the boom years.  The rate of increase applies to distressed and non-distressed sales.  Investors are purchasing distressed properties and there is a shortage of inventory in many areas due to a slowdown in residential real estate development.

Why America Owes A Lot To Ben Bernanke And The Fed

The Fed has been criticized for its use of monetary easing to prevent the collapse of the US credit system and the dangers from deflation.  Martin Wolf argues that the US owes a big debt to Ben Bernanke and the Fed.  Without the Fed's help, and that of other central banks, we might have had another global depression.  The US economy going forward faces a headwind from US fiscal policy which is contractionary.  Moreover, there are other structural problems in the US economy that will limit growth.  The economy is being held up by consumers who have stopped running surpluses.  Businesses are still running large surpluses and the US continues to run large current account deficits.  It is unlikely that the US will run current account surpluses.  Therefore, the growth of the US economy is dependent upon an increase in business investment that has been slow to develop. 

Welfare For The Wealthy Is Better Than Welfare For The Poor

A member of Congress who benefits enormously from the $100 billion per year farm subsidies, that go primarily to rich farmers, quotes the scriptures to explain why government should not provide food stamps that are primarily used to feed poor children.  I'm certain that many of the good citizens from Tennessee will applaud his use of the scriptures to rationalize his his vote against food stamps.  Most of them are not aware of the subsidies that their congressman receives from government.  Wasteful subsidies to wealthy farmers and oil companies are not as visible to most voters as are public welfare programs.  This is particularly true of voters in states like Tennessee who will respond favorably to messages from hypocrites like the congressman that they elected.

Should We Trust Economists?

Noah Smith was a physics major in college who got interested enough in economics to earn a PhD last year from the University of Michigan.  He is like a lot of other smart people who were good at math and science but were attracted to economics because it seemed like science, and it was more interesting to them.  He is now teaching finance instead of economics.  He believes that finance has more practical value than much of the economics that he has studied.  He recently gave a talk at the Bank of England on the usefulness of DSGE models that are widely used by macro-economists.  He argued that they are not very good at forecasting the economy, and he explained why they are not very useful for making economic policy decisions.  The short explanation is that DSGE models make numerous assumptions, that are needed to make the mathematics tractable, but most of the assumptions are invalid.  The real economy is much more complex than the models that are in use.

In this article, written for a broader audience than economists at the Bank of England, he explains why we should be skeptical about economic advice provided by macro-economists. The problems are much more complex than the theories and models that are in use.  Moreover, they necessarily overlap with the political perspectives of the economist.  For example, the advice that one might get from conservative economists like Robert Barro from Harvard, and John Taylor from Stanford, will differ from that of economists like Paul Krugman from Princeton, and Brad DeLong from Berkeley.  Economists tend to be very smart people who are very good at finding faults in the ideas held by other economists, but none of them are as good as meteorologists who are only pretty good at forecasting the weather.

Wall Street Investors Are Large Purchasers Of Distressed Housing

Wall Street investors have been purchasing large numbers of homes in states most affected by the housing bubble.  They plan to rent the purchased homes and sell them later when prices increase.  One of the benchmarks used to determine the fair market value of a home is a comparison of selling prices with the rental income from the property.  It would appear that prices had fallen well below their worth as rental properties.  The entry of investors into these markets has helped to drive prices up in states like Florida, California and Arizona.  It may not be easy for the investors to exit these markets.  Prices are likely to fall if they put large numbers of their rental homes on the market.

Wolfgang Munchau Explains Why Austerity Will Raise Its Ugly Head Again In Europe

The headlines in Europe indicate that the focus on fiscal contraction is being replaced by structural reforms that will fix the eurozone economy in the long run.  The structural reforms will not reduce debt to GDP ratios because banks are still in trouble and credit is not available to restore the necessary growth.  The failure to reach imposed fiscal goals will lead to another wave of pro-cyclical fiscal policy that is known as austerity.  It will keep coming back like the monsters in a B movie according to Munchau.  He also makes some important points about the way in which many think about the eurozone economy.  Since the eurozone is a closed economy with a common currency, inflation can only occur at the eurozone level.  Nobody would argue that inflation would occur in one of the states in the US as a result of federal policies that affect all of the states.

Robert Samuelson Argues That Tough Love Will Restore Faith In Government

Robert Samuelson notes that public trust in government is at historically low levels.  That is a fact.  His explanation for the lack of trust and his solution is not a fact.  It is based upon his distaste for government social welfare programs.  He cites a public opinion poll which shows that the public does not trust Congress and he argues that the public is wrong to conclude that the members of Congress are the problem.  The real problem is that government attempts to do too much.  It creates expectations that cannot be fulfilled and that leads to a loss of trust.  The implication is that trust in government would be restored if government tried to do less.  Apparently, the public perception of the clowns that we send to Washington is an illusion.  The public also suffers from an illusion that lobbyists have too much control over our political process, and that money plays too big of a role in our electoral system.

