Monday, September 30, 2013

Will Governments Provide The Leadership Than Corporations Are Looking For On Climate Policy

The press has been filled with reports on the latest report from the IPCC on the risks that we face from climate change.  This article by Nicholas Stern who wrote the influential report on climate change that increased our awareness of climate science, and the threat of climate change, summarizes the IPCC's latest report.  We are reaching a tipping point that will lead to irreversible and disastrous changes unless we act quickly to cut carbon emissions.  Stern believes that, with few exceptions, most corporations understand the issues and that they are looking for governments to provide the signals that they need to move more aggressively in the direction of more sustainable industrial policies.  The UK has put a stake in the ground by adopting policies which will be helpful.  Political leadership from the US and China, which are the largest emitters of carbon, is essential for the development of  policies that will point our large corporations in the right directions.  President Obama understands the risks that we face, and he has been making efforts in the US to provide the right set of signals to our corporations.  The risks from climate change in Asia are so serious that they cannot be ignored by leaders in China. Stern ends his article with a glimmer of hope for the development of a more sustainable industrial policy.

I don't know much about the politics in China but I am deeply concerned about politics in the US.  It is understandable that corporations most directly affected by policies that limit carbon emissions will resist government efforts to push the US economy in a more sustainable direction.  What bothers me most about the ability of the US government to work successfully with our large corporations to develop sustainable policies is political resistance.  A large segment of the US population has adopted beliefs , influenced of course by those able to shape public opinion, that are almost religious in nature.  They are not subject to change by the kind of data provided by the IPCC.  They associate efforts to reduce carbon emissions with a more general liberal conspiracy that threatens their way of life. Those conspiracy theories have been carefully nurtured by politicians who benefit from them. It will be difficult for politicians dependent upon a distrust of any policy tainted by an association with liberalism to reverse course on climate policy.

The Risks Of A Government Shutdown And A Paucity of Solutions

Paul Krugman describes the risks that we face if the radicals in the GOP are allowed to continue the game of "chicken" that they seem to be enjoying.  For many of them, no government at all is better than an elected government that does not share their ideology.  The GOP is a coalition of plutocrats, that benefit from its economic policies, and members of the Tea Party who are primarily inflamed by hatred of the President that we elected. One possibility is that the plutocrats, who are more aware of the implications of government shutdown,  will be able to influence GOP representatives that are dependent upon the Tea Party element in their districts.  It would appear, at present, that the schizophrenia in the GOP is not amenable to any form of therapy.  We may be in for a long period of craziness. Hatred is powerful emotion that many GOP politicians hope to harness for their benefit. 

A Contrast Between Politics In Germany And The US

They erosion of consensual politics in the US has been made tragically apparent by the GOP's willingness to risk economic disaster in an effort to achieve ideological objectives that are supported by a radical segment of its political base.  While its always dangerous for foreigners to interpret events outside of their country, the recent elections in Germany are interpreted as evidence for the strength of consensual politics in Germany. There are ideological differences in Germany that are similar to those in the US, but they do not affect the ability of the elected government to govern as they do in the US.  The radicalization of the GOP has produced a level of government dysfunction in the US that is unprecedented in our recent history. 

Saturday, September 28, 2013

The Rising Level Of The Wealth to Income Ratio And its Implications

A lot of attention has been being paid to rising income income inequality.  This has led many to argue for improving and expanding education opportunity.  That might have a limited effect on wage dispersion but most of the growth in income within the top 10% has gone to the top 1% despite the fact that the top 1% is not better educated than the remainder of the top 10%.  Out policy issues in the future will directed toward the concentration of wealth.

The ratio of wealth to income has been growing rapidly in the developed world.  It is driven mainly by a slowdown in economic growth.  For example if we assume a 10% saving rate and a 3% growth rate, the ratio of wealth to income is 300%.  If the growth rate falls to 1.5% the ratio is 600%.  Slow population and productivity growth will continue to drive down the economic growth rate in most developed countries.

Automation is also a factor in changing the ratio of wealth to income.  As automation is substituted for wage labor, the share of income going to capital will rise relative to wage income.

The wealth to income ratio has grown fastest in Spain.  It has been even faster than the change in Japan during its boom period.  It is not surprising that the economic and political consequences in Spain have been severe during its recession and the bursting of the real estate bubble.

The social and political fallout from growth in the wealth to income ratio will require atypical policies in the future.  There may be a need to have higher taxes and wealth and inheritance.  It will require international cooperation to limit the ability of the very wealthy to hide their wealth in tax havens.

Friday, September 27, 2013

Budget Deficits are Primarily the Result Of the Business Cycle in The US

If the GOP had any use for data the graph in this article would end the debate about budget deficits.  They have little to do with federal spending.  They are highly correlated with the business cycle.

What Do GOP Representatives In The House Really Value?

When a kidnapper demands ransom his values are very clear.  The kidnapper wants money as ransom.  The GOP House just sent its ransom note to the White House.  They are willing to lift the debt ceiling in order to allow the Treasury to keep from defaulting if the White House will agree to the following demands as ransom:

* Drop regulations on greenhouse gases
* Build Keystone XL oil pipeline
* Stop paying the Consumer Financial Protection Bureau
* Halt healthcare reform for one year
* Make it more difficult to sue for medical malpractice

We elected a president who took a different position in the last election on each of the demands made by the House.  The ransom note from the GOP House demands that we reverse the outcome of the presidential election or it will not allow the US Treasury to pay the government's bills or meet its financial obligations in the bond market.  In other words, the House Republicans don't really believe in democracy and they are financial terrorists.

We also learn what Republican's in the House really value, or at least who their paymasters are.  They love the fossil fuel industry; they love Wall Street despite their protestations about the bailout of the financial industry; the want to stop the roll out of healthcare reform because they fear that a positive response the reform will demonstrate to the electorate that they were wrong about the reform, and they are still trying to win support from those who believe that medical malpractice is responsible for the rising cost of healthcare (research shows that has about a 1% effect on the cost).

