Monday, March 31, 2014

Piketty Reminds Us Of Ideas From Veblen and Kalecki

This article describes some of the similarities between Piketty's concept of inequality and the ideas, which many have forgotten, of Veblen and Kalecki.

UN Report Argues That Climate Change Is With Us Now And Will Get Worse Unless We Act

The most recent report by the IPPC describes the changes that we are currently experiencing, and it warns that the damage from climate change will worsen unless we cut carbon emissions.  We are already seeing food shortages and high prices for basics like corn and wheat.  The next step will be starvation in many nations which do not have the resources to respond to the changes that are underway.  The US is not immune from the effects of climate change.  There is less snow on the western mountain caps, and the snow is melting earlier,  that means less water in summers that have been getting hotter.

The UN report may be welcome news for President Obama who plans to take action on climate change.  Unfortunately, the report will most likely lead to an increase in the number of Al Gore jokes that float around the Internet and talk radio.  Climate change denial has become part of the GOP's identity.  It will be difficult for the GOP to change its identity with its scientifically challenged base, and with the fossil fuel industry which contributes to their ignorance.  Moreover, responding to climate change will not be cheap.  Many nations will find it difficult to adapt to climate change, or to fund the programs that will be required to reduce greenhouse gas emissions.  It is a challenge, however, that can inspire us to work together to save the only planet that we have.

Sunday, March 30, 2014

When Economic Growth Is Not Good For Everyone

Paul Krugman provides a quote from Robert Lucas whose ideas came to dominate macroeconomic theory in the US.  Lucas argued that it is pointless for economists to worry about the problem of income distribution.  He claimed that economic growth would solve all of the distribution problems.  Krugman counters Lucas by arguing that we really aren't that smart about how to stimulate economic growth (even if that is not a good idea).  There are things that we can and should do about income distribution, however.  He gives the example of providing nutrition for poor children.  The nutrition of poor children seems to be unrelated to economic growth rates.

I would make a further point.  The US economy has been growing but median family income has been declining.  The growth in output has not improved the well being of most Americans.  Most of the growth in income has been filtered to the top of the income pyramid.  We have a very serious income distribution problem that many economists, like Lucas, have eliminated from the discipline of economics.

The Skills Zombie, Or Blaming the Victim For Being Unemployed

It has become popular to blame the unemployed for being out of work.  Some conservatives attribute it to a preference for unemployment benefits instead of work, but another way to blame the victims is to argue that they do not have the skills that are demanded in our high tech economy.  Tom Friedman has been making that argument for over a decade.  There is little evidence to support that claim.  Common sense tells us that the economy today cannot be so different from what it was during the high tech boom in the late 1990's, when we had full employment, than it is today.  The skills zombie theory is also contradicted by empirical research which is described in this article.  There must be another reason for high unemployment.  The simple explanation for high unemployment is that the demand for labor has not kept up with growth in the size of the labor force.  That is not a popular explanation because it suggests that something might be done to stimulate demand.  The government might be able to stimulate demand by spending more money on infrastructure, but conservatives don't like that idea either.  They prefer to argue that the government is responsible for the lack of demand for labor.  This covers all of their bases.  Either the unemployed are responsible for being out of work or the government is responsible for high unemployment. 


The End Of The Wisconsin Idea By The Anti-Environment Party

Wisconsin has been a leading state in the environmental movement.  The Wisconsin Idea called for the use of science in the development of Wisconsin's natural resources.  This article describes Scott Walker's support for a project that would end the Wisconsin Idea.  Walker is promoting the development of the largest open iron mine in the world.  Scientists have taken samples from the site which indicate that several pollutants would be released that would endanger one of our greatest sources of fresh water.  It would also run rough shod over the rights of Native American's who have been granted rights to land that would be polluted by the mine.

Scott Walker is the Republican governor of Wisconsin who has been vigorously supported by the Koch brothers who have used their billions to move state and national politics to the far right of the political spectrum.  They funded the Tea Party movement and they have been among the leaders of the anti-environment movement.  The Koch brothers have made their mark on politics in Wisconsin.  Walker is in their pocket, and Republican's now have a majority in the state legislature.  The iron mine project was defeated when Democrats were in the majority, but it has been supported by the Republican majority in the legislature.  It would appear that the project will go forward unless the Obama Administration takes action against it.  The GOP will argue that stopping the project will cost the state 700 jobs.  The Republican Party could care less about 700 jobs.  They use the job loss tactic to disguise their real purpose.  They want the financial support of the mining corporation which will reap millions from the project at the expense of the environment.

