Saturday, November 30, 2013

Charles Krauthammer Redefines Honesty At The Washington Post

Charles Krauthammer is provided a platform by the Washington Post to report on politics and world affairs.  He is also a regular on TV news shows.  He is also completely dishonest.  This post provides a good example of his dishonesty.  In 2005 a Republican senator proposed a change to Senate rules that would prevent the Democrats from using the filibuster against judicial nominees proposed by the Bush Administration.  Krauthammer wrote a strong article in favor of the change.  In 2013, the same Charles Krauthammer, used some of the same rhetoric that he used in his 2005 article, to attack Democrats for making changes in Senate rules that would prevent Republicans from using the filibuster to block judicial nominees proposed by the Obama Administration.  In other words the filibuster is a good thing when it used by Republicans, but it is a bad thing when it used by Democrats.  Its understandable that the Washington Post employs conservatives like George Will, Robert Samuelson and Charles Krauthammer to provide a conservative perspective on the news.  It is not acceptable, however, for the Post to employ reporters who are completely dishonest in their reporting.  We don't need another Fox News in America. 

Restore The Draft To Save America?

Dana Milbank considers several of the steps that we might take to improve our government and our society.  Few of them are politically possible, so he turns to an alternative.  He explains why restoring the draft might be helpful.  The draft would require people, who seldom have an opportunity to meet and understand each other, to work together for a common purpose.  It would also make our leaders less likely to engage in wars without purpose if their own children and grandchildren would be put at risk. He used Switzerland as an example of a country whose citizens speak four languages, and is not at risk of attack, which uses mandatory service as a way to build a national identity in a diverse nation.  Richard Nixon ended the draft during the unpopular Vietnam war.  The war protest movement was led by college students who did not want to be forced into fighting a war in which they did not believe.  Many of their parents agreed with them.  Ending the draft took much of the energy out of the protest movement. 

I'm not sure that restoring the draft would save our country but its discouraging to have a veteran reporter from the Washington Post, who understands how Washington works, offer a restoration of the draft as a last resort to develop a sense of a common identity and a national purpose.  Reporting in Washington must be like reporting in a war zone.  The reporters are not at risk, but they sense the futility of the battles between the political parties that are seldom guided by a sense of national purpose.

Why This Recession Is Called The Great Recession

Mark Thoma posted two charts from the Dallas Fed which illustrate how the US economy recovered from other recessions in comparison with the Great Recession.  Our current recovery, after 5.7 years looks nothing like our recoveries from previous recessions.  This one has been really different in many ways.  Industrial production has hardly moved over this period and the other factors are related to weak industrial production.  I guess this is what a post-industrial society looks like.

Friday, November 29, 2013

The President Of The European Central Bank Calls For Greater Unity And Less Nationalism

The ECB has become the bank regulator for the EZ.  Its president defends the bank's interest rate cut by arguing that rates are low because the economy is slow.  The decision of the ECB to cut rates was criticized by leaders in Germany who claim that it was done to remedy problems for specific countries.  The ECB also needs to create a resolution trust that can deal with the problems that might arise from troubled banks in the EZ who may not have enough capital to deal with impaired loans.

Why Putin Discouraged Ukraine Treaty With The European Union

The Ukraine decided not to sign a trade agreement with the European Union that was opposed by Russia's President Putin.  This article describes some of the reasons for Putin's opposition to a Ukraine treaty with the EU.  It also suggests that it may have harmed Russia's position with its neighbors and with the EU.  Moreover, Russian trades more with the EU than it does with its more immediate neighbors which used to be part of the Soviet Union.  Russia exports four times as much to the EU than it does to its immediate neighbors and it imports three times as much.  This raises a question about Putin's motivations for opposing a Ukraine treaty with the EU.

One explanation offered is that Putin views foreign policy in terms of its relations with the US more than he does with Europe.  He may have been encouraged by President Obama efforts to develop his relationship with him by choosing not to intervene in his efforts to form a Customs Union as a trade bloc with its immediate neighbors.  It is also suggested that Putin suffers from the British Disease.  That is, he is struggling with the loss of empire that Britain endured as the British Empire dissolved over time. Nobody really knows what motivates foreign policy in Russia, or the Ukraine, but it is a very important part of the world that is struggling economically and politically.  We should be paying more attention to the economy of this region than we have in the past.  Leaders in the EU were certainly very interested in developing stronger relationships between the EU and the Ukraine.

Why The Ukraine Might Have Decided Against A Trade Agreement With The European Union

The media in the US devotes a lot of space to political struggles in the Mid East.  We are informed less about political problems in Eastern Europe.  The Ukraine is a large country with a population 46 million which finds itself in a pickle between Europe and Russia.  It recently decided against signing a trade agreement with the EU.  This article describes the decision in terms of the weapons available from the EU and those used by the Russian President V. Putin who opposed a Ukraine treaty with the EU. 

President Putin implemented a trade boycott against the Ukraine in August and he has hinted that he might lower gas prices to the Ukraine.  The EU did offer any carrots to the Ukraine and it did not use any sticks that might have influence the decision.  The IMF also refused to provide 160 billion euro loan to the Ukraine.  According to this article, the decision was determined by a motivated Russian president willing to coerce a negative decision and a EU that was not willing to offer any carrots to the Ukraine.  It also suggests that the decision was very unpopular in the Ukraine.  What this article does not discuss is that the Ukraine itself is a divided country.  Some parts of the country are ethnically and politically aligned with Russia, and other parts of the country see a better future in an alliance with the EU.

How A Central Bank Can Deflate A Housing Bubble Without Raising Interest Rates

Gavin Davies, writing in the Financial Times, explains how macro prudential regulation can enable the UK central bank to limit the rise in real estate prices and household debt in the UK.  Ordinarily, a central bank could raise interest rates to achieve that result;  however, that would also cause other asset prices to fall, since the present value of assets is a function of the discount rate.  The central bank does not want that to happen, and it also wants to encourage corporate investment and lending to small to medium enterprises, which has been the weak spot in the economy.  Therefore, it wants to maintain low short term interest rates.  The solution to this problem is to increase the underwriting standards on the issuance of mortgages.  That should discourage households and banks from inflating the real estate market, while maintaining the low interest rates that support asset prices and encourage corporate investment.

It is interesting to note that the Fed, under Alan Greenspan, chose not to use its authority to regulate mortgage underwriting standards in the US.  The decline in underwriting standards led to the issuance of mortgages that were likely to default.  Those mortgages were sold to investment banks which packaged them into securities that were sold to investors across the globe.  The global financial crisis may have been avoided if the Fed had used its authority to regulate mortgage origination practices in the US.

Wednesday, November 27, 2013

CBS News Removes Reporter And Producer Of Controversial Benghazi Episode On 60 Minutes News Show

This article describes the vetting failures that caused CBS News to present a false account of what happened during the attack on the US Embassy in Benghazi, Libya.  The show featured the story of a contract employee of the embassy who claimed that he witnessed the attack.  The contract employee had previously told his employer and the FBI that he was not present during the attack.  The contract employee had also written a book using the false account of his presence at the embassy.  The book had been published by a subsidiary of CBS News, and it has been withdrawn from the market.  The CBS News reporter also had a conflict of interest.  She had previously taken a position on the attack that was consistent with the information presented by the contract employee on the 60 Minutes News Show.

CBS News was embarrassed by its failure to properly vet a politically controversial account of the Benghazi attack which has been promoted by the GOP.  They removed their reporter and her producer in order to protect the integrity of the reporting on the popular 60 Minutes show.  Its a pity that Fox News which has also featured controversial reporting on Benghazi, using information from the discredited contract employee, has not apologized for its vetting failures.  Apparently, Fox News has no reporting integrity to protect. 