Now the House Republicans are not stupid.  The values that they espouse are shared by the voters in their districts that have been gerrymandered to increase their chances of being reelected. They can also be assured of a continuing stream of campaign contributions from the industrialists who they support.  The same industrialists have also used their friends in the media and in think tanks to "educate" the electorate on these issues.  Their ransom threat will not hurt them in the next election.  It will, however, make it more difficult to govern our nation and it will deepen the chasm within the GOP between those who have to win state or national elections and the radicals in the House.

Thursday, September 26, 2013

The Fight To Put Climate Science Into The Curriculum Of Public Schools

There has been a long term battle to keep evolutionary theory in the curriculum of our public schools.  Many Americans prefer to believe that the earth is not billions of years old and they prefer the concept of intelligence design, which is not backed by the scientific community, to evolutionary theory which they view as a theory that has not been substantiated by evidence.  The new battle over the science curriculum is over climate science.  Many Americans, which includes many who reject the teaching of evolutionary theory, have been taught that the burning of fossil fuels is not connected to the warming of our planet.  More than half of our states are going to include climate science in the curriculum.  This is a welcome change in the science curriculum but it run into lots of resistance from those who have invested millions in maintaining ignorance about climate science. 

Why The Top 0.1% Should Not Pay Any Taxes

Corporate profits in the US are at an all time high, and wages are at an all time low.  The relationship between low wages and high profits suggest that the high incomes of the top 0.1% are coming at the expense of labor.  Some argue that the tax system should be made more progressive so that those earning over $1 million per year pay for a larger share of the cost of government.  Harry Biswanger, who writes for Forbes magazine, turns that argument around.  He argues that those earning over $1 million are so valuable that they should not pay any taxes.  After all they are the job creators in our society.  Without them there would not be any jobs.  Moreover, employees should be paid as little as possible so that the reward system encourages entrepreneurs to work harder and to create more jobs.

Biswanger's argument is a variation on a popular theme in America.  Instead of criticizing the top 0.1% for increasing their share of the national income at the expense of their employees we should thank them by enabling them to avoid taxes.  That argument is popular is some circles because magazines like Forbes employ people like Biswanger to make those arguments.

The entrepreneur who started Business Insider, and who employees 130 people, has a very different perspective.  He views his employees as members of a team that creates the value that makes his enterprise profitable.  He makes it possible for this employees to share in the value created by the team.  Moreover, he argues that we have made a mistake by increasing the share of value going to entrepreneurs, and top executives, at the expense of other members of the team.  As consumers they have less to spend on the products that are produced by our enterprises.  That is one of the reasons for slower growth in America.

This is a link to the video interview of Biswanger.  He takes the view that labor is a commodity that is sold on a market.  It would be foolish to pay a higher than market price for the labor that the firm rents or purchases.  That argument is usually extended to include the top management.  There is a market for top managers and the high prices that are paid for their skills has been determined by the market.  The implication of that argument is management skills have become increasingly rare in the US.  Otherwise the compensation that they receive would not have risen much faster in the US than it has in the rest of the world.  It also implies that the system that corporate boards use to determine CEO compensation is not rigged in favor of the CEO who appointed the members of the board.

Unfortunately, the institutional investors who own most of the shares in our corporations, are more aligned with the views of Biswanger than they are with the founder of Business Insider.  Labor is the largest cost for most corporations.  The easiest way to gain market share and profits is to keep the cost of labor as low as possible.  They have no problem with the CEO compensation system.  It makes perfect sense to pay a few million more for CEO's who will save many more millions by cutting the cost of labor.  The recession has helped to keep the cost of labor low because jobs are scarcer than labor.  The pool of labor has also been increased by globalization.  Consequently, the market for labor has become a commodity market.  The CEO market is bares no resemblance to the market for labor.

Wednesday, September 25, 2013

The Depressed Economy In The US Is All About Austerity

Paul Krugman asked a simple question and he got a simple answer.  He compared total government spending during since the recession, which has been on a downward trend, with government spending that only continued on its trend line prior to the recession.  Its hard to be precise about his estimate of the impact of the reduction in government spending from its trend, but it is clear that unemployment would be well below its current level of 7.3%.  Fiscal policy in the US is responsible for much of the damage to our economy that we are experiencing today and perhaps into the future.  The graph below provides a good illustration of the deviation from trend.  Government spending has NOT been out of control as Republicans and its media partners have argued.  The decline in government spending has contributed greatly to our slow recovery.

HIgh Speed Rail System In China And Its Impact On Productivity And Economic Development

China invested billions in developing a high speed rail system.  This was criticized by the usual suspects who don't support public investment.  They argued that the rail system would not attract enough customers to pay for its development.  They were wrong.  The rail system has been very popular.  The train stations are crowded with passengers, and the availability of high speed rail transportation has contributed to urbanization in previously remote areas.  Productivity has been increased and markets in China have been broadened.  The US made a similar investment in developing its interstate highway system in the 1950's.  It had a profound effect on regional development in the US.  Infrastructure investment in the US has declined steadily in the US over the last 50 years.

Jeff Sachs is Optimistic About Our Ability To End Poverty

Jeff Sachs cites John Kennedy's use of optimism to spur innovation.  He points to some of the success that has been made in poverty reduction and he explains how private and public investment partnerships will keep the poverty reduction ball rolling in the right direction.  He also believes that poverty reduction can be done in ways that are consistent with our battle against climate change.

Bill Gates' Dream

Bill Gates has been using some of his enormous wealth to fund projects that would solve many of our problems.  His pet project is described in this article.  He believes that reducing the cost of energy is the best approach to poverty reduction.  He is betting that it is possible to turn the stock of waste material from nuclear reactors into fuel for the next generation of reactors.  It is a long term project that would not typically be funded by venture capitalists who seek a faster return on their investments.  If the project is successful the cost of energy will be reduced substantially and it will also help to prevent the proliferation of nuclear weapons.  It will also reduce carbon emissions by limiting the use of fossil fuels in the production of electrical power.  China is the most likely candidate for building the first reactor that converts nuclear waste into energy.  China has the greatest need for new sources of energy and it invests much more money into infrastructure than other countries.