Saturday, March 29, 2014

How Does Climate Science Differ From Climate Politics?

The contrast between climate science and climate politics is dramatically illustrated in this article.  In 2013 there were 10,855 articles in peer reviewed climate science journals.  Only 2 of these articles rejected the idea that human behavior was responsible for global warming.  The percentage of politicians in the House and Senate who do not believe that human behavior is responsible for global warming is 30%.  As one might expect, most of the politicians who reject the anthropogenic hypothesis are Republican.  The majority of Republicans in the House and Senate claim to know more about climate science than almost all of the climate scientists.  I would bet that most of these politicians go to a medical doctor when they are ill, even though there might be some disagreement between doctors about a diagnosis, or a course of treatment.  They are not stupid when it comes to their health.  They pretend to be stupid, however, if it helps them to raise campaign funds, or get votes from the 30% who depend upon Fox News and talk radio for their information.

Friday, March 28, 2014

The Need For Environmental Accounting Standards

Firms like Exxon are beginning to provide information to investors about material risks to their business from the effects of global warming.  This article reports on other efforts by investors to demand more clarity on the risks to their business as well as information of their efforts to reduce carbon emissions.  The quality of the information that is being reported varies a great deal.  This suggests a need for standard accounting principles that will provide the information needed by investors.

Thus far, more pressure is being put on public corporations by investors.  One the firms that provides information to investors on environmental risks is Arjuna Capital.  The person heading up this effort at Arjuna is graduate of an MBA program that specializes in sustainable business development (Bainbridge Graduate Institute).  The movement of more MBA programs into sustainable development is bound to have an impact on how businesses report on the environmental risks that they face and the programs that they have to reduce carbon emissions.

Saving Capitalism From Capitalists

The Financial Times provided Thomas Piketty a platform to explain how capitalism can be saved from capitalists.  He suggests that we could return to the political environment of the 1930's if inequality continues to rise rapidly and pressures increase on the state to make the system less inclusive.  Its unlikely that this warning will influence many capitalists.  However, it does suggest that Piketty is not an enemy of capitalism.  He believes that it is important to retain the benefits of capitalism by sharing the benefits more broadly.

The Growth Of Shadow Banking

This report from the NY Federal Reserve shows the rise the finance sector in the US but much of the growth has come from financial institutions that are not part of the regulated banking system.  The financial crisis was triggered by these "shadow banks" which lost their source of funding when the assets that used as collateral for short term loans declined in value.  The Dodd-Frank bill which resulted from the financial crisis has been focused on regulating the traditional banking system.  However, the shadow banking system has recovered from the financial crisis and it is growing faster than the regulated banking system.  It also has a higher stock evaluation so the market believes that it will continue to grow faster than the regulated banking system.

The Recession Is Over In America

This graph (via Owen Zidar) shows that business profits tanked at the onset of the Great Recession.  They have improved dramatically, however,  from the trough in late 2008, and they are well above where they were before the recession.  Labor compensation, however,  remains below where it was prior to the recession.  The recovery in business profits has also been good for the stock market.  The recession is over for many Americans.

Greg Mankiw Argues That The Bush Tax Cuts On Capital Were Motivated By Economic Theory

Paul Krugman has picked up on Thomas Piketty's argument that a progressive tax on capital is needed to reduce the growth in income inequality.  Krugman argued that George Bush's tax cuts on capital gains and dividends were designed to benefit the oligarchy which owns the bulk of corporate stock.  Mankiw, who was a member of Bush's economic team, makes a different argument.  He claims that the Bush tax cuts were motivated by economic theory.  According to Mankiw,  the theory of optimum tax policy suggests that taxes on income and/or consumption are better than taxes on capital.  Certainly, Mankiw is correct in one sense.  The owners of capital believe that its a bad idea to tax capital.  Bush was sitting next to the founder of one our largest brokerages who suggested that a cut on dividends was a splendid idea.  I guess we have to decide whether Bush was more motivated by optimum tax theory or by Charles Schwab's suggestion.  Mankiw and Glen Hubbard, who was also an economic adviser to Bush, are prominent economists who are adept at finding ways to adapt economic theory to the interests of the super-rich.  Unfortunately, it is possible to find economic theories or research which can make the case for whatever policy one wants.