Tuesday, November 26, 2013

Why The Agreement On Nuclear Development With Iran Is Wrong

The GOP criticism of the deal with Iran is not based upon the substance of the deal, which few of the critics are familiar with.  It is a bad deal because it was negotiated by the Obama Administration.  This article in the Washington Post describes the reflexive comments made by the foreign policy experts in the GOP like Michele Bachmann, and George Bush's former press secretary.  Its easy to be a foreign policy expert in the GOP.  I expect that we will be hearing about this from Sarah Pallin before long.  When she was running on the McCain ticket in the 2008 presidential campaign she was asked about her credentials in foreign policy during a TV interview.  She answered that she could see Russia from Alaska.  Most of GOP critics cannot see Russia from where they live but they know that any policy that is made by the Obama Administration must be a bad deal.  Foreign policy is really quite easy to understand.  Some of these foreign policy experts compare the Iran deal with the deal made with Hitler in Munich prior to WW ll.  That would really get their Tea Party supporters fired up if they knew their history.  Its always a mistake to use diplomacy to avoid war.

The Pope Links The Tyranny of Markets To Rising Income Inequality

Many economists have been concerned about rising income inequality.  Some believe that it has led to stagnation and others argue that it has corrupted democracy.  The Pope took this to a new level by stating that the tyranny of a market mentality is inconsistent with the gospel of Christ.   The implication is that the gospel of neo- liberalism is a rival to religious sentiments.  He illustrated the problem by asking why the plight of the homeless is less newsworthy than a drop in the value of a stock index.  He also instructed the church hierarchy to address the concerns of the people and to set examples for others to follow.

It will be interesting to see how the Pope's message is received by evangelicals in America who have linked market ideology and conservative politics to their religious ideology.  The poor are often blamed for their misfortune, and social welfare programs are regarded as immoral handouts to the unworthy.  They have provided a moral justification for poverty and moral support for an economic ideology that refuses to accept the moral implications of the assumptions that underlie it.  Income inequality is simply the result of "natural" market forces that reward everyone for their marginal contribution to production.  Social welfare is also optimized by allowing market forces to operate with minimum government interference.  Externalities are acknowledged but they are regarded as minor problems that are easily managed without distorting the market.  The problems of growing income inequality, and the misery of the "moochers" are not viewed by the Pope as minor externalities.  Furthermore, allowing market forces to operate without concern for the environmental damages that will harm future generations, so that this generation can indulge in luxuries, is a serious moral issue that is absent in a morally blind market mentality.

Sunday, November 24, 2013

The Corporate Incentive Gap And Secular Stagnation

This is one of several articles that attempt to explain the slow growth of many western economies.  This article lays some of the blame at short term corporate incentives.  Households and investors have responded to monetary policy, which has kept interest rates low, by taking on more debt to consume or to purchase assets which have been appreciating.  Household debt in the US is growing faster than GDP or household income.  Households and financial investors are using debt to make purchases but corporations are not using their retained earnings to invest in long term projects.  In the early 70's business investment was 15 times the payout in dividends.  Today the ratio is less than 2.  Corporate profits are at a post war high but they are being used to reward shareholders by increasing dividend payouts, or by stock buybacks which increase share prices.  Corporate behavior is totally consistent with the incentive system that drives corporate behavior.  Why should executives invest in projects which have a long term effect on stock prices when they might not be there to share in the rewards?  It is also the best way to please many shareholders because they have a greater concern about the short term behavior of stock prices than they do in the price of the shares that they hold in the more distant future.

The Focus Now Shifts To Explaining Secular Stagnation

Larry Summers suggested that the US economy may have been in a state of secular stagnation prior to the financial crisis, and that it was obscured by asset bubbles maintained full employment.  He did not bother to describe the path that the economy followed to arrive at stagnation.  This article provides an explanation for the path to stagnation.  It was the unintended consequence of government policies to expand debt financed consumption in order to compensate for negative net exports. 

The comments that follow the article are very interesting.  Some are quite critical, others offer support, and some expand the possible explanations for stagnation.  I think that Summers may have opened up a discussion that may go beyond what he intended.  After all, he was part of the Clinton team that formulated some of the economic policies that may have contributed to secular stagnation.  Paul Krugman praised Summers for introducing the concept of secular stagnation.  His first pass at an explanation, however, had little to do with government policy.  He suggested that bad demographics may have been the culprit.  He reserves his criticism of government policy to inadequate fiscal stimulus during the recession.

Saturday, November 23, 2013

Stages Of Economic Recovery In The UK And Similarities With The EZ and The US

Simon Wren-Lewis provided an excellent description of the stages of recovery from recession.  He examined the recovery in the UK and commented on how government policies affected the recovery.  His analysis also applies to recoveries in the US and the EZ.

The most recent recessions in the UK (also in the US) were created by the central banks in order to correct for rising inflation.  The recessions were easily ended by the central banks by reversing monetary policies to stimulate economic activity.  The Great Recession, with the exception of Greece, was different.  It was created by the banking system.  The banks made bad loans that could not be easily paid back and the credit system collapsed. 

The recovery from the collapse of the credit system was made worse by economic policies in the UK and elsewhere.  Governments decided that budget deficits, which ordinarily increase during recessions, due to lower tax revenue and increased social welfare spending, should be reduced.  They raised taxes and cut government spending.  GDP growth in the UK has been reduced 1.5% annually since 2010 and the European Commission estimates that GDP growth in the EZ has been lowered by 4.5% as the result of austerity measures.  This contrasts with the rate of growth in typical recessions which usually accelerates in the second stage of recovery.

In the third stage of recovery, the economy grows faster than trend in order to make up for lost ground.  That has not happened in the UK.  Employment has held up better than output and that is not a good sign.  It means that productivity is lower and so are living standards that depend upon growth in productivity.  If the lower rate of productivity growth in the UK is permanent, it means that living standards in UK will remain depressed.  Its not easy to determine the reason for lower productivity growth but it may be due to the misallocation of credit by the banking system.  That leads us back to the problems in banking system.

Bankers believe that they deserve the large share of income that they receive because they provide the money that lubricates the industrial system.  The CEO of Goldman Sachs echoed that sentiment by claiming that the banks do God's work.  Simon Wren-Lewis disagrees.  He believes that rent seeking is responsible for the rising share of income the gravitates toward the financial system.  The banks were creating bad products that  were sold to poorly informed investors, and they were taking risks to increase profits with the knowledge that they would be bailed out by the government.  They were weakened by the financial crisis and they are not providing credit to higher risk start-ups that may be more productive than the more stable large corporations that they support with credit.  The decline in productivity may be partially explained by the misallocation of credit.  The banks are not doing God's work by allocating credit to its most productive use.

Lewis ends his post on a pessimistic note.  He believes that the banks in the UK have too much influence over government policy.  The UK government does not support efforts in Europe that might make the banks less profitable.  The growth of the financial system is a critical part of industrial policy in the UK.  This is also true in the US.

The Swiss Culture And CEO Compensation

This article describes the elements of the Swiss culture which puts moral pressure on CEO's to be more egalitarian.  When the Novartis CEO demanded a $78 million severance package, which would not upset many in the US, the people reacted.  He gave up his demand for the severance package and retired to a more sympathetic environment in the US, where it is a badge of honor among CEO's to be the highest paid among their peers. 

Friday, November 22, 2013

Youth Unemployment Is Terrible Everywhere

This Chart shows youth unemployment rates relative to the general unemployment rate in several countries.  It is especially bad in Europe but it is higher than the general level across the globe.  This is not good for the future incomes of young people and it is not good for the economy or society.