Tuesday, September 24, 2013

Speech By NY Federal Reserve Bank CEO On Economic Outlook and Monetary Policy

William Dudley's speech yesterday provides a good snapshot of how he looks at the US economy and how he views the likely use of monetary policy going forward.  He describes some of the headwinds that are restraining the rate of recovery in the US, and he discusses some of the fundamentals that might be able to overcome the headwinds.  He also reinforces the dual mandate that requires the Fed to use monetary policies to provide stable prices and stable employment.  The Fed is one of the few central banks in world that has a mandate to provide employment stability as well as price stability.

Some of positive fundamentals that he lists are as follows:

Household balance sheets reflect an improved debt to disposable income ratio which is back to 2003 levels.  Most of the household deleveraging has taken place.

Delinquency rates for consumer debts such as spending on durable goods, credit cards etc. is down.

Households are more creditworthy and better able to finance the purchase durable goods.

Housing starts are only 900,000 on annualized rate versus a 1.5 million rate that is suggested by demographic trends and an increase in the household formation rate.

Business investment should be stimulated by large cash reserves, positive cash flows and easier access to credit.

Some of the headwinds to growth create chicken and egg problems that might slow the growth rate.  For example the slow growth in household disposable income my dampen consumer spending.  Low consumer demand may limit business investment, which in turn, may limit growth in disposable income which is needed to spur consumer spending.  Furthermore, the recent increase in mortgage interest rates may restrain the expected growth in the residential housing market.  Fiscal policy in the US is another risk factor.  Its hard to predict what actions Congress might take that will affect spending by governments.

Dudley also offered his views on the outlook for monetary policy.  He argues that the Fed is data driven.  It will continue to keep short term interest rates low until the unemployment rate meets a threshold of 6.5%.  Since the unemployment rate is falling slowly, and it is being driven downward partially a decrease in the size of the labor market and by the increasing use of part time jobs, the Fed will be keeping rates low into 2016.  The current inflation rate is below the Fed target of 2% so he is not concerned about the effect of the Fed's purchase of longer term securities on its mandate to protect against inflation.

Are Median Family Income Trends Different In The US And Canada?

This article looks at the data in Canada and the US shows that the answer to question depends upon how you look at the data.  If you look at long term trend lines you get a different than you do if you look at departures from trend in each country.  A few simple graphs illustrate this issue very nicely.  The long term trends show Canadian median incomes declining and US median incomes increasing.  If one looks at recent trends it appears that Canadian median incomes are increasing and US median incomes are falling. 

The Battle Over The Implementation Of Obamacare

The GOP is doing whatever it can to defund ACA but that will not work.  The real battle is over the effectiveness its implementation.  Paul Krugman argues that celebrity supporters of ACA, using twitter to reach their huge audiences, will defeat the efforts of Murdoch's propaganda machine to keep young people, who do not have access to employer provided insurance,  from signing up at the exchanges.

I do not buy Krugman's argument.  It is up to the administration to make sure that the public understands how to use the exchanges that are being set up in the states.  The feedback that I get suggests that propaganda machine has been more effective in disinformation than the administration has been in informing the public.  It needs to step up its efforts by an order of magnitude.

Recession: What Is It Good For?

Jeremy Warner, who is the Assistant Editor of The Telegraph in England, told us what recessions are good for in his editorial which is cited by Simon Wren-Lewis:

“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”
And the final paragraph starts:
“The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.

Warner's argument doesn't make sense to Lewis for several reasons.  In the first place, it is foolish to make an effort to achieve a small state during a recession when interest rates are at the zero lower bound. (Unless one believes that high unemployment is a good thing). Economists who argued against austerity were not necessarily advocates for a larger state.  In the second place, the public's appetite for a large or small state is not dependent upon the state of the economy.  The government did not use the small state argument to justify spending cuts.  It told the public that cuts in spending were necessary to deal with a public debt crisis even though the UK and the US had no problems funding their debt. The government should do what households do when they take on too much debt.  Spending cuts are the solution for high household debt and for high public debt. In other words the debt crisis argument was a ruse.  The public was not interested in achieving a smaller state because of bad economy.  The conservative government in England used the debt crisis argument as the means to achieve a smaller social welfare state. The cuts in spending advocated by the government were not directed towards reducing subsidies to business interests. 

Lewis does not discuss why the public might be less interested in cutting the size of government in good times.  Politicians, however, can be less interested in cutting the size of government in good times.  If they were concerned about reducing the public debt, they could use budget surpluses to pay down the public debt.  The Bush administration had an opportunity to do that, but it chose to cut taxes instead of paying down the public debt. Cutting taxes, primarily for the wealthy, is the goal of conservative governments in good times.  In bad times, spending cuts are preferred to making the tax system more progressive in order to pay for public services.

The real question is not small state versus large state.  It is a question about whose interests are served by government fiscal policy.  Austerity in the US has kept unemployment high during the recovery from the recession.  Corporate profits, however, are at an all time high, and those in the upper income brackets have seen their incomes rise back to where they were before the Great Recession.  The GOP House just passed a bill which provides subsidies to agribusiness at the same time that it passed a bill that substantially reduced access to food stamps.  It is not interested in a smaller state or in reducing government deficits.  It is all about shifting government spending away from those who vote for the "wrong party" and rewarding those who support their party.

Paul Krugman claims that few economists are making the argument for "expansionary austerity".  He wonders why politicians and many in the media are still advocating for policies that are no longer supported by prominent economists.  The economists who argued for austerity have already done their damage.  They are now trying to restore their academic reputations.  The public, however, is largely ignorant about economics, and it is still being misled by the media which does a poor job of informing the public and a good job of misinforming the public.  Fox News in the US,  and The Telegraph in the UK, do their job much better than the mainstream media which still pretends that those who argue that the world is flat deserve the same consideration as those who argue the earth is round.  The "flat earth society" is alive and well in most parts of the world.  Economists have ended the debate about austerity but they are no longer relevant.  Politicians and the media no longer need academic support for their positions on fiscal policy.

Sunday, September 22, 2013

Is Tesla Worth 33% Of Ford's Market Capitalization?

Tesla provides an interesting story about the future of itself and the future of the auto industry.  It has a market capitalization of $22 billion which is 33% of Ford's market capitalization.  Ford sold 1.29 million vehicles in the US last year and Tesla sold only only 10, 500 cars which were primarily sold in California.  It receives substantial benefits from California's energy policies.  It is able to sell its carbon emission credits to other companies that amount to around $13,000 per car because it sells an all electric car that does not emit pollutants. 

