Wednesday, July 31, 2013

Home Prices Up 12% in US

Home prices in the US rose 12% versus the year ago prices in May.  This is good news for homeowners.  Investors are purchasing a lot of the underpriced existing homes which will be used for rentals.  The economy is more dependent upon the building of new homes.  That market is still depressed.  This is reflected in the stock prices of major home builders which have tumbled in recent months.

Jamie Galbriath Is Interviewed On Europe

This is an extensive interview, mostly about issues in Europe, that is well worth the effort.  Galbraith offers his views on the economics and politics of the eurozone.  He has spent quite a bit of time meeting with politicians in Europe and he has an unconventional approach to economics that is refreshing.  He does not believe that the eurozone can survive if Greece leaves the union.  History provides many examples that he uses to support this view.  He discusses the political and economic situation in Greece in some detail and he argues that European integration is dependent upon German leadership.  The politics in Germany stand in the way of the best solutions and the consequences of a eurozone break up will be severe for Germany, as well as it for the entire eurozone.

Sunday, July 28, 2013

A Brief History Of Monetarism Versus Fiscal Policy

Milton Friedman claimed that the Great Depression could have been avoided if the Fed had not let the money supply shrink.  He did not believe that we needed a very active Fed since it was only necessary in his view to have the money supply grow at the same rate as the economy.  Even more importantly, according to Friedman and his conservative colleagues, we did not need a very active government using fiscal policy to moderate the business cycle.  Friedman, after all, was totally opposed to Keynesian theory which supported the use fiscal policy during the Great Depression.  Moreover, conservatives were generally opposed to many of the views expressed by Keynes in his General Theory which was a critique of classical economics.

The recovery of the US economy, that resulted from the military buildup before and during WW ll, provided empirical support for Keynesian theory.  The first battle in the war between monetarists and supporters of Keynes went to Keynes.  The war was not over, however.  Stagflation in the early 70's was difficult to explain with Keynesian theory.  We were not supposed to have inflation during periods of high unemployment.  This led to a compromise between monetarists and supporters of Keynes.  The so called New Keynesian's accepted classically inspired microeconomics as the foundation for macroeconomics, and they viewed monetary policy as the first line of defense against a bad business cycle.  Friedman's monetarism died a natural death but the Fed successfully employed the management of interest rates during the period of that has been called The Great Moderation that began in the 1980's and lasted until the Great Recession.  The management of interest rates replaced the management of the money supply.

The Fed has actively used monetary policy during the Great Recession to reduce interest rates.  Short term nominal interest rates are close to zero and real short term interest rates are negative.  We have reached the zero lower bound in which nominal interest rates cannot fall any further but the economy has been slow to recover.  This has led the Fed to use unconventional monetary policies to manage the economy.  They have not been terribly effective in stimulating the economy, but political resistance to the use of fiscal policy means that it is the only weapon available.  That is why many economists support the Fed's policies despite the arguments by conservatives that they will destroy the economy.  They believe that government policies are responsible for our slow recovery.  If the government would just get out the way, market forces would lead to a strong recovery.  Keynes is dead but Milton Friedman still lives in their economic philosophy.

The Psychology Of The Irish Meltdown

The Irish economy was sunk by real estate developers and the bankers who financed the real estate boom and bust.  The Irish government assumed the debt that was incurred by the banks. The taxpayers rescued the bankers.  The rest is history.  Taxes have been raised to finance the government debt, and essential government services have been cut.  The Celtic Tiger era is over.

For the last month the Irish public has been treated with tapes of the bankers discussing their problems and the government rescue they required.  The laughed about the issues and had no concern about how their actions were harmful to their fellow citizens.  Their amorality was palpable in the tapes.  This article, by and Irish novelist, attempts to explain the psychology of the bankers and those who were duped by the real estate developers into the Ponzi scheme.

Saturday, July 27, 2013

The Speech On The Economy That Obama Did Not Make

Econospeak posted a response to a post by Krugman in reference to Obama's recent speech on the economy.  It was mainly about a distinction that Krugman made between the views of Stiglitz and Minsky.  Krugman, however, was less concerned about the distinction between Stiglitz and Minsky than he was about shifting their focus on structural issues in the economy back to the issue that he prefers to write about.  Krugman believes that it will take us a long time to fix the inequality issue raised by Stiglitz or the overuse of leverage by the banking system that Minsky wrote about.  He focuses his attention on stimulating aggregate demand in order to reduce unemployment.

Consequently, I have posted a quote from Econospeak which had little to do with the differences between Stiglitz, Minsky and Krugman.  It focuses attention on the connection between trade deficits, budget deficits, and income inequality.  This is a speech that no US president would dare to make.

If I were Obama’s speechwriter, I would say something like this: America’s economic pre-eminence and its key currency status has enabled it to become an unsustainable deficit country.  This has fed the inequality that has made our society so much coarser and unjust.  And this inequality, the ability of an economic elite to prosper while the rest of us languish, has undermined the political will to make the changes that need to be made if America is to prosper again.

And if I wrote that, I wouldn’t be Obama’s speechwriter much longer.

The US has been running trade deficits of around 5% of GDP for many years.  Those trade deficits led to lost jobs and lower incomes for many Americans.  Government borrowing and spending and consumer borrowing and spending has been necessary to compensate for large trade deficits.