Paul Ryan, The Poverty Warrior, Seems To Have Learned How To End Poverty From Groucho Marx

Paul Krugman provides some humor to Paul Ryan's approach to poverty reduction.  His logic is much like that of Groucho in this video clipKrugman jokingly disputes the idea that Ryan found his idea in the conservative "think tanks".  Ryan may have got his idea from the comical Marx.

A Successful Medical Doctor Explains How He Has Been A Moocher

Mitt Romney suggested that 47% of Americans are moochers who rely upon government rather than their own initiative to become self sufficient.  Paul Ryan, who was his running mate in the presidential election is basing his "War on Poverty" by claiming that social welfare programs prevent Americans from becoming self sufficient.  If we eliminate social welfare programs everyone will have an incentive to be successful.  I found the quote posted below among the comments following a post on this topic.  It does more to discredit the nonsense about moochers and dependence on government than most of what has been written about this issue.  We are all moochers but in a good way.
Pat S said...
I am a physician and a moocher. As such, I was the beneficiary of about $500,000 (in current dollars) of payments that financed my K-12 education, my undergraduate education, my medical school education, and my residency training. I continue to be the beneficiary of payments from the federal and state government that account for about 40% of my income -- income that the physicians of the 1950's and earlier received in the form of chickens and potatoes, if they received it at all. The grateful taxpayers of the United States have made me, by any standard, wealthy.
It doesn't stop there. My father (the moocher) was also educated in public schools and then in a public university with additional help from the GI bill. The GI bill helped him buy his first house. In addition, he became wealthy as a real estate developer because the interstate highway system, other road and infrastructure building, and GI bill and FHA dollars turned cornfields into land for housing developments and shopping centers. The taxpayers made him rich too.
However, none of this makes me or my dad members of the "takers" in the eyes of Romney, Ryan, and their enablers. We are "makers," because as upper class, well educated people we "deserve" the government help we got that boosted us to success -- just as John Galt deserved all the subsidies that paid for the railroads and other projects he developed, Mitt Romney deserved the government underwriting of the financial industry that helped make him rich, and Paul Ryan and his family deserved the government money from the oil industry and road contracts that made them rich.
It's only the undeserving poor that don't deserve the government money they squander on food, housing, and medical care. They should have picked better parents.

A Classic Example Of Bad Reporting By Bloomberg News

The title of this article suggests that Larry Summers would like to use asset bubbles to create a full employment economy.  Buried in the article is a disclaimer which indicates that Larry Summers did not advocate reliance on asset bubbles to stimulate the economy.  The bulk of the article, however, explains why asset bubbles, which were not proposed by Larry Summers, are a bad idea.

The author of this article is an economics editor for Bloomberg News, which is a reasonably good news source relative to a mediocre press.  He certainly knew better than to accuse Larry Summers of something that he did not claim.  His real intention may have been to discredit Larry Summers for suggesting that the US economy may be in a state of secular stagnation.  It was easier to show how foolish a reliance on asset bubbles would be than to prove that the US economy is not stagnating as Summers suggested. 

We should keep in mind that Larry Summers referred to asset bubbles to make an important point that led him to suggest the possibility of structural problems in the US economy.  If the economy is dependent upon asset bubbles to achieve full employment, there must be structural problems in the economy that should be addressed.  Otherwise, we may be in for an extended period of slow growth and high unemployment.  He never suggested that asset bubbles were a good remedy for a stagnant economy, but the intent of the article is to deny the existence of structural problems in the economy by building a case against asset bubbles.

Thursday, November 21, 2013

US Senate Votes To Limit The Use Of The Filibuster

It requires a super-majority in the Senate to stop a filibuster.  About half of all the filibusters in the history of the Senate have occurred during the Obama Administration.  The GOP has used the filibuster to block votes on presidential cabinet nominees and federal judges.  In essence the GOP has used Senate rules to limit the ability of the executive branch to function during the Obama Administration.  The filibuster can still be used to block legislation and to block Supreme Court nominees.  The action by the Senate will enable elected presidents to run the executive branch without undue interference from the party that lost the presidential election.  It is a victory for whatever remains of our democracy. 

The graph below shows how the frequency of the filibuster increased in recent years.  It was infrequently used before 1970.  It peaked during the Obama Administration by a wide margin.

The GOP Bases Its Electoral Campaign On Anti-Obamacare Roll Out

This article describes the GOP's plan to continue efforts to block the implementation of Obamacare.  For all intents and purpose it is no longer a Party that offers ideas to develop a better society.  It is basing its legitimacy on a campaign to delegitimize our elected president and his signature piece of legislation.  Much of the campaign, described in this article, is based upon the use of false information.  The administration has made many mistakes in its roll out of Obamacare but the GOP painted a much worse picture about healthcare reform.  It is willing to block millions of Americans from access to healthcare in order to maintain its control of the House in the 2014 election cycle.

Lord Stern Answers Questions About India's Role In Climate Change

India is one of the emerging market countries that are receiving two thirds of the world's investment and are responsible for 50% of global output.  If it follows China's development path and produces 8-9 tons of carbon per capita, there will be no chance for the world to meet its global emissions target.  India only produces 2 tons per capita today but it wants the opportunity to become a richer country.  Lord Sterns suggests that India can continue with its development of solar power and it can eliminate much of the waste in its current power grid.  Rich countries should help India defray the cost but India is one of the countries most vulnerable to climate change; it is in its interest to find more efficient ways to develop it its economy.

Tuesday, November 19, 2013

Why The World Is Nuts About Almonds Which Is a $4 Billion Industry In California

Almonds are a big business. Production in California has doubled since 1990 and California produces 80% of the worlds almonds. This article describes the economics that are driving up prices and demand for almonds.  China has become a big importer of nuts, including almonds, and consumers are substituting almond milk for diary milk which is regarded by many as a health problem.  The biggest threat to the almond market is a reduction in the number of bees that are essential to their production.  Beekeepers report a 30% decline in the number of bees as a result of several environmental issues that threaten their health. 

Paul Ryan Wants To Be Our Poverty Warrior

The Washington Post still loves Paul Ryan.  He has gotten nowhere in his efforts to reshape the US budget, so he has decided to lead the GOP attack on poverty.  The Post gives 4 pages to this article about Paul Ryan and his way of thinking about reducing poverty.  It does not describe some of the specifics in his plan.  The basic idea is that Lyndon Johnson's "war on poverty" is the problem.  Poor people who are on food stamps stop dreaming about how to be successful.  Government needs to end government programs which provide an incentive to remain dependent upon government.  Paul Ryan will shift the focus to helping the poor to accept responsibility and to become advocates for limited government.  He wants to shift the burden of dealing with poverty from the government to the individual.  The government would end many of its poverty programs and fund self-help programs for the poor who need to accept their responsibility for being in poverty.

This article provides more detail about Ryan's "War on Poverty" and it is not short on criticism. 

Switzerland Is Trying To Limit CEO Pay

This article (via Manan Shukla) describes an effort in Switzerland to reduce CEO pay by imposing a 1:12 ratio on CEO pay.  CEO pay could not exceed  12 times the pay of the average employee.  At one time in the US the CEO of IBM stated that CEO pay should not exceed 20 times the pay of the lowest paid employee.  Of course, there aren't many executives in the US share that view.  CEO compensation between 1978 and 2011 grew by 725% while average pay only grew by 5.7% in that period.  It is estimated that CEO compensation is 231 times greater than that of the average worker.