Tesla is not only innovative in its engineering and design; it has also been innovative in its financial engineering.  Large Wall Street firms are among its shareholders and so are other auto companies.  Wall Street analysts have been bullish about Tesla and its stock price.  They keep raising their estimates as Tesla begins to produce lower priced electric vehicles that will serve a mass market.  They also admire Tesla's CEO who some regard as a mixture of Steve Jobs and Bill Gates.  They view Tesla as a high tech company more than they do as an auto company in a mature market.

Tesla faces many challenges as it attempts to expand its product line and its market outside of California.  Those challenges are described in the article but other car companies have taken notice and they are looking for ways to expand into the electric car market.

Libertarianism, Social Darwinism And The Southern Strategy

Libertarianism is a form of Social Darwinism.  The basic assumption is that unbridled competition leads to survival of the fittest.  The quote below was taken from a question and answer session following Ayn Rand's graduation speech at the US Military Academy at West Point in 1974.

[The Native Americans] didn’t have any rights to the land and there was no reason for anyone to grant them rights which they had not conceived and were not using…. What was it they were fighting for, if they opposed white men on this continent? For their wish to continue a primitive existence, their “right” to keep part of the earth untouched, unused and not even as property, just keep everybody out so that you will live practically like an animal, or maybe a few caves above it. Any white person who brought the element of civilization had the right to take over this continent.” * Source: “Q and A session following her Address To The Graduating Class Of The United States Military Academy at West Point, New York, March 6, 1974

Ayn Rand was an opponent of racism but her ideology has an implicit form of racism built into it.  It was OK for the US military to drive Native Americans off of their properties because they did not have a legal right to their property (perhaps they did not have deeds).  Moreover, it was OK for an "advanced civilization" to assume ownership of their homeland because Native Americans were not taking full advantage of its resources.  The survival of the fittest should be allowed to operate so that the cream can rise to the top.  This also justifies the use of military force, and other means, to determine outcomes in less developed countries that do not share our superior culture and ideologies.  The cream should be allowed to rise to the top.  In other words, the single most powerful apparatus of the state should be used to advance the cause of Social Darwinism.  The use of state power is a public good when it serves the interests of an elite that meets with her approval.  This is totally at odds with her ideology of libertarianism.

The following quote is from Lee Atwater, who is a deceased Republican operative who helped the senior George Bush get elected by portraying his opponent, in a powerful ad, as governor who released a black man from prison who was free to commit another violent crime.

You start out in 1954 by saying, “N-gger, n-gger, n-gger.” By 1968 you can’t say “n-gger” — that hurts you. Backfires. So you say stuff like forced busing, states’ rights and all that stuff. You’re getting so abstract now [that] you’re talking about cutting taxes, and all these things you’re talking about are totally economic things and a byproduct of them is [that] blacks get hurt worse than whites. And subconsciously maybe that is part of it. I’m not saying that. But I’m saying that if it is getting that abstract, and that coded, that we are doing away with the racial problem one way or the other. You follow me — because obviously sitting around saying, “We want to cut this,” is much more abstract than even the busing thing, and a hell of a lot more abstract than “N-gger, n-gger.”

Atwater described the southern strategy perfectly.  It was not OK to be openly racist, but it was OK to employ abstractions that were used as code words.  Libertarian rhetoric, such as advocacy of "state's rights" was used to justify opposition to federal government programs which served the interests of the wrong kind of people.  The libertarian menu was extended to include deregulation, tax cuts for the wealthy and for cuts in spending on entitlements.  We are witnessing this in full force in the GOP battle to defund Obamacare.  Libertarian rhetoric is being used to build populist opposition against a federal program that extends healthcare benefits to the "less deserving".  Over time a political party that bases its populism on racism, disguised as libertarianism, will run into problems.  Its hard to win national elections by appealing to the lowest common denominator in our country.  The GOP runs the risk of becoming a regional party that is unable to serve the interests of the elites that have been its historical supporters.

Wednesday, September 18, 2013

Why Do We Have High Unemployment?

This article describes the different interpretations given for unemployment by Keynes and by one his colleagues at Cambridge (Pigou).  Unfortunately, the economics profession is still having the same debate about the interpretation of unemployment.  Pigou argued that unemployment was due to imperfections in the labor market.  Labor is commodity that is sold on the market and it is subject to law of supply and demand.  If the market were allowed to work properly the price of labor would fall and employment would rise.  The imperfections in the market were interpreted as frictional and structural problems in the market.  They are the same imperfections that are used today by austerian's to explain high unemployment. 

Keynes offered a radically different view of unemployment.  He did not accept the view that there would not be long periods of unemployment as long as the frictional and structural problems in the labor market were eliminated.  He believed that the market was inherently unstable, and that high unemployment was better explained by the cyclical nature of business investment.  He argued that government spending during a downturn in the business cycle could compensate for the decline in business spending during a recession.  That would prime the pump and encourage business investment.  He also argued that the government should run budget surpluses during good times.  That would enable government to more easily increase spending during downturns.

One of the problems with Keynes's theory is that governments are tempted to run deficits even in good times.  For example, George Bush inherited a budget surplus that was produced by the dot com boom.  He decided to cut taxes and to increase spending in order to deal with the slowdown in the economy.  The surplus turned into a large deficit and that it made it more difficult to deal with the consequences of the financial crisis.  Consequently, there are two basic reasons for opposing government stimulation during a recession.  Conservatives can point to frictional and structural reasons for high unemployment,  or they can argue that governments cannot be trusted to be fiscally responsible.

This article provides some data that show the relationship between unemployment and fiscal policy in response to the Great Recession.  Conservatives have won the argument over the interpretation of unemployment and it shows in the data.  Unemployment continues to be a problem everywhere but it is worse in countries that have employed procyclical fiscal policy.

The High Cost Of Being Poor

We think about predators as animals who prey upon the weakest member of their target group.  They attack the young, who are unprotected, and the wounded.  This article is about predation within the human race. It is about humans who target the weak for profit.  Curiously, there are predators everywhere.  This includes Wall Street bankers as well the homeless at the bottom of the pyramid who exploit the weakest among the homeless.  Unfortunately, our legal system does not provide much protection against predation.  The poor are often put in positions where they enter into contracts that make them poorer.  Those contracts are enforced by the courts.  This makes it very difficult to escape from poverty.