Since the creation of unfulfilled expectations is the real of cause of the public's mistrust of government, the solution is for government to shrink itself.  Trust would be restored if politicians did what Paul Volcker did in the 1980's.  He broke the back of inflation by raising interest rates and triggering a recession.  That kind of tough love is needed today to restore confidence in government.  Congress should take out the scalpel and cut the popular programs that Samuelson does not like.  His trust in government would be restored.  The real question is whether that would restore the public's trust in government.  I think that Samuelson is the one who suffers from illusions.  The public's distrust of Congress is not an illusion.

The Tax Break State

All governments use tax policy to achieve social objectives.  The US government provides tax breaks that reduce government income by $900 billion per year.  This article breaks the tax breaks into three categories and it shows how each affects distinct income groups.  Around 30% of the tax breaks benefit the top 1% because they are the primary beneficiaries of the preferential tax treatment of capital income.  The top 20% benefit primarily from the mortgage interest deduction and the exclusion of state and local taxes along with health insurance premiums, paid for by employers, which are excluded from taxable income.  The majority of tax credits go to those with low incomes.  Tax credits are usually supported by democratic politicians along with most of the tax exclusions that benefit middle class Americans.  The republicans prefer to cut tax credits, and they work hard to maintain or increase tax breaks for the top 1%.  That is the simple answer to how Congress deals with $900 billion of tax breaks per year.

Why Medical Care Is So Expensive In The US

This article describes the irrational healthcare system in the US.  Healthcare spending in the US per capita is twice that of any other nation.  Those with good insurance get good care but premiums keep rising faster than inflation, and millions of Americans have no insurance.  It has become more of a business than many doctors would like it to be, but the financial incentives to take advantage of the system are powerful.  It is, by far, the single most important driver of our long term budget problems.  You only have to look at the politics of Obamacare to see what the problem is.  Those who benefit from high prices are willing to pay politicians whatever it takes to keep the system the way it is. 

Trustee Reports on Medicare And Social Security

The Trustee reports show that Social Security and Medicare costs will rise over time in relation to GDP.  Social Security expenditures are in line with predictions made in the 1980's when the payroll tax was created to provide a surplus that would be used to pay for future expenditures.  It is completely untrue to say that Social Security is facing bankruptcy.  Over time Medicare costs as a share of GDP will rise faster the cost of Social Security.  Eventually, it become a larger share of GDP than Social Security.  That is primarily due to growth in medical expenditures per beneficiary.  The percent of GDP consumed by the these programs is also due to a more moderate rate of GDP growth.  The lower growth rate in GDP is a function of slowing population growth.  The size of the labor force and the productivity rate are the most important determinants of GDP growth. 

Online Conference on Economic Issues In Asia

There are a number of online research papers in this conference.  Most of the papers are on China and India but papers on other Asian countries are also included.  These papers might provide a respite for those who are interested in learning more about economic issues outside of the US and Europe.

Growth Is Slowing Down In India

Most countries would like to have a 5% growth rate.  India's 5% growth was a disappointment, however, because it is its lowest growth rate in the past decade.  The lower growth rate is attributed to a lack of investment in infrastructure.  Among other things, India does not have enough power to support faster growth. 

Steve Job's Graduation Speech At Stanford

After a review of numerous graduation speeches that were delivered this year, I decided that it would be more interesting to post the speech given by Steve Jobs.  Like most good speeches it was brief, but it was also pithy.  He told three stories about his life that were meaningful to him.  The audience was not sure about how to react to what he told them.  My guess is that much of what he said will live with them for some time.  The future is unpredictable and one can't put the dots together ahead time.  We can only assess our lives after the fact by looking backwards.  Death is one of lives certainties.  Don't waste the time that is given to you. He tried to live each day as if it were his last.

A Debate On Making The Tax System More Progressive

The interesting point about this debate is that the 14 % who were undecided prior to the debate supported a more progressive tax system after the debate.  Only 2% of those who were opposed to a more progressive tax system changed their minds.  One could argue that Newt Gringrich and Art Laffer were not good choices to oppose Paul Krugman.  On the other hand, they made the same arguments that have been used by others to support cutting taxes for the rich.  Tax cuts for the rich were supposed to grow the economy and make everyone better off.  It was not hard for Krugman to show that there is no evidence to support that hypothesis.

Why We Should Tax Capital Gains And Dividends As Ordinary Income

The preferential treatment of taxes on capital reduced government tax revenue by $161 billion.  It is the second largest tax expenditure in the US and 93% of the benefit goes to the the top 20%.  Moreover, the top 1% gets 68% of the benefit.  Research shows that the rate of taxes on capital has no impact on the rate of investment and economic growth.  Those who are worried about federal deficits should be concerned about ending a tax expenditure that makes the tax system less progressive and has no social benefit.  Of course, those who believe that increasing the post tax income of the top 1% is a public good will oppose any increase in tax rates on capital.

The Third Age Of Financial Globalization

This article has numerous graphs which illustrate how the flows of financial capital, as well as levels of savings and investment, have shifted over the last few decades.  Developing countries represent a much large share than they did in the past.  Growth in China plays a major role in these shifts but it would be substantial even without China.