The proposal in Switzerland has been attacked with a PR campaign which has turned popular opinion slightly against the proposal.  There is enough concern about the rapid rise in CEO compensation in Europe, however, to generate some political support for measures which gather some momentum.  Many believe the CEO is not only a problem of fairness but that it provides incentives to CEO's to manage the financial numbers that affect their compensation.  That is not always in the best interest of shareholders and other stakeholders in large corporations.  Compensation differentials also affect the functioning of our democratic institutions.  The super-rich are able to use their wealth to influence elections and they have a powerful incentive to limit the role of government tax policies.  The tax system has become less progressive in the US as income inequality has risen.

Jeff Sachs Argues For Strategic Government Investments As Opposed To Stimulating Consumption

Jeff Sachs makes a case against fiscal policies that stimulate consumption when the lack of investment is our real problem.  He gives several examples of how strategic investments that involve public-private investments in sustainable infrastructure would be superior to throwing money and policies that only stimulate demand.

US Income Inequality In Six Charts

John Cassidy uses six charts to describe income inequality in America.  The data are very revealing.  The level of income going to the top 1% has varied substantially over time.  It peaked prior to the Great Depression and fell to a steady level before peaking again prior to the Great Recession.  Some believe there is a causal relationship between the rise in inequality and stagnation but the question has not been studied enough to reach a firm conclusion on causation.

Another chart shows the level of income inequality in the US and other nations.  The major finding is that many nations have high levels of income inequality that compares with that of the US.  The major difference between the US and other nations is that income inequality in the US after taxes is much higher than it is in other nations.  That is because US tax policy and transfer payments is less progressive than it is in other nations.  Many other nations use government policies to make after tax income more equal than does the US.

It is also interesting to observe the regional distribution of income inequality in the US in relation to a measure of social mobility.  Social mobility is much lower in the South and in the Mid-West than it is in the other regions.  In other words, it may be more difficult to move up the income ladder in areas with high levels of income inequality. 

It is somewhat discouraging to observe that public opinion in favor of income redistribution policies in the US has not risen with the rise in income inequality. Many Americans cling to the myth of Horatio Alger and they are either uniformed about the reality or indifferent to it.

Sunday, November 17, 2013

Dean Baker Comments On Asset Bubbles And Secular Stagnation

This is the first of several posts in response to Larry Summers' speech at the IMF conference.  Summers argued that the US economy had problems before the financial crisis.  We had asset bubbles in the stock market and in the real estate market which were necessary to maintain a full employment economy.  He concluded that the US economy may be in a period of secular stagnation in which asset bubbles are needed to have a full employment economy.  Dean Baker points out that asset bubbles are a bad solution, and he suggests some of the structural problems in the economy which might be responsible for stagnation.  Income inequality may contribute to stagnation because the income is going to people who save their money which is not being invested in domestic production. It is being used to speculate on the asset bubbles and declines that create opportunities for speculators.  He also points out that the US has been running trade deficits for a long time.  Its hard to grow an economy when jobs and income are being exported elsewhere on a regular basis.  

The Financial Times Comments On Larry Summers Question About Secular Stagnation

This article in the Financial Times discusses the issues raised by Larry Summers at the IMF conference.  It includes a graph which illustrates the implications about growth in GDP. 

Tim Geithner Joins Private Equity Firm As President and Managing Director

There has been a lot of speculation about what Tim Geithner might do after he left his job as US Treasury Secretary.  He did very well for himself.  He will bring a lot of value to the private equity firm even though he has no experience in private industry.  His relationships with politicians and top finance professionals across the globe are worth a lot of money to Warburg-Pincus.

Jeff Sachs is Hopeful That The Devastation In The Philippines Will Stimulate Action On Climate Change

Jeff Sachs believes that catastrophic weather events will be able to overcome the effects of energy industry lobbying and enable government to turn its attention to the problem of climate change.  This article in the NYT describes the concerns that many poor nations have about the failure of rich nations to do what is necessary to protect them from the impact of climate change.  They believe that the rich nations are guilty of climate injustice.  Unfortunately, the rich nations have more immediate problems on their plates.  They don't know how they can meet many of their domestic obligations.  Perhaps the adaptation of the global economy to the realities of climate change can be the new growth industry that can address the problem of secular stagnation raised by Larry Summers which is discussed in the following post.

Larry Summer's Speech On Secular Stagnation Has Radical Implications

Paul Krugman explains the implications of the speech given by Larry Summers at the IMF conference.  Summers pointed out the US economy has been driven by bubbles for a couple of decades.  Some have blamed low interest rates for the bubbles.  But if low interest rates were the problem we would have expected inflation and rising interest rates during the bubbles, but that did not happen.  He argues that negative interest rates (nominal rate minus inflation) may be the new normal.  That is, we need negative real interest rates to have a full-employment economy.

Summers argues that the new normal rate of interest may be negative because there is not enough investment to absorb our savings. He then suggests that our low rate of investment is caused by secular stagnation in the economy.  There are lots of possible causes of secular stagnation but our demographics are not favorable for investment.  Our population, and the size of our labor force is not growing fast enough to create the demand that would stimulate investment.  Without the doubling of household debt since 1980, which fueled our bubbles, we would not have had full employment economies prior to the financial crisis.

If Summers is correct in his analysis, and we have a problem of secular stagnation, we are focusing on the wrong problems in Washington.  For example, we tend to view savings as virtue and we believe that debt is a sin.  Our problem today is that our savings exceed the demand for investment.  Many of our politicians tell us that we should be worried about inflation. But if negative real interest rates are the new normal we may need more inflation to achieve a full employment economy.  The focus on deficit reduction is also counterproductive.  We need more spending and less savings in a stagnant economy.  Furthermore, the cost of debt service is very low when real interest rates are negative.

Summers' speech created quite a stir at the IMF conference.  If he is correct, and secular stagnation is our problem, it will take quite an effort to reshape our thinking about how to deal with our economy.  Japan has been in a similar situation for two decades and it has been difficult for policymakers to deal with the reality of secular stagnation.

Friday, November 15, 2013

A Humorous Image Of Deflation At The Federal Reserve

It looks like we may be hitting the lower bound of deflation at the Fed.

How Social Democrats Can Fight Back

This article in Foreign Affairs describes how the acceptance of neo-liberalism in society caused social democrats in the US, UK and Germany to promote a "third way" that accommodated market friendly neo-liberalism in their politics.  The move to the center helped Clinton, Blair and Schroeder to win elections, but it blurred their distinction from their competitors.  Moreover, competitors like Angel Markel in Germany adapted her party's programs in order to recapture the political center.

The Social Democrats were unable to capitalize on the financial crisis because the electorates believed that they were partially responsible for creating the opportunity for the crisis by their embrace of neo-liberalism.  They need to provide a clear vision of the good society which will combine prosperity with social justice.  They can't do that by using focus groups to give the public what they say that they want.  Their vision should capture the imagination of a public that is fully aware of our problems but has not been presented with a viable alternative.  It would be a mistake to base electoral success on telling the public that they are the less of two evils.

How Economic Thinking In Germany Affects Economic Policy In Eurozone

There has been a lot of discussion about the economic problems in the eurozone and its distaste for the use of stimulative fiscal and monetary policies.  This is an article written before the September elections in Germany, that offers a description of the dominant economic perspectives in Germany.  Economic ideas in Germany are much less diverse than those in the US where Keynesian's and free marketers from Chicago often disagree about economic policy.  The economic consensus in Germany is called "ordoliberalism".  It owes much more to the ideas of Hayec than to those of Keynes.  It opposes cartels and monopolies and it uses government regulations to achieve the economic outcomes which would be consistent with that of perfectly competitive markets.  There is a technocratic preference for rigid rules and legal frameworks which place the management of the economy beyond the reach of democratic decision making.  The market may not be self correcting, as those from Chicago and Austria believe, but astute regulation may help to achieve the same end as a self correcting competitive market.  The German elections won't change economic policy preferences because the basic tenets of ordoliberalism are widely shared among the major political parties.