Tom Friedman Gives His Views On Syria

Tom Friedman was a hawk on Iraq, and he is a hawk on Syria.  He provides his analysis of the situation in the Mid-East, along with his psychoanalysis of V. Putin, in this article.  I posted this article, however, to amplify one his points about the lack of populist support for US intervention in Syria.  The GOP has usually been hawkish on the use of military force, but John McCain, who has never seen a problem that could not be solved by the use of American might, was unable to win support from the GOP base.  Its possible that the GOP base, along with many Democrats, has learned something from our past experiences in the Mid-East. But its also a possibility that Tea Partiers do not support military intervention for another reason.  They oppose anything proposed by the president that they despise.  On this issue they are aligned with the left wing of the Democratic Party.  This must feel strange to them.

What Is Pushing The GOP So Far To The Right?

Right wing organizations with lots of money to spend are targeting Republican's in primary elections who have taken moderate stances on issues dear to them.  They are spending more money attacking moderate Republican's than Democrat's are spending against Republican's.  Republican's who have not voted to defund Obamacare, and those who voted for raising the debt ceiling are getting most of the attention from right wing organizations.  The Republican Party is being radicalized and captured by a small number of organizations that hope to transform the country.

These groups have spent a lot of money teaching the public to hate Obamacare.  They use that hatred, in turn, to raise more money from their base.  They use the Internet to reach Tea Partiers and tell them that they can vote against Obamacare by sending money to them.  Hatred of Obamacare, as well as a more general hatred of a black president, and all of his policies, is a motivation that holds this group together.  The GOP has become a party with hatred as its foundation. That serves the traditional base of the GOP very well.  There aren't enough plutocrats to win elections.  The reactionaries among the plutocrats have found a way to build a populist base that will support its agenda.

One Depressing Fact From Census Data

Median household income was $51,681 in 1989.  The data from the 2012 census shows that there has been no growth in median household income for 24 years.  It was only $51,017 in 2012.  The data for 1989 are reported in 2012 dollars, in order to correct for inflation.  There has been considerable growth in income over the last 24 years but has not trickled down the median household.

Monday, September 16, 2013

Corporatism And University Administration In America: The University Of Oregon As An Example

Universities are an organizational anomaly.  Corporations, and most other organizations, have hierarchical structures in which the authority to make important decisions cascade to the top of the hierarchy.  Universities have been unique in many respects from the corporate structure that is dominant in society. The faculty are actively involved in making important academic decisions and they are even involved in evaluating and recommending the hiring and  promotion of faculty.  For example, the faculty set the requirements for the awarding of degrees, and they are actively involved in making decisions about the curriculum which is essentially the product that the university delivers to its students.  University administrators have generally been drawn from the faculty and they have historically supported this unique form of organization.  This article is about changes at the University of Oregon, which is similar to trends in other states, that limit the freedom of faculty and change the organizational structure of the university in important ways.  The intent is to impose the corporate structure on the American university.

This trend has been apparent for some time and it is consistent with the rise of corporatism and hierarchy in America.  Universities have become more dependent upon private funding as public funding has diminished over time.  Non-academic activities have also become an important source of revenue, and reputation for universities.  Universities with outstanding athletic teams have a recruiting advantage in attracting the best students. Athletic facilities, which are essential in building strong football, basketball and other sporting programs are often funded by private donors who desire naming rights on the new facilities.  The Boards Of Trustees at many universities have also changed over time.  They are frequently drawn from the executive ranks of corporations and they are more comfortable with the way that decisions are made in corporations. They don't understand or appreciate the unique structure of the traditional university.  For example,  a group of trustees at the University Of Virginia decided to fire a president who depended upon faculty input in academic decisions about the direction of the curriculum.  This led to protests which overturned the decision by the trustees but is an example of role played by trustees who do not respect the traditional ways in which universities have been organized.

It is important to point out that university faculty have also played an important role in our society.  They are highly educated and better informed about many subjects than the average citizen.  They typically have views about public affairs that run counter to popular opinion and the direction of politics in America.  That is not appreciated by many in the political and corporate hierarchy.  They are more concerned about establishing social control than they are about providing a platform for dissent.

Friday, September 13, 2013

The Information Gap In Public Awareness Of Cost Drivers In Medicare

The three most cited causes for growth in Medicare costs in the media are GOP talking points.  The public believes that poor management by the government, along with fraud and excessive hospital charges are the major factors driving growth in Medicare costs.  They are usually associated with conservative efforts to propose "free market" solutions for containing healthcare costs and reducing budget deficits.  Only 6% of the public believes that new drugs and  technologies are a major factor in the growth Medicare costs.  This article provides some of the research findings which indicate that new drugs and technologies are responsible for 35-50% of cost growth in Medicare.

It is unfortunate, but not surprising, that the public is poorly informed by the media about the factors that are driving Medicare costs and the growth in healthcare costs in America.  When we realize that healthcare spending accounts for over 17% GDP, and a large share of government spending, it is more than unfortunate; it is a disaster.  No business would attempt to operate without a good understanding about its major cost drivers.  Our political system operates with the consent of a very poorly informed public. 

I would like to add a few points beyond the obvious conclusion that the media do a poor job of educating the public on important issues.  In the first place, it is not surprising the new technologies account for a large share of the increase in healthcare costs.  Most of the research that takes place in government and in private institutions is directed toward finding treatments for some of our most difficult to treat illnesses.  The growth in medical technology is consistent with the desire within the medical profession and in the medical industry to relieve suffering.  We would not want to reduce this effort, but we could be smarter about the use of drugs and treatments that do not work well, and we could also do a better job of price control.  Much of the basic research is funded by government, but the benefits from this research go largely to private firms that take advantage of the public research.