Wall Street Banks Developed A New Way To Corner Commodity Markets

In the good old days of the "Gilded Age" Wall Street bankers did what they could to corner commodity markets through ownership.  That allowed them to set the prices for important commodities.  That inspired game makers to invent the game of monopoly which rewards the player who can establish monopolistic positions.  The game also included a card that would send a player to jail if she were unlucky.  That card has been removed from the modern version of the game.  It is more consistent with our new era of liberty.  Bankers and other monopolists seldom face the threat of imprisonment.  This article describes the new form of monopoly that enables the banks to profit from monopoly.  They no longer attempt to corner commodity markets through ownership.  Instead, they have purchased warehouses that store the commodities.  They earn a premium for storing a commodity and they have figured out how to increase the length of time that a commodity sits in one of their warehouses.  The average length of storage in one of Goldman Sachs's aluminum warehouses has increased from six weeks to 16 months since they cornered the storage market.  More importantly perhaps, Goldman also trades futures in the aluminum market.  The price of aluminum is determined in spot markets that are very sensitive to variations in supply and demand.  Ownership of the warehouses, and the ability to affect the supply of aluminum in the spot market, gives Goldman  an important advantage in the trading of aluminum future contracts.

Goldman is not alone in this game.  Other Wall Street banks have established positions in other commodity markets.  They have been assisted in their efforts by the Federal Reserve which is responsible for regulating them.  There are many holdovers in the Fed from the Greenspan era who share his anti-regulation philosophy.  The government agency that regulates the commodities futures market is taking a look at this practice.  It is more likely than to Fed to alter this arrangement. 

North Carolina Takes The Lead In Voter Repression

The Supreme Court decided that southern states had changed and that the voter rights law no longer required them to demonstrate compliance.  Meanwhile, states controlled by the GOP have been experimenting with a variety of methods of repressing the turnout of voters who are most likely to vote for Democrats.  North Carolina moved to the top of the class after the Supreme Court decision.  They are using all of the methods developed in other states to keep the wrong people from voting.  The Supreme Court, of course, will view this as a good example of states rights, and consistent with the original intent of our founding fathers who tolerated slavery and created the electoral college as hedge against populism.

Thursday, July 25, 2013

Why Energy Independence Is A Dumb Idea

Economists and politicians in the US like the idea of energy independence.  Charlie Mugar who runs Berkshire Hathaway with Warren Buffet tells us that this is a dumb idea.  We should be saving our energy reserves for a time in which they will be more needed and more expensive.  We should be investing in green energy technologies in the meantime.  Mugar tells us that free market ideas are always the best ideas. 

How Do We Fix Detroit?

There has been a lot of press coverage about the collapse of one of Americans largest cities and what is being done about it.  This article does a good job of describing the problems and some of the bright spots in Detroit.  It concludes that there is no formula for fixing the problem and that is a good thing.  Of course there is no formula for something as complex as restoring one of our major cities.  I'm not sure, however, that this is necessarily a good thing.  There are lots of cities in the US that face problems similar to those in Detroit.  It would be helpful if we had a better understanding of how to approach these problems.

We Need More Than GDP To Measure Economic Well Being

GDP is commonly used to measure the success or failure of economic policies implemented by government.  This article, which focuses on the UK, explains why we need other measures to complement GDP.  It suggests that median per capita GDP provides important information about the distribution of income that is important for well-being.  Median income in the UK, has been stagnant for many years, as it has been in many developed countries.  Economists, and many politicians, have been less interested in distributional issues than they are in the overall growth of economies.  They frequently report per capita GDP but that is based upon average income.  Growth in average income obscures distributional trends in income growth because average income increases even when most of the growth in income goes to those at the top of the pyramid.  For example, if Bill Gates walked into a bar, the average income of those in the bar would rise enormously but that would have little impact on the rest of the patrons in the bar.  The median is a better measure of central tendency because it is less affected by extremes.  Perhaps that is why it is less frequently used by economists and politicians to measure growth in income.

What Makes Healthcare Exchanges In The US So Complex?

This article compares the US exchanges under Obamacare with those used in Switzerland.  The exchanges in Switzerland are more user friendly and they do not require the use of an exchange navigator.  The complexity of the US exchanges is due to many factors but it is largely determined by the greater number of choices that are available to consumers under Obamacare.  Consumer choice is desirable but it comes at the cost of complexity and higher administrative costs for the exchanges.

The use of exchanges in the US is also complicated by politics.  Each state is responsible for setting up its own exchange of leaving that up to the federal government.  Many states controlled by Republicans are determined to undermine the successful implementation of Obamacare.  Consequently, there is a lot of misinformation about the exchanges and about Obamacare that consumers must sort through.

Is The Fed's Policy Of Paying 0.25% Interest On Bank Reserves Harming The Economy?

Martin Feldstein argued that the Fed is responsible for many of our economic problems because it is paying banks interest on the reserves that it holds.  Noah Smith tore this argument apart and Paul Krugman went into more detail about why Feldstein is wrong.  He ended his post by asking why prominent economists like Feldstein keep making bad arguments that are not supported by data, or by economic theory.  I think he knows the answer.  Feldstein was an economic adviser to Ronald Reagan and he has been one of the most important Republican economists in America over the last 30 years.  He was the Chairman of the economics department at Harvard that he staffed with influential economists who share his political philosophy.  He was also the head of the National Bureau of Economic Research (NBER) where his influence is still present.  Most economic problems are very complex and they are very hard to untangle.  Clever economists like Feldstein are expert at shaping the data to fit their desired conclusions.  Government is usually the problem rather than the solution.  The ideal world is one in which markets are permitted to operate without government interference.  For example, at a recent session of the NBER, that honored Martin Feldstein, a paper was presented that concluded that the rapid rise in CEO compensation was best explained by the operation of the labor market.  Corporate boards are forced to pay what the market for CEO's has determined.  The price is always right.  Greg Mankiw, who is the current Chairman of the economics department at Harvard makes a similar argument.  The rapid rise in CEO compensation is explained by market forces.  The wage premium reflects a rapid increase in their productivity.