How Does Europe's Current Recovery Compare With Its Recovery From The Great Depression?

Paul Krugman provides a graph which shows that the decline in industrial production during the Great Depression was deeper than that of its current recession.  However, the recovery from the Great Depression was better than the recovery from the Great Recession which began in 2008.  This confirms his belief that the economic policies adapted by European leaders have provided the wrong medicine.

Greg Mankiw Provides An Interesting Review Of Alan Greenspan's Recent Book

Greg Mankiw understands the economics profession very well.  He made his way to the top of the profession and he knows how it is done.  Alan Greenspan did follow the path that most economists take to rise within the academy.  He became the Chairman of the Fed by following a different path.  The Map and The Territory was written to please two audiences: academic economists, and those who might be interested in learning more about the making of public policy.  The book will not impress academics because it is not written in their language.  It may be of interest to some outside of the academy, but it might have been better if Greenspan had not made an effort please two audiences.  Mankiw concludes that the book contains a lot wisdom that has been wrapped in a strange package.  Alan Greenspan spent 18 years as the Chairman of the Federal Reserve.  The book reflects much of what Greenspan has learned about making public policy.  Many will argue that the book was written to defend the policies that he supported.  That is probably true, but it provides lessons on the complex problems faced by policy makers at the Fed and the process of getting things done.

I don't usually like the op-eds written by Greg Mankiw because he mixes his knowledge of economics too often with his political philosophy.  There is a reason why he was selected as an economics adviser to George Bush and Mitt Romney.  However, I think that he did an excellent job of explaining why Alan Greenspan's book might be valuable to some readers and not to others. Wisdom in a strange package is still wisdom.

Thursday, November 14, 2013

The New Government In Australia Reverses Course On Climate Policy

Australia is experiencing its hottest year in history.  This article describes some of the consequences of the high temperatures in Australia.  Unfortunately, the new government has ended its tax on carbon and it is not very interested in what scientists say about the potential damage from climate change.  Public opinion on climate change in Australia seems to be quite inconsistent and politicians are pretty good at tracking changes in public opinion.  Rupert Murdoch's media empire has been leading the effort to shape public opinion against government programs to address climate change in Australia just as he had done in the US and the UK.  We should reserve a special place for Rupert Murdoch in our history.  He has done more to misinform the public on critical issues that require political attention that anyone in recent memory.  His organization has mastered the art of yellow journalism.

CBO Budget Projection Through 2038 Shows Where We Need To Focus Our Attention

This graph from the latest CBO Budget report does a nice job of describing US spending and revenues through 2038.  Budget deficits between 1973 and 2013 have averaged around 3.5%.  Despite claims that federal spending has been out of control the real picture is one of stable federal spending in relation to revenue.

The budget deficit projected for 2038 shows an increase in the deficit to 6.4%.  The increase is entirely due to spending on Social Security and Healthcare.  There is decline in other federal spending between 2013 and 2038.  Net interest also increases as a share of spending due to the higher budget deficits and rising national debt.

In conclusion, we need to focus our attention on containing healthcare price inflation and make some tweaks to Social Security.  Everything else is noise. 

The War Within The Economics Profession

Keynesian economics, which focused on restoring demand during downturns in the business cycle, was never popular with conservatives because it justified government intervention into the market economy.  Conservatives did not want government's to run budget deficits to boost aggregate demand when it was below the level needed for full-employment.  Conservative economists, centered around the University of Chicago, developed an alternative view of the macro economy that implicitly ruled out the need for governments to intervene in the market economy.  Milton Friedman's monetarism, followed by rational expectations theory, suggested that government intervention to restore aggregate demand was either unnecessary or that it would make things worse.  For example, rational expectations theory assumed that rational agents would respond to any change in government policy by taking actions which would reverse the intended effect of the policy.

The Chicago approach to macro economics eventually became more popular within academia, but New Keynsian models, which assumed a classical micro foundation with rational agents, but also assumed that price were sticky, and may not adjust the economy in the short term,  have been used by economists at central banks to develop policy proposals.  They assume that monetary policy is the preferred vehicle for moderating the business cycle in the short term with one exception.  When interest rates are at the zero lower bound as they are today, fiscal policy can have a more powerful effect on aggregate demand and reduce unemployment.

The battle between conservatives and New Keynesian's is still going on.  Paul Krugman is not happy with the way in which the battle is being waged by conservatives.  He argues that they control the academic journals and that they ignore evidence when they criticize those who argue for the use of fiscal policy in the kind of recession that we have today.

Wednesday, November 13, 2013

San Francisco Fed President On Rebalancing Economies In China And US

The President and CEO shared his thoughts on how China and the US must rebalance their economy's in the future.  The US economy has depended upon high levels of consumption.  It must increase investment and exports to balance its economy.  China's economy has been focused on exports and investment spending.  It must find ways to increase consumption and lower its dependence on exports and capital spending.

The financial crisis has caused the global economy to grow more slowly.  That has affected the level of exports in China and increased its need to find other sources of economic growth.  The US also faces the same problem.  It is hard to understand how the US can increase its level of exports in a slow growth global economy.  This is especially difficult when trade is so heavily dominated by manufactured products which has been a shrinking part of the US economy.

The speech highlights some of the problems that have motivated China to reform its economy, and it suggests that the US must increase spending on education, physical capital, technology and infrastructure.  Its hard to understand how government spending can be increased in much needed areas in the current political environment that is dominated by reductions in government spending in order to further reduce budget deficits.

1970 Was The End Of Economic Security And The Beginning Of The Age Of Anxiety In The US

Harold Meyerson does an excellent job of describing the economic history of the US over the last four decades.  He describes the age of security following WW ll,  in which workers shared in the gains in productivity, and the shift to the new era in which the gains in productivity went to shareholders.  He picked 1970 as the starting point of the new era of anxiety because it was the first year in which median wages declined from the previous year. It was followed in 1976 by the first post war trade deficit in the US which has been repeated every year since 1976. Meyerson does not mince words about the causes of this shift.  He argues that it was initiated by a decline in worker power that required cooperation between politicians and industry.  He contrasts it with what has happened in Germany over the same period where workers have shared in the gains from productivity.  He attributes this to a more worker friendly industrial policy in Germany. Germany has managed to run trade surpluses under the same conditions of globalization faced by the US. Some of the salient events that accompanied the move to an epoch of anxiety in the US are highlighted below.