Economic Recovery In The US Has Been A Recovery For The Top 1%

Paul Krugman has been writing about the new business cycle in the US that has U shaped recoveries from recession instead of the V shaped recoveries prior to 1982.  In this article he turns his attention to the primary benefactors from our U shaped recovery.  The gains in income during this recovery have gone primarily to the rich.  The top 1% has received 95% of gains in income.  Inequality is also found within the top 1%.  Those earning over $1 million have received 60% of the gain.

Krugman argues that growing inequality is undermining the values that have defined America.  He describes some of the ways in which that is happening and he explains why the growth in inequality cannot be explained by the concentration of skill within the top 1%.  They also benefit from greater opportunities to earn high incomes.

There has been a lot of debate about the causes of income inequality.  Some argue that it determined by market factors, while others believe that government policies have encouraged growth in inequality.  That is a complex debate that Krugman does not discuss.  However, the US economy grew rapidly prior to the 1980's when inequality in America was small relative to what it is today.  Extreme inequality is not necessary to fuel economic growth.  On the other hand, the changes made in the US under the guise of the "trickle down economy", initiated in the Reagan era, have contributed to the growth in income inequality since the 1980's.  The gains made by the top 0.1% have been made at the expense of the rest of the population.

Krugman does not examine most of the changes that have made it easier for the super-rich to grow their incomes at the expense of the rest of us, but he does offer one suggestion.  Perhaps it is time to make the tax system more progressive.  The tax system has been made less progressive as income growth has become more concentrated. 

China Announces Plan To Curb Air Pollution

China consumes around half of the coal consumed in the world.  This has created a highly visible air pollution problem as well as a health problems.  Consequently, the government has taken some steps to address this problem.  This article describes some of the programs that have been put in place to reduce air pollution.  The plan has been criticized by some environmentalists in China as being too weak.  China has invested heavily in the use of coal to provide energy for its rapidly growing industrial system.  It will not be easy for the government to limit the use of coal as long as it is an essential resource in its industrial policy.

Thursday, September 12, 2013

Financial Reform US Style

The Dodd-Frank bill was written in response to the financial crisis.  The intent was to prevent a similar crisis in the future.  The bill addressed most of the important areas that contributed to the financial crisis.  I told one of my classes that the big problem with the bill was that government agencies were left with the problem of determining how the intent of the bill would be defined and implemented.  There was little reason to believe that regulators, that had been captured by Wall Street, would take the necessary actions to implement the bill in the way in which it was intended.  This article describes four important features of Dodd-Frank that are yet to be implemented according to the intent of the bill.  We don't know when or how the next financial crisis will occur.  What we do know is that we have not done all that we should have done to prevent it.  Moreover, the Wall Street banks are still too big to fail.  The government will be forced to rescue them in the next crisis. In the meantime the Wall Street casino is operating at full sail.

Wednesday, September 11, 2013

Krugman Describes How New Keynesian Economics Is Self-Adjusting

The New Keynesian's differ from the Old Keynesian's in important ways.  As long as central banks make the right decisions the economy is self-adjusting at full-employment.  Paul Krugman provides the economic model used by New Keynesian's which is also used by many central banks.  It works fine unless we reach the zero lower bound for interest rates as we have done today in the US.  At that point,  the Fed should use more unconventional monetary policies and expansionary fiscal policy, which has been contractionary in the US in the last three years.  He blames our current employment shortfall on bad economic policies. The old Keynesian's don't believe that the economy self-adjusts to full-employment, or that it has a tendency towards full-employment if there is no government intervention. 

J.M. Keynes On The Prospects For Our Grandchildren

In 1930, at Keynes argued that we would have solved the problem of scarcity for our grandchildren The economy would grow to the point where there would be enough economic output to provide for the basic needs of everyone.  Humanity would then have enough leisure to enjoy the non-material advantages that were only available to the well-to-do in his age.  Economic growth was driven by greed and the desire to accumulate wealth.  It was important that nothing was done to interfere with that motivation until the entrepreneur had created enough wealth that it could be more widely shared.  Keynes also indicated some the steps that would be necessary to achieve that result.

Keynes was right about our ability to create enough output to satisfy the basic needs of our citizens.  He was wrong, however, about how that output would be distributed.  He was also wrong about the desire to accumulate wealth even when it was not possible to consume much of the income that it produced.  He was also wrong about our ability to avoid war and some of other things that would enable our grandchildren to enjoy life as he envisioned it.

I posted this overview of Keynes's vision for our grandchildren to show that we have solved the problem of scarcity in many ways.  Keynes was correct about the prospects for economic growth.  He was wrong, however, about how our wealth would be used, and how we would take advantage of the opportunity for leisure. There are reasons to believe that Keynes would have supported the idea of steady state economy as long enough output was created to satisfy our basic needs and our culture adapted properly to the opportunities that were made available to enjoy many of the finer things in life that did not require the consumption of material output.

Is The Economy Self Adjusting?

Its all too common to find people who have never read Keynes, and who have been misinformed about his essential ideas, claim that he was an advocate for big government and large government budget deficits.  This article written by Keynes just prior to his publication of his General Theory, may contribute to a better understanding of his economic thinking which attacked the prevailing economic theories which assumed a self-correcting economy which provided full-employment in the long term.

The article was written in 1935 during the Great Recession, and during an even longer period between the two great wars when Britain suffered from an extended period of unemployment.  The conventional wisdom at that time was that prices would adjust automatically so that long term periods of unemployment were not possible.  The fact of high unemployment in this period led Keynes and others to question the wisdom of economic theories which suggested that the economy was self adjusting.  Keynes, and his fellow critics, came to believe that the economy was not self-adjusting even in the long run.  He provides his reasons for departing from conventional wisdom in this article and explains why he decided to become one of the "cranky heretics" who questioned the assumptions behind the self-regulating economy.

The conventional wisdom at that time was based upon the theories of Say and Ricardo which supported the concept of the self-adjusting economy.  Keynes also made the point that Marx's critique of capitalism was based upon his understanding of Ricardo's theory, which led him to argue that the contradictions in capitalism would lead to its demise.  Keynes was hopeful that a modified form of capitalism could provide for full-employment and maintain many of the advantages of capitalism.  To do so, however, he had to attack the conventional wisdom that assumed a self-adjusting economy that led to full-employment in the long-term.