Keynes provided an answer to Krugman's question many years ago.  He argued that David Ricardo's influence within the economics profession was best explained by the coincidence of his theoretical framework with the interests of the powerful in British society. 

Is Multinational Employment Shifting Back To US Employment?

One of President Obama's talking points in his speech on the economy is that MNC's are bringing jobs back to the US.  The most recent data on this subject, which only includes 2011, does not support that claim.  Moreover, the data do not include foreign jobs that have US firms have outsourced to contract manufacturers who are not employed directly by US firms.  Its understandable that the president would like to focus attention on a few companies that have created jobs in the US.  However, his decision to do so suggests that he has no intention of changing the dynamic that has been underway for many years.  MNC's make employment decisions based upon how it impacts their firms.  Honda, for example, employs workers in the US to assemble cars in the US because it is less expensive than shipping assembled cars, and because it conforms to a quota system that limits the number of cars that it can ship into the US. Its good business for Honda to do so.  US firms also employ workers in international subsidiaries when it makes good business sense.  US policies have little to do with their decisions.

Wednesday, July 24, 2013

The New Railway Era?

Globalization is dependent upon low cost transportation.  Trade between China and some parts of the world is being supported by old fashioned railroads.  Rail transportation is also growing in the US.  It provides the lowest cost transportation within the US and between internal US markets and our shipping ports.  Rail transport will also grow as the cost of oil increases.  Warren Buffet has invested heavily in railroads.  He is usually quicker than most in spotting a bargain. 

American Exceptionalism

America is different in many ways from other nations.  None of our differences is more pronounced than the growth rate of our spending on healthcare.  The growth rate tapered off in 2012 but the trend line is dramatically different from that of other nations.

A Nation Divided By Politics

This article describes the budget proposals being developed by the Republican controlled House.  It includes huge cuts in the SEC which regulates the security markets, and the IRS which is responsible for enforcing tax policy.  It also includes big cuts to the EPA which is responsible for protecting the environment.  The easiest way to describe the House budget is that it is against everything that the president that we elected if for.  The House budget will not pass in the Senate but is shows the enormous value gap that exists in our nation.  The Republican members of the House were elected by the people in their districts.  Their budget reflects the values of the citizens that elected them.  Those values have been carefully honed over the last decade or two by the folks who created the Tea Party.

Nothing reflects the values and the intentions of a government more than what it chooses to spend the tax revenue that it collects, and from whom it chooses to collect the revenue.  The battle over the budget is really a battle about our value system.  The Republican party has made a conscious decision to magnify and exploit the minor differences in values that are typical in any country.  This has turned us against each other and it is making our country ungovernable.  Its motto should be "divided we stand and divided we fall".

We should also remember that large cuts in government spending were originally advocated by the GOP as the way to reduce the federal budget deficit.  The federal budget deficit has been shrinking along with our recovery from the recession.  It is pretty clear that the real intention of their proposed spending cuts is to shape government in their image.  It has little to do with fiscal responsibility.

Tuesday, July 23, 2013

Our Future Depends Upon Selecting The Right Green Energy Policies

We recognize that our planet is finite and that we cannot continue to operate as we have in the past.  Our basic problem is that we have to determine an industrial policy that will enable us to rapidly develop green technologies.  Unfortunately, many oppose the use of industrial policy by governments.  This article discusses this problem and suggests a way to sell industrial policy to the public. 

Dani Rodrik Explains Why He Is Moving From Harvard To A New Job

Dani Rodrik is one of our top developmental economists.  He has worked at Harvard for over 20 years and he has been quite happy there.  It is a great place to work.  He does not have to look hard for new problems or opportunities for research.  The world comes to Harvard and to the Kennedy School where he teaches.  Yet he decided to take a new position at the Institute For Advanced Study (IAS) located in Princeton.  I really liked the most important reason that motivated his decision.  He knew what he would be doing for the rest of his professional life if he stayed at Harvard.  He is less certain about what he will be doing at the IAS.  He has a chance to create a somewhat different Dani Rodrik.  We should all have the opportunity that has been given to Dani Rodrik.  We would all be better off   if we took opportunities to reinvent ourselves.

Why You Are Safer In A Big City Than You Are In Rural America

This study conducted at the University of Pennsylvania reached a conclusion that would surprise most Americans.  They believe that big cities are more dangerous than rural regions.  This study explains why we are safer in big cities.

Senator Warren Shows Why She Should Be Our Next President

CNBC made the mistake of inviting the junior senator from Massachusetts to defend the bill that she and John McCain are proposing that would impact the Wall Street banks.  The bill would restrict FDIC deposit insurance to banks that use deposits to make loans.  Investment banks that engage in riskier speculations, like those that caused the global financial crisis, would not have access to FDIC insurance.  The bill is a small step in the right direction that would make the financial system more stable.  The mistake that CNBC, which is generally a platform that advocates for Wall Street, made is that they picked an argument with the wrong senator.  She showed that she is much more knowledgeable than the talking heads that CNBC employs to advocate for Wall Street.  It was almost embarrassing to watch her destroy them. 

Is Urban Sprawl The Cause Of Detroit's Problems and Lower Social Mobility?

Paul Krugman had posted an article connecting Detroit's problems to urban sprawl.  He extends his comments to the general problem of lower social mobility in cities with high urban sprawl.