  •  Paul Volker, as head of the Federal Reserve, declared a war on inflation.  Interest rates were raised to over 20% and the economy went into recession.  The high interest rates made it difficult for firms to justify new investments which did not exceed the new hurdle rate.  Between 1979 and 1983, 2.4 million manufacturing jobs were lost in the US.
  • The deregulation of the US economy began under Jimmy Carter and it was supported in the Senate by democrats like Ted Kennedy.  That trend continued until it crested during during the Bush Administration prior to the financial crisis.
  • In 1980 President Reagan broke a strike by federal air traffic controllers by firing all of them and replacing them with new workers.  This triggered a new era of union busting by major US corporations.
  • The relocation of industry from the North to the low-wage South led to a convergence in wages between the North and the South.  Wages in the North fell as competition between the North and the South increased.  Even foreign manufacturers took advantages of low wages and anti-union laws in the South.  They paid lower wages to workers in the South than they paid to their domestic labor force, and they used temporary workers to perform jobs at even lower wages than permanent employees.  The US South became a low wage country.
  • Wal-Mart also facilitated the Southernization of the US economy.  It became the largest employer in the US and it adopted an anti-union strategy in all of its locations.  Wal-Mart also used its market power to force its vendors to cut prices to the bone. Its vendors were forced to offshore production to low wage countries in order to meet Wal-Mart's demands.  The trend set by Wal-Mart impacted wages paid by local retailers and it was copied by other large retail chains.  Chain retailers have replaced US manufacturers as the largest employers in the US.
  • US trade policies like NAFTA and its policy with China facilitated the loss of jobs in the US.  It is estimated that 7.4 million jobs were lost as a result of the change in US trade policy with China.
  • In 1981 Jack Welch announced that company loyalty, which had been an important goal of management in the US,  was nonsense.  He led GE into the new era in which the corporate mission shifted from a concern for all of its stakeholders to the single goal of increasing shareholder value.  Other large corporations followed suit and corporate executives arranged for their compensation to be linked to increases in the stock price.  Jack Welch recently declared that this was one of the dumbest ideas that American corporations initiated but it has now become accepted practice in the US and it is being adopted in many foreign countries.  
  • The bottom line is that the share of corporate revenues in manufacturing that go to wages and benefits have declined by 14% since 1970. The only periods of rising wages in the US have occurred during the infrequent business cycles in which we have had a full-employment economy.

China Plans To Implement Economic And Social Reforms

The new leader of the Communist Party put a stake in the ground about new directions in China.  Markets will play a larger role in the allocation of resources and China will shift its production away from high polluting industries.  The economy will rely less on state owned enterprises and heavy investments by the state.  There will be a new partnership between the private sector and the state.  The government will also create a new organization similar to the National Security organization in the US which provides advice to the President.

Tuesday, November 12, 2013

Climate Change And Social Justice

The typhoon that has devastated the Philippines has highlighted one of the bad features about global warming.  This article summarizes a report by the World Bank which shows that the harm from global warming will be unequally shared between rich and poor nations.  The biggest impacts will occur in the world's poorest nations, and they are less able to protect themselves from harm.  The typhoon that hit the Philippines may not have been caused by global warming but scientists predict that one of the features of global warming will higher intensity storms like the typhoon that may have killed over 10,000 in the Philippines.  The loss of life and economic potential in the Philippines has been severe and they do not have the capability to deal with the losses that they are experiencing.

The Economic Growth Conundrum In The US

Economists don't have an exact way of calculating economic growth potential but it is clearly related to the amount and quality of the factors of production.  The most important factors are labor, capital equipment and technology.  Tim Taylor reviews a study from the Cato Institute which suggests that it will become increasingly hard for the US economy to increase its growth rate.  The number of hours worked per capita are not growing, and the rate of savings and investment in physical capital has been declining.  The productivity of labor had been rising, along with a rise in the quantity of schooling, but the growth in education has been flat since its peak in 1970.  There is a potential for new technologies to increase the productivity rate, but productivity seems to have peaked despite an increase in the number of workers engaged in science, technology and mathematics. 

The rate of economic growth can have an impact on a nation's standard of living.  The rule of 70 provides an useful way of looking at the relationship between the economic growth rate and living standards.  If we divide the growth rate into 70 we can determine how many years it will take the economy to double in size.  For example, it will take 70 years for the economy to double at 1% and 35 years to double at a 2% growth rate.  Consequently, one of the implications of a slower growth rate is that living standards will not grow at the rate to which many western nations have become accustomed.  That in turn raises some interesting questions.

In recent years most of the growth in national income has gone to those in the top income brackets.  If that trend continues the standard of living for the majority of Americans will remain stagnant.  On the other hand, the rate of economic growth does have an impact on politics.  If we assume that our polity differs primarily on the importance of social welfare programs and tax rates, a high rate of economic growth makes it easier to maintain social welfare programs without raising taxes.  A slow rate of economic growth, however, leads to the kind of politics that we are currently experiencing.  Those with modest incomes are concerned about a loss of funding for social welfare programs, and those with high incomes worry about a potential increase in their taxes.  Much of the political noise about budget deficits in rich nations is between those who are concerned about the erosion of social welfare programs and those who don't want to pay for them.

Global warming raises another interesting question about economic growth.  If we decide to lower the global economic growth to deal with the potential harm from global warming, we will have to decide how the burden of slower global growth will be shared.  Some believe that living standards are already very high in the rich countries, and that we should allocate future economic growth to poor countries.  It has been very difficult for nation states, who place national interest above other factors, to make decisions about the management of the global economy.  It is also not clear that nation states have to ability to make these decisions.  Large multinational corporations make most of the decisions that affect the global economic growth rate and where that growth will occur.  They will continue to make investments where they see the most opportunity for growth and profits.  Slower economic growth in rich nations may already have been determined by their investment strategies.  The political divide in rich nations between those who support social welfare programs, and those who favor lower taxes,  may be with us for some time.  This will test the ability of nation states to operate in world where the economy has been globalized.

Saturday, November 9, 2013

Why Has The Media Declared Chris Christie A Pragmatist and Bill de Blasio A Radical?

Robert Reich raises this question and provides his answer.  Compared to the Tea Party faction in the GOP Christie is welcomed as a moderate pragmatist.  On the other hand his record as the Governor of New Jersey is very conservative.  Christie is only a pragmatist relative to the Tea Partiers in the GOP.  Bill de Balsio, who was recently elected Mayor of NYC, ran on a traditional Democratic platform of progressive taxes which will be used to improve the education system.  The media refers to him as a left wing radical only because he supports programs which have been generally abandoned by the drift of the Democratic Party toward the right-center position that used to be occupied by the old GOP.

Why Did S&P Downgrade France's Sovereign Debt?

Paul Krugman responds to the S&P downgrade by comparing France's debt with that of the UK which it did not downgrade.  On the surface, France looks similar or better than the UK.  The S&P justified the French downgrade by arguing that France has not generated enough growth enhancing reforms.  This presumes that the S&P knows which kind of structural reforms will generate growth and that it understands France's internal situation better than its government.  Krugman does not believe that economists really know which reforms will indeed produce growth in a specific country.  The S&P can't know what economists cannot agree upon.

Since the S&P can't really know what will produce growth in France, why did the downgrade France's debt?  It turns out that they did not like the way that the government has attempted to reduce its budget deficit by raising taxes on the wealthy.  They prefer cuts in government spending to tax increases.  The S&P may also believe that France is not free market enough for its taste.  They would like France to reduce the size of its government and the welfare state that it supports.  In other words, fiscal responsibility is only a good thing when it used to reduce the welfare state.

How Badly Has The US Economy's Potential Been Damaged?

John Cassidy picks up on a report that was presented at the IMF's annual research conference.  Paul Krugman briefly summarized the report that I posted a few days ago.  Cassidy goes into more detail on the question raised in the report.  We know that the recession, and our response to it,  caused our economic growth rate to deviate well below our long term growth trend.  According to the report some of the damage to our economy will linger for some time and keep our economic growth rate well below its historical trend.  This raises a deeper question that many economists have been discussing for some time.  Some economists, like Krugman, argue that economy would have recovered fine if government had done the right things during the recession.  That is, government inaction caused the damage to the economy and that we will get back on our trend line over time.  Other economists wonder if the US economy was in bad shape prior to recession and that we should not expect the economy to maintain its historical growth rate.  They argue that the growth rate was maintained by government actions which promoted the bubble, and the real estate bubble.  That is, asset bubbles were responsible for keeping the economy on its long term trend line prior to the recession.  In other words, we should not expect the economy to return to its long term rate of growth in the future.  We should more realistically expect a much lower future growth rate

This is an important question.  If the economy grows at 1.5% instead of 2.5-3.0%, government tax revenues will fall and government spending will have to be dramatically reduced.  This will exacerbate the political issues that we are currently facing in the US.  A rising economic tide covers up a lot of problems that are exposed by a low tide.  We can look forward to increased government dysfunction and turmoil if we are forced to deal with deeper economic problems in the future.