Most economists realized that there was excess capital and labor.  Therefore, there was not a problem if insufficient capital.  The basic problem was insufficient demand.  Keynes attacked the assumption of self adjusting prices, including the rate of interest, which supported the concept of the self-adjusting economy.  He argued that the interest rate could be adjusted by government to increase consumption and demand for residential housing.  He understood that personal consumption could also stimulated by policies which provided more disposable income to those with a higher tendency to spend a larger share of their income.  He was concerned, however, with creating an imbalance between consumption and capital investment.  Therefore, he argued that lower interest rates would encourage capital investment which would be made available to satisfy growing consumer demand.  He also believed that unconventional fiscal policies  could be used to stimulate demand.

Keynes elaborated on the ideas in this article when he wrote The General Theory in the following year, but the essence of his thinking, which focused on the determinants of demand,  and the fallacy of the self-correcting economy at full-employment were captured in this article, as well as the arguments used by conventional economists against government interventions that would keep the economy from self-adjusting.

Tuesday, September 10, 2013

Why We No Longer Have Sharp Recoveries From Recessions

Paul Krugman offers his explanation for our jobless recoveries from recessions since 1982.  He asserts that we had V shaped recoveries prior to 1982 because they were engineered by the Fed. The Fed raised interest rates in order to fight inflation's prior to 1982.  The higher interest rates caused a slow down in the housing market which is very sensitive to interest rates.  In order to end the recessions, the Fed lowered interest rates and produced quick recoveries led by a recovery in the housing market.  Krugman argues that this  experience led to the expectation that recoveries from recessions should be V shaped.  He concludes that our recessions since 1982 are different.  They were not triggered by the Fed and they cannot be reversed simply by lowering interest rates.  They were caused by the bursting of credit bubbles.  Most of the recessions were caused by the bursting of credit bubbles.  They were not deep, but the recoveries took longer.  In other words, U shaped recoveries have been the new normal since 1982; we have a new business cycle.  He can't understand why economists in the Obama administration predicted a V shaped recovery.

Dean Baker has a slightly different take on this topic than Paul Krugman.  He agrees with Krugman that we can't depend upon the housing market to get us out of the jobless recovery that we are experiencing.  The decline in the housing market was not caused by higher interest rates engineered by the Fed.  Therefore, it will not rise above normal levels, which would be needed to stimulate the economy, by the lower interest rates provided by Fed policy.  He also points out that personal consumption and business investment as a percent of GDP are at normal levels.  He argues that we still have negative net exports which are not discussed by Krugman.  He believes that emerging market countries have been keeping the dollar at a premium relative to their currencies by purchasing treasuries with the dollars that they get by running trade surpluses with the US.  He expects that they will step up their efforts to stimulate consumption in their domestic markets and become less dependent upon exporting to the US.  When that happens the dollar will depreciate in value and stimulate growth in US exports.

Baker's analysis is not very encouraging for a couple of reasons.  It may take a long time for the dollar to depreciate due to the rationale that he provides.  Furthermore, we are no longer the manufacturing powerhouse that we once were.  The export market is primarily a market for tradable goods that are currently being manufactured elsewhere.  We have an advantage in products that are related to the defense industry, which includes commercial aircraft as well as weapons, but it would take a long time to regain our lost share in many consumer products.  Moreover, our multinational corporations believe that it is advantageous to locate manufacturing closer to the more rapidly growing emerging markets that they covet.

Unfortunately, we are having a debate about the shape of our recoveries from recession.  We know why recoveries take longer than they took prior to 1982, but neither Baker or Krugman provide us with a set of polices that will increase the employment outlook even in the long term.  They both believe that Congress could provide a stimulus, which would help in the short term, but that is no longer a topic of discussion in our current political climate.  Moreover, its hard to find economists who have a good grasp of the structural problems in our economy, or a positive vision of the future with which we will have to grapple.  Even worse, many of them believe that the economy is self-correcting, and that includes most of the New Keynesians. 

Thursday, September 5, 2013

The Misuse Of Ronald Coase

In a recent post I provided link to a video that featured Ronald Coase.  I did so because it provided an insight into his character.  He was a humble person who had a very practical and circumscribed view of his ideas.  This article describes some the ways in which Coase's work was exploited by ideologists at the University of Chicago.  One of his ideas was christened with the title of the Coase Theorem.  This put a scientific gloss on a very simple idea that only applied to a small set of disputes over property rights.  His simple idea, which is still in introductory textbooks, and often without the caveats that Coase used to qualify his idea, has been exploited to limit the role of government in dealing with the social cost of externalities.  Moreover, Chicago's law school incorporated Coase's simple idea into its teaching of property rights.  An entire generation of lawyers have been influenced by the misuse of Coase's ideas.  Moreover, a large number of legal precedents have been established which make it more difficult for large groups of individuals to use class action suits to seek damages against corporations.  This article by John Cassidy does a good job of describing the misuse of Ronald Coase.  The misuse, however, goes beyond economics.  Our legal system has also been infected by the economic ideology of economists at Chicago.

Whats Causing The Decline In India's Economy?

India's growth rate has declined this year.  This article describes some of the structural problems in India that might explain the decline.  Most of the structural problems that it describes existed while India was growing rapidly.  Therefore, its hard to understand why they are responsible for slowing economic growth. 

India's growth was stimulated, in part, by growth in the technology services sector.  Companies like IBM, Accenture, etc. took advantage of India's pool of highly skilled workers to provide information technology services to their customers outside of India at lower cost.  Growth in that sector may have been responsible for much of India's economic growth, and it may have peaked.  That labor pool may have been exhausted and the market for information services provided by IBM and the like may have stalled as a result of slow growth in their domestic markets.

The other factor, that is described in this article, is the flight of capital from India.  Investors were seeking high returns in India while it was booming and they are looking elsewhere for better returns.

Wednesday, September 4, 2013

What Is The Purpose Of Austerity In France?

A eurozone commissioner criticizes France for using tax increases to cut it budget deficit.  He believes that they will shrink the economy.  He favors budget cuts to reduce the deficit.  Is he really opposed the the size of the French state?