The Economics Of Gasoline Prices

This article by an environmental economist makes me wonder about the quality of some of the economists who blog about environmental issues.  He does not understand the difference between the supply of oil and the supply of gasoline.  The price of gasoline is not affected by the supply of oil as much as it is by the supply of gasoline.  The comment following his blog makes it clear that a small number of refineries in the US produce most of our gasoline.  The refineries are most profitable when they operate at 95% capacity.  Any glitch at a refinery will reduce the amount of gasoline on the market because there is little excess refinery capacity available to remedy a problem at one of the refineries.  Prices will rise whenever there is a problem in one of the refineries. Moreover, there will seldom be a problem of excess capacity which would cause prices to fall.  The only thing that would cause gasoline prices to fluctuate,  when refineries operate at 95% capacity, are fluctuations in demand.  Prices tend to rise during summer holiday periods when demand for gasoline peaks.

John Whitehead, the environmental economist who confused the supply of oil with the supply of gasoline, also praised a study which employed a cost/benefit analysis to conclude that drilling for oil in Alaska and the Artic region would be a good idea.  The costs would be high but the additional supply of oil would only result in a modest decline in gasoline prices. Apparently, its a good idea to drill for more oil as long as it does not cause prices to fall too far.  There was no discussion of environmental costs. 

Another Example Of The Revolving Door Between Government And Industry

This should not surprise anyone.  Lawyers easily move back and forth between firms that defend corporations and government agencies that regulate them.  The financial payoff comes when they land one of the top jobs in a private law firm.  In this case, the lawyer who was in charge of enforcement at the SEC scores a $5 million payoff at a top corporate law firm where he will represent firms under SEC investigation.  His knowledge of how the SEC works, and his relationships with SEC lawyers who still work there,  will be very valuable.

The biggest problem with the revolving door is that the end game is to land a top job in private practice.  That is bound to influence what one does when they are in the SEC or other government agencies.  The best way to curb this practice is to pay top government lawyers competitive salaries but that is not practical.  The alternative is to pay them well, and extend the waiting period between their exit from government service and a job as a corporate defense attorney. It is only one year today.  That is about the time that it takes to review all of the offers that top SEC attorneys receive when they resign.  Unfortunately,  Congress has been cutting budgets for the SEC, the IRS and other government agencies.  We are making careers in government less attractive than they once were.

Saturday, July 20, 2013


Tim Taylor summarizes a paper that describes the changes in global trade over decades.  We are in a new pattern of global trade that has implications which are seldom discussed.  

Friday, July 19, 2013

Paul Krugman Claims That China's Economy Has Hit A Wall

Krugman raises some caveats about the accuracy of data available in China, but he argues that the Chinese economy is in for a day of reckoning.  Compared with other economies, China's economy has been overbalanced towards investment.  Personal consumption is much lower in China as percent of its economy than it is in most other countries as well.  The wall that China has hit, according to Krugman, is the investment wall.  There are fewer opportunities for investment that provide a good return.  China has also reached a point where surplus labor is falling.  Wages have been rising and China will have to devote more of its output to personal consumption.  The model that China has been using to promote rapid economic growth will have to be modified, and China will not be able to grow at its current rate according to Krugman.

Thursday, July 18, 2013

Wage- Price Flexibility And Full-Employment

In the New Keynesian models of the economy falling wages and prices eventually leads to full-employment.  Paul Krugman explains the channel by which that happens.  Falling wages do not increase the demand for labor.  Price deflation increases the real money supply and that causes interest rates to fall.  In a sense, price deflation acts like expansionary monetary policies. Wage and price deflation might enable an individual country to increase its exports, and raise employment, but that can't happen if other countries respond by lowering wages and prices.  That leads to depressed global demand and global recession.

In a liquidity trap, like we have in the US and Japan, interest rates are already at the zero lower bound.  Therefore,  monetary expansion is not effective in increasing demand and employment.  It only works if it raises expectations of inflation.  Expectations of price inflation will encourage business and consumers to spend today in order to avoid higher prices.  Deflation is bad because it increases the real burden of debt.  Borrowers will have to pay back their debt with more valuable dollars.  Wage and price deflation is the wrong medicine for high unemployment.  Its a good thing that wages do not fall rapidly during a recession.

Wednesday, July 17, 2013

Ben Bernanke Tells Congress That It Is The Major Threat To Economic Recovery

One has to give the Fed Chairman credit.  He told the GOP dominated House that Congress was that fiscal policy,  which is set by Congress,  will reduce economic growth below the Fed's forecast.  He also told them that aggressive monetary, which most Republican members of House opposes, will continue as long as inflation remains below the Fed's 2% target and unemployment is above 6.5%.  That is not what Republicans wanted to hear.  It is expected that he will step down after his current term.  The president may have a hard time replacing him with someone who is willing to tell Congress what he thinks about it's policies.

John Galt May Be Driving Sears Out Of Business

Bloomberg Business Week published this article that describes the organization structure at Sears.  It is a model based upon competition between business functions that operate as profit centers.  It was created by a hedge fund guru (Eddie Lampert) who purchased Sears.  Lampert believes that the invisible hand does a better job of providing signals to top management than cooperative functions that do not run their own P&L.  It doesn't seem to be working at Sears, but it provides an interesting contrast between the radical restructuring at Sears and the way in which most retail firms operate.  John Galt does not have experience in retail but he does not believe that it necessary.  He runs Sears bu the numbers.  This article should be required reading in every business school.  It also raises many questions about the theory of the firm which interests folks like Paul Krugman who posted the article below.