Right Wing Groups Growing In Europe

This article describes many of the populist political parties that are growing in Europe.  They are Europe's version of the Tea Party in the US.  Like the Tea Party, they oppose immigration for a variety of reasons.  Some oppose the Muslim immigrants who do not share some of the cultural traditions,  and others oppose globalization which dilutes their national identity and threatens the loss of jobs.  They also believe that mainstream politicians are out of touch with the people, but they do not oppose big government.  Unlike the Tea Party, they defend government provided social welfare programs.  They worry that these programs may be cut, and that too much of the money is being spent on immigrants.  They also do not share the Tea Party fervor for free market ideology which has been woven into a crude form of libertarianism which flavors its anti-government philosophy.

These movements in Europe may be the tip of the iceberg.  Social welfare programs depend upon economic growth.  It will not be easy for many governments to maintain them under conditions of economic stagnation.  Moreover, national and ethnic identities are powerful forces.  Efforts to integrate Europe's economy were more effective in overcoming nationalism when the prosperity was growing and widely shared.  Populism in the US will also be a powerful force under conditions of rising income inequality and lower social mobility. 

Friday, November 8, 2013

Typhoon Hits Philippines With Highest Wind Speed In Modern History

This article has a satellite picture of the typhoon as it made landfall in the Philippines.  The wind velocity of 195 miles per hour sets a new record.  This is exactly what we expect to happen with global warming.  Global warming deniers claim that air temperatures over the last 15 years are not above average and that global warming is a hoax.  They ignore the fact that sea water temperatures are elevated, and that we should experience more weather events like the typhoon in the Pacific as a result of global warming. 

President Obama Is Trying To Sell Infrastructure Investment To Public

The president is pushing an infrastructure investment that will enable US exports of grain, via the Mississippi river through the port of New Orleans, to be competitive in the long run.  Given that the Speaker of the House has referred to the president's plan as an effort for him to play Santa Claus with taxpayer money, he will have to sell it to the public in the states that depend upon this waterway for their livelihood.  There is no way of selling it directly to the GOP dominated House.

Politicians in Washington have apparently decided to vote against Santa Claus for some time.  US spending on infrastructure as a percent of GDP is half of what it was in 1960. 

Rapid Industrialization In China And Scarce Freshwater

There has been a lot of reporting about the poor quality of air in China's industrial heartland.  This article describes another environmental problem related to rapid industrialization.  China has 7% of the world's fresh water supply and 20% of the worlds population.  Industrialization has exacerbated the fresh water supply problem.  Much of its limited supply of fresh water has been polluted by industrial waste.  Drinking water has become scarce in many parts of China.

China shares many of the rivers which supply its fresh water with other countries in S.E. Asia.  The level of the rivers that supply fresh water in the Mekong Delta is at its lowest level in 50 years.  China is a aware of its problem and it has invested heavily in several projects that might increase its supply of clean fresh water.  It is doubtful,  however, that these projects can adequately address the fresh water supply problem in the face of rapid industrialization.

US Economic Potential May Have Been Reduced By 7% Because Of Recession

Paul Krugman is attending the IMF's annual research conference and he believes that the blockbuster report at the conference will be the Fed's study on lost economic potential in the US.  The study explained how our failure to deal with high unemployment will have lingering effects on the US economy.  The long term unemployed have become unemployable and they are no longer able to contribute to the economy.  That along with other failures in our response to the recession may have reduced the potential output of the US economy by 7%.  That amounts to around $1 trillion of lost annual output for many years.  One of the consequences of lower economic potential is that the "normal" rate of unemployment in the US will rise above the 5-6% number that we associate with a full-employment economy.  We may be at the new normal today in the US with unemployment at 7.3%.

The lost output that we will experience for many years is the result of political failure.  The US political system, along with that of many countries in Europe, decided that budget deficits were a more important problem than high unemployment.  Some countries in Europe may not have had any choice in how they dealt with the recession.  The US did not have to make the choices that it made.

Thursday, November 7, 2013

Quarterly Growth In US Beats Estimates

GDP grew by 2.8% in the last quarter.  That was well above the estimated growth predicted by economists.  The growth was driven by inventory investment and by a lower trade deficit.  There are still economic headwinds that are discussed in the article.

Market Liberalization and The Problem Of Political Liberalization In China

China's system of capitalism has produced rapid growth, but it has also introduced problems that it must deal with.  This article describes some of the reforms that might be discussed at its current plenum of party leaders.  Major reforms always effect vested interests who will tend to resist reforms that affect their privileges.  Some of these areas of resistance are also described in the article.  The basic question that Chinese leaders face is the problem of economic liberalization in a political system that has depended upon extensive state political control.

European Central Bank Reduces Interest Rate To 0.25%

The inflation rate in the EZ fell to 0.7% in October.  That is well below the inflation target of 2% and it increased concerns about the threat of deflation.  It is very difficult to control price deflation once the deflation spiral gets started.  When prices fall, corporate business profits fall and wages must be reduced.  That leads to a fall in consumer spending which further reduces profits.  Deflation is also bad for debt holders.  The value of their loans remain constant but they must service their debt with falling income.  Their debt burden is therefore increased and the risk of default rises along with reduced access to credit.

The rate reduction by the ECB will not be popular with central bankers in Germany.  They believe that deflation is good for the EZ periphery.  Falling wages will make them more price competitive and increase their ability to grow their economies through exports.  The problem with that theory is that it is impossible for every country in the EZ to run trade surpluses without increasing trade deficits among their trading partners.  Global current accounts must balance out at zero. 

The action by the ECB also raises concerns about slow economic growth in the EZ.  Price deflation is usually associated with recession or depression.

The US Is Focusing On the Wrong Deficit

The focus in Washington is on cutting the US budget deficit.  That is the wrong target if we are interested in producing jobs.  If we cut our trade deficit by 2% it would produce around 2.8 million jobs.  This article suggests some of the things that might be done to cut the US trade deficit.

It may be politically difficult to cut the US trade deficit because a large share of the trade deficit is the result of imports by US firms that are sold under their brand name in the US.  If we don't do something about the trade deficit, however, we can't cut our budget deficit without making things worse in the US.  Our budget deficit adds some the lost spending, which is about $500 billion per year, from our trade deficit which is about 3% of GDP.  For the last decade we have been using government spending, and investment bubbles to compensate for our large trade deficits.

The Obama Administration has a goal of doubling US exports by 2015 but that is the wrong target.  The trade deficit reflects net exports in the US.  That is exports minus imports.  We need to increase net exports.

Wednesday, November 6, 2013

How Should We Interpret The Governor Races In NJ and Virginia?

The center right Republican governor of NJ was re-elected by a wide margin in a largely Democratic state.  A Democrat won the election for governor in Virginia over a Tea Party backed candidate.  This article makes an effort at explaining the results.  It was clearly not a good result for Tea Party supporters but its hard to extract a simple explanation for these results.  What worked for the GOP in NJ may not work in other states but the GOP needs something more than opposition to Obamacare as an election strategy.