Mankiw supports his claim, that class interest had nothing to do with Bush's tax cuts, by pointing out the President Obama made only minor changes to Bush's tax policies when he took office.  It never occurred to him that the president had to deal with Republicans in Congress to make any changes in tax policy.  This is the political party of both Mankiw and Hubbard which is motivated more by optimum tax policy than it is by class interest.

America Invented The New World And Progressive Taxation

Paul Krugman tells us that as America approached the "Gilded Age" prior to the Great Depression, Teddy Roosevelt made a speech in favor of the New World that motivated the formation of America.  The New World was in stark contrast with the Old Europe and its aristocracy.  He called for a more progressive tax system that would keep the New World from becoming the Old Europe.  A speech by one of America's leading economists made the case for using the tax system to reverse the pattern of rising inequality.  In other words, the notion of America as the exemplar of the New World, and the use of progressive taxation to achieve that end, has a long tradition in our country.  That tradition, of course was not popular with the plutocracy.  Teddy Roosevelt was a member of that class and he was called a traitor to his class.  Apparently, most of his peers preferred the Old Europe to the New World.  It took the Great Depression, and the New Deal that followed in its footsteps, to deflate the plutocracy. FDR became the traitor to his class.

The New Deal and the progressive tax system have been under attack since the Reagan era.  There is a reason why the plutocracy has anointed Reagan with sainthood.  He was a great salesman.  Conservative economists told Reagan that cutting taxes on the rich would stimulate the economy, and that tax revenues would actually increase as the economy expanded.  Reagan sold that message to the public.  Reagan's message was welcomed by libertarians who believed that taxation was theft.  Some economists agreed with George HW Bush who called that idea "Voodoo Economics". Greg Mankiw, for example, ridiculed Reagan's new economic theory in one of his early textbooks.  He removed that critique, however, from later editions of his popular textbook.  Mankiw went on to become the Chair of Harvard's economics department, and an economic adviser to George W. Bush.  He was also an economic adviser to Mitt Romney during his presidential campaign, and he has written articles in defense of America's rising plutocracy.  Mankiw is not unique in this respect.  Economists who advocate for the plutocracy do very well financially and professionally. 

It appears that we at a crossroad.  We can continue on our current path, and America can lead the rest of the world in the direction of the Old Europe.  We have the option, however, to go back to our roots as the leader of the New World.  Societies and economic systems are created by human beings.  We have to decide what kind of America we want and what kind of world we want to create.  We have two major problems that we have to solve.  We have to solve the problem of rising income inequality and we have to save out planet from global warming. We are capable of doing both.   

Thursday, March 27, 2014

Thomas Piketty In Six Charts

Jack Cassidy has made an effort to boil Thomas Piketty's story of inequality down to six charts.  Obviously, Piketty's book of over 700 pages goes well beyond these charts.  However, Cassidy may get his US audience more interested in the issues raised in the book by focusing attention of these charts which indicate the the US has become the most unequal society in history.  It was once a much more equal society and but the rise in equality has been accelerated by the concentration of wealth in the US and the incomes from that wealth.  Piketty's book is primarily about the rising contribution of wealth to income inequality.  The US has the highest rate of income inequality because it is the wealthiest country in the world and that wealth is highly concentrated.  As long as our tax system encourages wealth concentration income inequality in the US will continue to set historical records.