What Does The Market Based Experiment At Sears Imply For The Theory Of The Firm?

Paul Krugman wonders what Eddie Lampert's reorganization at Sears and argues that it runs counter to the prevalent organization large corporation.  They are primarily command and control systems in which functional divisions provide most of needs of the corporation.  If markets are the best way to organize firms our major corporations violate the concept of market rule.

The Affordable Care Act Seems To Be Working As Planned In New York

Individuals will be able to purchase healthcare insurance at much lower cost than they were before ACA.  The exchanges have encouraged insurance companies to offer plans at competitive prices.  Since everyone is mandated by law to purchase insurance, healthy young people who chose not to purchase health insurance prior to law will be new customers for the insurance companies.  That makes the overall risk pool more attractive for the insurance companies and less expensive.  The experience in NY is similar to that of California and Oregon where exchanges have been effectively implemented.

Tuesday, July 16, 2013

Are Hedge Funds For Suckers?

A handful of hedge funds provide good returns to their investors.  Most of their business comes from institutional investors like insurance companies, pension funds, university endowments etc.  Some of their business comes from wealthy individuals.  They have been restricted by the SEC from selling their services to investors with less than $1 million in assets.  The SEC has ended that restriction.  Consequently, some hedge funds will target that market.  This raises questions about whether hedge funds are a good bet for most people.

This article, which is follow on to a critique of hedge funds in Bloomberg Business Week, explains why they may not be a good investment most people.  On the other hand, they are very good for hedge fund managers.  They get paid very well when they provide a good return, and the investor loses when the fund does poorly.  The hedge fund manager is not required to return the fees that were earned during the good years. Most investors are better off investing in low cost index funds than they are in paying high fees to mutual funds that are actively managed.  That is because mutual fund managers do not consistently beat the broader stock market.  That logic also applies to hedge funds.  The high fees paid to hedge fund managers is an even larger hurdle for them to overcome in order to provide a consistently good net return to investors.

Australia Ends Carbon Tax

The carbon tax has been very unpopular with businesses and with the public.  Australia's new Prime Minister decided to end the carbon tax, prior to the fall elections.  The plan is to implement a cap and trade system which will dramatically reduce the cost per ton of carbon emissions.  Climate policy in Australia has been trumped by economic issues and strong resistance from businesses most affected by the tax.

Monday, July 15, 2013

What The US West Coast Will Look Like After Climate Change

The rate of sea level rises has increased on the West Coast.  This article has visual images of what familiar places on the West Coast will look to future generations given scientific projections of the impact of climate change

Slower Economic Growth Prospects For China And India?

China and India have been growing much faster than many other parts of the world.  Growth is beginning to slow down in both of these countries.  This article compares and contrasts the economic growth prospects for China and India.  Governance is an issue for both of them but the governance issues are quite different.  Their growth prospects will depend upon how they make needed changes without making important changes in governance.

Sunday, July 14, 2013

The Wall Street Journal Provides A Platform For Economic Nonsense

John Taylor is a prominent economist from Stanford.  He and like minded colleagues with a University of Chicago implant in the brains have written a series of articles in the Wall Street Journal about the financial crisis, and the failures of US fiscal and monetary policy.  Brad DeLong reviewed their WSJ articles and found inconsistencies, faulty predictions about what would happen in the economy as a result of government policies, and even ignorance about the data that existed at the time in which their articles were written.  If they were graduate students at Berkeley they would have been given failing grades by Brad DeLong.  Since they are prominent economists who adhere closely to the ideology preferred by the WSJ, and many other economists, they are given a platform by the WSJ and a free pass by many of their colleagues in the profession to publish nonsense. 

Saturday, July 13, 2013

Leadership For Social Change

This is a link to a video interview by Bill Moyer with senior lecturer at Harvard who shares his experiences in leading social changes with graduate students at Harvard's Kennedy School.  It provides several very valuable lessons that can be useful to those among us who are concerned about climate change, income inequality and other social issues.  There are powerful forces that resist the changes that are necessary, and it is too easy to accept the status quo. Leaders have to believe in the improbable, and share that belief with those with whom a counter movement can be created.  It is a mistake to accept the probable outcome, or compromises which lead to a dead end.  It is also a mistake to wait until the time is ripe for change.  The only right time to lead the change process is now.

One of the salient ideas that I took from the interview is the importance of a stories or a narrative to inspire the necessary change.  The narrative of the free market has been used by those who prefer the status quo and who resist change.  It provides moral, political and economic ideas that motivate conservative movements.  This is a deeply flawed narrative, and it is important to expose those flaws.  It is also important to provide an alternative narrative that is based upon moral, political and economic values.  Many of us share those values but they require a movement to achieve the goals that we seek.  It is not sufficient to be content with the "superior" values that we hold as individuals.

The occupy Wall Street movement did a good job of raising awareness.  It eventually disappeared because it relied upon a single tactic.  Movements must be supported by a strategy as well as a narrative.  The right strategy is often developed through experience with a variety of tactics.

I strongly recommend this video to those who believe in social change and want to learn more about the leadership of social change movements.