Alabama GOP Primary Result Is Blow For Tea Party

The establishment supported candidate for the House seat in a very conservative district defeated the Tea Party backed candidate in a bitter race.  The Tea Party candidate refused to concede the election and threatened to start up a new party.  This result may cheer up the GOP establishment which poured lots of money into the campaign but it cannot afford to alienate about 25% of its base which is very active in elections.

Monday, November 4, 2013

US Public Investment Near Record Low

Its no wonder that growth in weak in the US.  America is not investing in its future.  Corporations have cut back on investment and so has the government. 

Why Its Been A Good Year For The Top 10% and A Bad Year For Everone Else

The stock market is up 24% this year and the top 10%, which owns 80% of the stock, is prospering.  The bottom 90% has seen little growth in income and Congress is bent upon cutting programs like food stamps which are used by almost 50% of our children.  Robert Reich offers his explanation for this situation.

The stock market is up because profits are near an all time high and large corporations are using their retained earnings to buyback their stock and to increase dividend payouts.  That is good in the near term for shareholders but it is bad for everyone else.  It can't sustained in the long term.  Investment is needed to create the jobs and demand that is necessary to keep the ball rolling.

Congress is focused on cutting government spending, especially on programs that benefit the bottom 90% because they are invisible to politicians.  They don't fund their campaigns and almost all of the politicians are members of the top 10%. 

Saturday, November 2, 2013

The New Amercan Capitalism

We are all familiar with publically held firms which are called "C" corporations.  They raise funds by issuing shares to shareholders whose rights are overseen by boards of directors.  They are also extensively regulated by government and their profits are subject to taxation.  A share of their earnings are distributed to shareholders by dividend payouts, but a large share of their earnings are retained for future investments.  Consequently,  they are not dependent upon the financial markets for investment capital.  This article describes a rapidly rising form of business organization that have several advantages.  They have the advantage of limited liability that "C" corporations possess, but they are also less regulated by government and they do not pay corporate taxes.  The profits from these firms are distributed to investors in the form of dividends,  and the master partners are compensated like hedge fund managers.  They receive a fee and a share of the profits in addition to the dividends on shares that they might own.  Since they do not retain their earnings they must be able to consistently raise capital from investors.  Therefore, they must provide high yields in order to raise capital on an annual basis.

There has not been a lot of publicity about this new form of capitalism despite the rapid rise in the use of the various styles of limited partnerships that have been created.  For example, the number of "C" corporations that Vanguard has available for its index fund of publically held corporations has been almost halved over the last few years.  Since these new organizations are not available to mutual funds, and many pension funds, they attract a different type of investor who is willing to take the risk associated with them.  Consequently, to the extent that they remain as profitable as they have been in recent years, and produce high yields to investors,  income inequality will be even greater than it has been in the past.  Furthermore, corporate taxes will continue decrease as a share of government revenues and income taxes will also fall because dividends are taxed at a lower rate than ordinary income.

Friday, November 1, 2013

US Spending On Infrastructure Has Collapsed Since 2002

Infrastructure in the US is primarily done by the states with funding from the federal government.  Despite the ability of the government to fund infrastructure investment at very low interest rates, spending has fallen sharply.  The decline in infrastructure spending has harmed the recovery and it does not auger well for the future.  The deferred spending on infrastructure will have to done in the future at a much higher cost.  If the US were a business the collapse in investment would be a signal to the market that the firm was in trouble.

Der Spiegel Is Critical Of Efforts to Punish And Reform Large Global Banks

The arrest of a top UBS banker in Italy inspired Der Spiegel publish this article which describes some of the government efforts to take a stronger position against the large banks which have been deemed "too big to fail".  The large financial penalties that have been recently levied against several of the large banks are criticized as being small relative to bank assets and profits.  It is also critical of the effort by the G20 countries to agree upon global reforms which might prevent the next bank crisis.  They have devolved into country specific reforms which are heavily influenced by bank lobbying efforts.

Germany Reacts To US Treasury Report Which Is Critical Of Its Export Based Economy

The US Treasury report, which has generally been critical of China in the past, has shifted its focus to Germany.  Germany's export surplus is greater than China's and internal spending on consumption has been stagnant.  The critical Treasury report came at a bad time because German's are still seething over the revelations of NSA surveillance.  On the other hand, growth has been slow in the eurozone and some believe that Germany could do more to stimulate consumer demand.

The problems in the eurozone create a real dilemma for Germany.  They have been able to manufacture high quality products which they are able to sell successfully on global markets.  It does not make much sense to criticize Germany for its success in an area where the US and the UK have been less successful.  It is also hard to blame Germany for the lack of success by countries on the periphery of the eurozone who have numerous structural problems which make them less competitive within the eurozone.  On the other hand, it is important for all of the countries in the eurozone to maintain the common currency.  Germany may have to do more to insure the success of the eurozone.

Why The War Against The Poor Is Central To GOP Campaign Strategy

The war against the poor, which also has racial implications, is a very important part of Republican ideology.  The Tea Party concern about federal budget deficits is really a smokescreen for a deeper issue.  They want to cut federal safety net programs, including Obamacare, which disproportionally benefit minorities and immigrants who tend to vote for Democrats. 

The GOP base consists of a relatively small number of well off voters who do care about fiscal policy.  They worry that their taxes may have to be raised in order to fund entitlement programs that absorb a rising share of federal spending.  They also support immigration reform which is anathema to Tea Partiers.  The GOP cannot win elections, however, by appealing to their traditional base.  They must also attract less well off voters to their cause.  They like Social Security and Medicare, which establishment Republicans worry about, but they don't like immigrants and they don't like to see their tax dollars going to the "wrong kind of people".  They also place a high value on fundamental Christian and economic ideas which the Republican establishment gives lip service to as long as it differentiates them from liberal democrats who are portrayed as godless socialists.

This difficult marriage between establishment republicans and the Tea Party has helped the GOP to win the House, but it has harmed them in national elections and it has cost them some seats in the Senate where the Tea Party succeeded in nominating candidates who were unelectable.  The real question going forward is whether the marriage can be saved as it is or whether it will fail.  A republican leader like Ted Cruz, who is admired by the Tea Party, might be able to engineer a takeover of the GOP or he might successfully create a third party. 

NSA Spying Is Threat To US Technology Firms

Google, Yahoo, Microsoft, Twitter and Facebook have built global businesses that depend upon the security of the information that flows through their networks.  They are very concerned that the revelations about NSA surveillance will undermine their global business.  The recent leaks about NSA surveillance also caused them to distrust the government because they learned things about the surveillance that NSA did not tell them.  Moreover, NSA's attempts to respond to their concerns by telling them that they are not spying on Americans does not help them to sustain a global business.

This article describes some of the things that they are doing to make their networks more secure and their efforts to lobby Congress which enabled NSA surveillance when it passed the Patriot Act in response to 9/11.  Their business models, however, are based upon providing specific information to advertisers so that they can target potential customers.  That makes their data more vulnerable to attack.

Alabama Primary Is Test Case For GOP Effort To Stop Tea Party Takeover Of Party

"Mr. Young’s voters are drawn by his declaration that homosexuality “always has been, always will be” wrong, his full backing of using a government shutdown “to stop Obamacare,” and his insistence that people “have the right to acknowledge God in schools and in the public square.”
Supporters of moderate Republican candidates worry about whose voters will turn out.
“We can have all the money in the world, but if we can’t get the center-right Republicans to the polls on Primary Day then it does not matter,” said Steve LaTourette, a former Ohio congressman who is now trying to build an $8 million “super PAC” to help support more mainstream Republicans in 2014 primaries."

The quote above from a NYT article summarizes the messages that attract Tea Party supporters in Alabama to the polls and the basic problem that establishment Republicans face.  Tea Partiers are more active in primaries than mainstream Republicans.