Tuesday, September 3, 2013

Ronald Coase On Markets, Firms and Property Rights

Ronald Coase just passed away after a long life of over 100 years.  He was one of the most influential economists of the last century because of the impact that his ideas had at the University of Chicago where his economic ideas were incorporated into legal theories that have had a powerful influence worldwide.  The University of Chicago released this video of Coase which was produced in 2009, to honor him after his passing.  He was asked to talk about markets, firms and property rights and he offered his views which may be interest to many of you.  Even at an advanced age he has a sharp mind and a degree of humility which is quite refreshing.

He made a very simple point about markets that is somewhat atypical.  He believes that markets are not a creature of nature.  On the contrary, they are created as a system of contracts. That is, they are developed by human beings in order to accomplish certain objectives and they can be altered by human beings.  The Coase theorem, which is one his most seminal ideas, assumes a perfectly competitive market and suggests that government intervention in markets may be less efficient in the resolution of disputes than actions taken by the parties involved in the dispute to resolve market failures and externalities.

His concept of the firm departs dramatically from the version of the firm that is commonly depicted in economic textbooks.  He correctly views the firm from a sociological perspective, and he claims that his seminal article on the nature of firm is outdated.  He did so because he actually worked with firms in order to work on practical problems.  The various functions within a firm, and the individuals involved in providing information to management, do not seek to maximize corporate profits.  They consider their own interests above the interest of the firm to maximize profits.  Moreover, they do not measure measure marginal costs.  Consequently, firms do not choose to operate at the level in which marginal costs are equal to marginal revenue.  He also argues that firms do not suffer from the problem of diminishing returns to scale as it assumed in economic textbooks.  There can be increasing returns to scale.  The idea of diminishing returns to scale were derived from the analysis of farming.  A plot of land does run into the problem of diminishing returns as it increases the amount of fertilizer to a finite plot off land.  The idea of diminishing returns to scale, like many ideas in economics which were developed during the industrial revolution in England,  do not apply to the modern economy.  Many of our most important industries benefit substantially from economies of scale.  For example,  once the costs of developing networks or software products have been amortized,  the cost of delivering the next product are close to zero, and the additional revenue is primarily profit.

Coase did not take much time in this video to talk about property rights.  On the other hand, they have probably had a significant effect on the legal system.

Coase refers to Richard Posner in this video who wrote an article about Coase and Keynes.  He did not understand why Posner wrote such an article because his contact Keynes and his ideas was not significant.  Posner, is a lawyer who has done a lot of work with economists, like Gary Becker, at Chicago to incorporate economic ideas into the law curriculum.  He may have opposed Keynesian economics like many of the economists at Chicago when he wrote the article.  After observing the consequences of the financial crisis, however, Posner wrote an article on why he has become a Keynesian.  I doubt that this went over well in the economics department at Chicago.

How Will Recent Economic Data Affect The Fed's Purchase Of Long Term Secutites?

The Fed has been purchasing long term securities in order to strengthen the banking system and to reduce the unemployment rate.  Tim Duy reviews the recent economic data and speculates on how that will alter the Fed's policy known as quantitative easing.  He concludes that the Fed will soon begin to taper its purchase of long term securities and that this will not have a negative effect on the economy.  Duy provides a good overview of the economic data that the Fed uses to make decisions and he offers his insights into how the data will be interpreted by the significant players at the Fed.

China's Economic Policies, Global Warming, And The Universal Problem Of Altering The Economy

This article suggests that air pollution, which affects everyone in China, has become such a big problem that China may decide to take more aggressive steps to reduce carbon emissions.  China has become the largest emitter of carbon because its rapidly growing industrial economy is based upon energy from coal.  Unless China shifts to cleaner forms of energy, and makes significant changes in its industrial structure, its share of global carbon emissions will continue to increase.

The article describes some of the actions that China might take to limit carbon emissions and some of the obstacles to those plans.  My takeaway from the article is that growth in carbon emissions is not uniquely related to capitalism, or to a nation's form of government.  China's state operated firms have a powerful incentive to continue growing, and the hold that its government has over its citizens is dependent upon increasing the standard of living of its citizens.  The imperative for economic growth is universal.  This article was published because the air pollution problems in China are visible today.  That might enable the government to alter its economic policies today in order to provide a relief to a current problem.  It is very difficult for any government to take actions that will limit economic growth in order to prevent something bad from happening in the future.  There are examples, however, where governments have been able to alter behavior in order to prevent bad things from happening in the future.  The US government has been very successful in reducing the consumption of tobacco despite opposition from the tobacco industry and the dependency of many of its citizens on nicotine consumption.  High taxes on tobacco products, along with a host of efforts to alter the culture which reinforced tobacco consumption has reduced tobacco consumption dramatically in the US.  Efforts to discourage tobacco consumption that depended solely upon educating citizens about the dangerous effects of smoking that might affect them in the future were not effective.  We need something similar to the actions taken by governments to reduce tobacco consumption in order to reduce carbon emissions.

Monday, September 2, 2013

The Multinational University

Most multinational corporations realize a good share of their of their revenues and profits in non-domestic markets.  This article describes some of efforts by several US universities to expand into international markets.  In the process they do what most multinational corporations have done to be successful: they adapt their product to meet the needs of the local market.  Fast food chains sell their brand and not a particular product.  As universities adopt the corporate model they abandon some of the ingredients that have made their brand valuable.  In authoritarian countries that discourage freedom of expression universities that are attempting to capitalize their brand have redefined academic freedom which has been essential part of their brand in the US.  They support the idea of free thought but they accept the constraints placed upon them by their government sponsors to discourage freedom of expression.  NYU or Yale in authoritarian countries will not become centers of student protest movements.  The corporate managers in these universities, along with their corporate trustees, may wish that they could modify their domestic market to accept the same definition of academic freedom.  They will not get much help from their faculties which have not supported their efforts sell their brand abroad.

Labor Day In America

Paul Krugman tells us what motivated Congress to create a holiday to honor the people who do the work in our society.  He includes a lot of other observations in the article, but the quote that I posted below is all that we need to take out of the article.

"Consider, for example, how Eric Cantor, the House majority leader, marked Labor Day last year: with a Twitter post declaring “Today, we celebrate those who have taken a risk, worked hard, built a business and earned their own success.” Yep, he saw Labor Day as an occasion to honor business owners. "