Derivative Trading Regulation In US Takes A Small Step Forward

The US regulator for derivative trading has taken steps to apply the Dodd-Frank bill, which was passed during the financial crisis, to the trading of derivatives by US Banks.  The rule will prevent banks from shifting their trades to unregulated countries such as the Cayman Islands.  It was not able to apply Dodd-Frank to trades by bank subsidiaries in Europe and elsewhere.  The banks will be able to take advantage of less stringent rules in foreign subsidiaries as long as they can argue that the regulations in those countries are "comparable" to those in Dodd-Frank.  We can probably expect that millions will be spent by the banks on lawyers who will work vigorously to define "comparable" in a way that satisfies the banks.  Unfortunately, the head of the agency which regulates derivative trading is stepping down at the end of the year.  He has been reform minded.  We will have to wait to see if he is replaced by a like minded chairman, or by a regulator supported by the banking lobby.

The Tea Party's Farm Bill Shows Its True Colors

The Tea Party dominated House passed a very generous farm bill which provides huge subsidies over ten years to agribusiness which provides campaign contributions to Republicans in return.  Support for agribusiness is one of the reasons for the GOP's dominance in the farm belt.  The bill contains no funding for food stamps which has been one of our most effective anti-poverty programs.  The food stamp program has usually been included in the farm bill in order get needed support for the subsidies to agribusiness.  The GOP's dominance in the House permitted it to pass the farm bill without including the food stamp program.

The GOP's eagerness to subsidize agribusiness shows that it really cares little about reducing budget deficits.  What it really cares about is winning elections.  Its strategy is to throw money at large campaign contributors,  and to cut programs that provide benefits to the "wrong kind of people". Those who benefit from anti-poverty programs include minorities.  That enables the GOP to win votes from Tea Party members who feel superior to minorities.  Tea Party loyalists defend their opposition to anti-poverty programs by claiming to be against big government ( when it rewards the wrong people) and by raising concerns about budget deficits.  That has been an effective strategy, particularly in the South, and in rural America, for a long time.  Poor minorities are at the bottom of the social pyramid.  Their presence at the bottom of the pyramid enables poor whites to occupy the rung just above them. 

Thursday, July 11, 2013

The Flexible American Workforce

Most economists like the idea of a flexible labor force.  Flexibility means a lot of things that are consistent with the concept of a market.  In the labor market workers are suppliers of labor.  Employers have a demand for labor.  The demand for labor can change in accordance with changes in the product and service markets.  A flexible labor force is able to adapt to changes in the demand for labor.  Anything that limits labor flexibility makes the labor market less efficient.  The market is also less efficient if employers are constrained by labor laws, union, or regulations that inhibit their freedom to do satisfy their demand for labor at a desirable price.

In a full employment economy the demand for labor may exceed the supply.  That puts pressure on employers to satisfy their demand in ways that provide an advantage to workers.  When the economy operates below full employment, the advantage shifts to employers.  This article describes some of the ways that employers have used to take advantage of the job shortage.  The number of part time jobs and temporary jobs has been increasing for a decade.  This has been accompanied by a decrease in hourly wages and a decline in the number of workers who are eligible for the benefits that ordinarily are made available to full time workers.  This has been good for business profits since the cost of labor is a major part of a businesses operating costs.

In addition to this trend, the demand for labor has shifted in ways that affect compensation.  The bulk of the new jobs in the most recent employment report have been in the service sector.  They are predominately in the low paying retail and hospitality sector.  The number of manufacturing jobs created, which typically pay higher wages along with benefits, was less than the number of manufacturing jobs that were lost.

The increased use of temporary and part time workers also distorts the data on unemployment.  They are considered to be employed even if they would like to be employed full time.  A lower unemployment rate does not mean what it used to mean when workers were laid off during a low point in the business cycle and were called back when business improved.  Jobs in the US are not what they used to be.  The labor force is more flexible and lower paid and it will remain that way as long as the economy operates below the full employment level.  

What Is A Bank? And Why Do They Resist Holding More Capital.

What is a bank?  The simplest definition is that banks borrow money short term, at low interest rates, and they lend it out longer term, at higher interest rates.  The money that they borrow by taking deposits, or other forms of borrowing, are liabilities to a bank.  The loans that they make are assets.  Banks are insolvent when their liabilities exceed the value of their assets.  To protect themselves from insolvency banks hold capital, or equity, that can be used to compensate for any losses that they might incur from the assets that they hold.  Their assets lose value when the risk of default increases. The ratio of assets that banks hold in relation to their assets has become an issue since bank regulators want to increase that ratio to avoid future banking crises.  If banks held more capital or equity they would be more able to deal with a decline in the value of the assets that they hold.  

Banks don't want to increase their capital to asset ratios because that reduces their leverage.  Banks are measured on the profits that they earn in relation to the capital or equity that they hold.  If they are required to hold more capital they have less leverage, and their return on equity will be lower at the same level of profit.  Bank executives are compensated primarily on the return that they earn on the equity that they hold.  They argue that higher capital ratios would increase their costs and reduce the amount of lending that they do.  Bank regulators don't buy that argument and they want to reduce the risk of insolvency in order to avoid the next banking crisis.  The only certain outcome from this debate is that banks will spend more money lobbying regulators and politicians against the need for higher capital ratios.

US Department Of Energy Warns About Impact Of Climate Change On Energy Systems

The report by the US Department Of Energy listed the numerous ways in which climate change is affecting the US energy systems.  Last year was the warmest year in US history and last July was the warmest July in recorded history.  The costs to the energy system are currently measured in the billions.  In the future they will be measured in the trillions if nothing is done to reduce the impact of climate change on our entire energy system. 

One would think that a report like this from the Department Of Energy would raise concerns and spur action.  President Obama's recent speech on climate change indicated that he is aware of the problems discussed in the report.  His speech was immediately attacked, however, by politicians and right wing opinion leaders who oppose everything that the president proposes.  Opposition to climate change policies has become a long term platform in one of our major political parties.

Wednesday, July 10, 2013

Free Market Ideology And Price Fixing

Markets are assumed to be price competitive.  Some markets are price competitive.  In other markets prices are fixed by a variety of means.  This article describes how Apple fixed the prices of e-books with five major publishers.  Apple lost the first battle in an anti-trust law suit against them.  The next trial will determine the damages and Apple's financial liability.

Europeans Have Lost Faith In Government

The economic crisis in Europe has led to a loss of faith in government.  This has occurred in the rich countries as well as those most affected by the economic crisis.  There are major concerns about how tax dollars allocated and what they are spent upon.  A concern about corruption and the influence of lobby's on government is much more pronounced than it was before the crisis.  The public has also lost confidence in the media.  This was particularly evident in England which has witnessed the hacking scandals conducted by one of Rupert Murdoch's newspapers.

IMF Cuts Global Economic Growth Forecast Again

The IMF cut its global growth forecast for the fifth time this year.  Growth in 2013 and 2014 will be lower than it was in their most recent forecast.  Slow growth in Europe, and changes in US fiscal and monetary policies, are affecting growth in BRIC countries that have been providing much of the growth in the global economy.  The emerging market economies are heavily dependent upon growth in the developed world.

The Decline Of North Carolina

North Carolina was one of the more progressive states in the South.  Over the last few years Republicans have taken over the government of the state and they are systematically reversing the gains that had been made.  This article describes some the changes that have taken place in North Carolina.  These changes are part of well orchestrated, and well funded strategy that is underway in many states that are controlled by republicans.  The Koch brothers, and their allies, are major funders of the ALEC program which supports these efforts at the state level. 

Meet A Republican Corporate Governance Crusader

Robert Monks is a member of a dying breed.  He is an old fashioned republican who believes in shareholder democracy.  He is convinced that large corporations have effectively acquired control over the US government, and that CEO's have captured control over our corporations.  That implies that a relatively small group of powerful CEO's run the country.  Our electoral system has been corrupted, and shareholders have little interest shareholder democracy.  Our large institutional investors, who own most of the stock in US corporations, are passive investors who allow corporate executives to run corporations in their own interest.  This article describes some of the efforts that he has been taking to reverse this dynamic.  Unfortunately, he is a rare breed who represents an ideal that no longer exists.

Tuesday, July 9, 2013

Tribalism And Inflationitis

Many economists, politicians and Wall Street types have been predicting inflation for the last five years.  We haven't seen inflation in most of the world but that doesn't change their predictions about inflation.  Of course, we will have inflation some day and they will be correct some day.  Even a stopped clock is right twice a day. 

Noah Smith argues that those who have been predicting an event that has not occurred are supported by membership in a tribe.  Tribal members tend to believe the same thing and they keep repeating what they believe to themselves and to others.  That is what keeps a tribe intact.  He describes some to the tribes that he has observed and contrasts tribalism with a denial of reality.  In science, reality has a way of eventually intruding on strongly held viewpoints.  Reality has little impact on tribal members.  Unfortunately, a lot of prominent economists are members of of one kind of tribe or another.  Smith has an interesting way of categorizing the tribes to which they belong.

The US Economy In Eleven Charts

This article describes the US economy at the mid-point of 2013 pretty well. 

Sunday, July 7, 2013

Adam Smith And The Market Society

Jerry Weintraub is a professor at the University of Pennsylvania who teaches a course on the pros and cons of economic liberalism.  In this post he is critical of a post by Brad DeLong about Adam Smith which he regarded as naive.  Since the long weekend in the US has limited the number of interesting posts in economic blogosphere, I thought that it would be interesting to focus some attention on some fundamental ideas that are not time bound.  Weintraub is highly critical of Smith's dichotomy which limits social behavior to two motivations.  The market system is based upon self interest, and a system of market exchanges, which unintentionally leads to a better result than a system based upon beneficence and intentional interventions in the market system.

I think that Weintraub's critique of Smith is well taken.  He also refers to The Great Transformation by Karl Polanyi which argues that a system of market exchanges is not natural or universal.  He asserts that a market system can only exist in a market society, and economic liberalism goes beyond economics.  It is the philosophy of the market society.  Polanyi provides a powerful critique of the limitations of the market society and the philosophy which is used to justify it.

Economic liberalism developed in 18th century Britain.  Consequently, Polanyi devotes a considerable amount attention to the great transformation that was taking place in Britain.  Labor is just another commodity that is priced in accordance with the market for labor.  When the price of labor fell below the minimum required for subsistence an entire system of self protection was developed in reaction.  It may be profitable to avoid the historical description of that system and devote more time to the rest of the book if it is of interest.  

Germany Is Doing What The US Should Be Doing

Germany is investing in infrastructure.  The payback on most of these investments will exceed their cost which includes very low interest payments.  There are many opportunities for infrastructure investment in the US but we can't get it done.  They are being postponed because we are told that they are unaffordable at our current debt level.  That argument makes no sense.  Needed investments will have to made in the future perhaps at higher cost.  Germans either trust their government to make the right investments or some of our politicians don't like infrastructure investments when they might benefit the wrong political party.  Some of the investments being made in Germany have not worked out according to plan.  That happens with private investments as well.  However, the ideology is different in the US.  In the US many assume that government is incapable of making the right investments and it is assumed that private industry seldom makes bad investments.  It was not always that way in the US.  Our interstate highway system was supported by both political parties and our country would be very different without it. Government investment also made the information highway, known as the Internet, possible.  The world would be totally different without it.

Friday, July 5, 2013

Why The US Should Not Cut Carbon Emissions

Charles Krauthammer is one of several neo-conservative opinion writers on the Washington Post.  He is also a familiar figure on TV news shows.  He helped to shape public opinion in support of the US invasion of Iraq.  In this article he attacks Obama's declaration of war against global warming.  His logic is a bit convoluted.  He provides several reasons for denying that our planet is warming.  After all, many of his readers are global warming deniers, but he also claims that he is not a denier himself.  This causes him to look for other reasons to oppose the president's plan.  He argues that the president's plan will be bad for the US economy, and that it is really a war against coal miners.  It does not make sense for the US to bear this economic burden when the rest of the world will not follow our lead.  In other words, global warming is a global problem that can't be resolved at the national level.  Unfortunately, he also argues that international efforts to combat global warming have been failures.  Consequently, the only reasonable policy is to do nothing.  We can't do it alone, and we can't lead an international effort to solve a problem that may not be a real problem to many of his readers.  He has logic chopped his way to the perfect conclusion.  President Obama is a foolish person for announcing a plan to solve an unsolvable problem that may not exist.  Krauthammer is a real genius. 

Paul Krugman's Fourth Of July Essay

We are a very different nation today than we were when the nation was founded.  On the other hand, the democratic ideal that inspired our founding fathers remains in tact.  We may not always live up to that ideal, but it is a powerful part of our heritage.  Even those who conspire against the ideal have to pretend that they adhere to it.  That is no small achievement. 

Wednesday, July 3, 2013

Sleepwalking To Extinction?

If one believes that our planet cannot support a world in which everyone consumes at the level of US consumption today we have a real problem on our hands.  This article describes that problem in stark terms.  It argues that corporations have no incentives to limit production or consumption.  They have powerful incentives to promote consumption.  Governments also have incentives to promote growth and to provide jobs.  China, for example, is growing its economy at a much faster rate than developed countries.  It is on a track to become the largest economy in the world, but it will need to become several times larger than the US economy to bring its per capita GDP up to the levels that exist in developed countries today.   Scientists who are concerned about the impact of unconstrained economic growth on our planet face enormous obstacles.  Capitalism is a problem because it is based upon a principle of constant growth, and governments have a similar need to encourage and support growth. We are also part of the problem because we overconsume even when it does not make us happier.

After I read this article I began to hope that the scientists are wrong about about the perils of global warming.  I don't think that they are wrong, but I am not optimistic about our ability to do what may be necessary to deal with the problem.  The kinds of changes that are advocated in this article are so disruptive that it will take a tragedy to unleash the forces of change that may be required.  On the other hand, I posted the article because we need to be thinking more deeply about the problems that we face, despite our inability to get agreement even on market based solutions such as cap and trade or carbon taxes.

Monday, July 1, 2013

The Climate Casino

William Nordhaus is the President Elect of the American Economic Association.  He has written a book on the science, economics and politics of climate change.  It is entitled The Climate Casino and it will be released this fall.  It will receive a lot of attention because of his position and his experience in many of the areas that are involved in climate change.  It will include his recommendations on how to deal with one of the most important issues of our time.  I have posted the intro to his book for those who are interested in the high stakes game that has been underway for many years without much impact.

The Balance Between Security and Freedom

The revelations about NSA's PRISM program, and US spying on European diplomats, has caused many Europeans to lose their trust in the US government.  This article is by a German politician who explains why German's are so sensitive to these reports.  They had lost trust in the US government under George Bush and they had high hopes for the Obama presidency.  They have been disappointed by Obama's inability to close down Guantanamo and because of his defense of NSA.

When German's learned about the storing of digital communication data, that was legal under the European Constitution, they took actions to change the Constitution.  Most American's, who have not experienced secret police practices which promised security with the loss of personal freedom, seem to be supportive of US spying.  They tend to believe that only terrorists need to be concerned about government spying.  They support police brutality for similar reasons.  Only criminals need to be worried about police brutality.  Hopefully, we will not have to experience the Gestapo and the Stasi to become more concerned about the weapons that we have given to government.

I have also been disappointed by my president.  My concern, however, goes beyond the office of the president.  Any president that we elect will inherit a national security apparatus that has grown and become more sophisticated over many years.  George Bush took advantage of that apparatus.  Its not clear whether a president who has concerns about that apparatus can do much about it.  Our president's only become aware of the power at their disposal after they are elected to office,  and it will live after they leave.  They are "short-tirmers" in the eyes of bureaucrats who have built the system.

The Unstoppable Rise In CEO Pay

CEO compensation in 2012 averaged $15 million.  That was a 16% increase over 2011.  Stock options comprised $9 million of gross compensation.  The median stock holdings of CEO's is equal to $51 million.

The focus of CEO compensation packages is on short-term performance.  Only a handful of firms include measures of product innovation.  Stock options are also granted in the first two months of the year.  CEO's get more shares if the stock prices fall after the first two months.  They may be being rewarded for the destruction of shareholder value.

This report provided lots of details on CEO compensation and made several recommendations for change.  However, it expressed little hope for a positive change in CEO compensation.  Corporate boards, which determine CEO compensation are hand picked by the CEO, and most of them are CEO's at other firms.  They are a part of the brotherhood.  Most Wall Street investors are also more concerned about short term performance than they are about the longevity of the firms in which they invest.  They can make money by selling shares short when they anticipate a decline a in firm's stock price.

This graph provides an interactive guide that lists the 2012 compensation  of top CEO's.