A Conservative Response To Progressives Who Propose Higher Taxes On The Super-Rich

Charles Lane is one of the conservative editors of the Washington PostHe points out that some of the largest tax expenditures benefit upper middle class progressive in blues states that want to raise taxes on the super-rich.  Some of the biggest tax expenditures, which primarily benefit, the upper middle class progressives, are related to home ownership.  They can deduct mortgage interest payments from their gross income, and they also benefit from a lower capital gains tax when they sell their homes.  Areas in the US with the highest home prices receive most of the benefits from these tax breaks.  They also happen to be the areas in the US where most of the progressives live.  Lane suggests that the progressives in these blue areas better watch out.  Those tax breaks do not increase home ownership because many homeowners do not earn enough income to take advantage of those deductions.  They take the standard deduction when they file their tax returns.  Instead of increasing home ownership, the tax breaks increase the price of homes by 11-18% and that varies by region. Home owners in blue regions benefit more than those in other regions.

Lane's message is that progressives better watch out or they may get what more than they have asked for when they promote higher taxes on the super-rich.  They may lose one of their most valuable tax breaks in the process.

Is A Jobless Economy In Our Future?

One of the good things about automation is that it increases productivity.  That means that output can be increased with fewer workers.  This article reports on a study which indicates that up to 47% of the jobs in the US have the potential to be automated over the next 20 years.  That is good news for those who believe that there will be better jobs available for the displaced workers.  All that they need to do is to increase their skill levels so that they can take higher paying jobs that require more education and training.  That of course is what Tom Friedman has been telling us for the last 15 years in his books, and in his op-eds.  The future belongs to the best educated society.  Displaced workers may even become authors like Tom Friedman who is very productive.  He has been writing the same story for 15 years.

The problem with this story is that we don't need that many highly skilled workers.  We can't replace 47% of the jobs being performed today with new jobs that require an advanced education.  We will be faced with the problem of providing incomes for a large number of people who do not have jobs, or we will need to create more jobs for workers who are not in demand. 

The estimates made about the impact of automation on the job market may be exaggerated.  However, the percent of employed Americans in the labor force has been shrinking for more than a decade.  Much of that has been due to the outsourcing of 2 million manufacturing jobs, but some of that has been due to automation.  Its pretty clear that governments will faced with the problems created by a more productive economy.  Some of the things that government might do are described in this article. They are not the kinds of things that are very popular with our politicians.

The IMF Announces Economic Aid to Ukraine

Ukraine has been at risk of defaulting on its debt.  Russia had promised to provide $15 billion in aid to the deposed government.  The IMF has promised provide $14-18 billion in aid to Ukraine and promises from western governments for aid over the next two years increase the total aid to $27 billion.

There is a difference, however, between the conditions imposed on Ukraine by the IMF and Russia.  The IMF demands structural changes in the economy in return for its help.  The basis idea is to make the economy more competitive by depreciating its currency, reducing domestic gas subsidies, and by raising taxes on the Ukraine monopolies that had been supported by its corrupt government.   On the other hand, Russia had no interest in imposing structural changes on the economy or on the corrupt government that has been deposed.  It has responded by raising the price of natural gas that it exports to Ukraine.

Ukraine's economy has deep structural problems.  The conditions imposed by the IMF, in an attempt to strengthen the economy, will not be popular.  Moreover, they may not work.  The Ukraine government may be easier to change than its economy.  The new government which will be forced to impose the structural changes has its work cut out for itself.

Wednesday, March 26, 2014

How The President Can Limit NSA's Bulk Collection Of Data

The president can put an end to NSA's bulk collection of data in a simple way.  All that he has to do, according to Senator Leahy, is to make a decision to not reauthorize the bill that permits NSA to collect bulk data this Friday.  Instead, the president wants Congress to pass a bill to constrain the collection of bulk data by NSA.  The answer that he will get from Congress is predictable.  The House has already proposed a weak version of a bill that limits NSA's collection of bulk data.  Apparently, the president is not willing to take ownership for the limitations placed on NSA.  The GOP House has no interest in taking any actions that will allow the president to do what needs to be done. 

Eleven Responses To Capital in the 21st Century

Brad DeLong posted 11 responses, from notable people, to Piketty's book.  Its not clear that that his book will lead to any action, but it has certainly gotten the attention that it deserves.

Meritocracy At News Corp

Rupert Murdoch names one of his sons to be the successor to his throne.  He will follow in his father's footsteps as the king of yellow journalism.

Tuesday, March 25, 2014

Selling Soap And Selling Politicians

This chart shows the spending by Republican PAC's versus Democrat PAC's.  The marketing expenditures on competitive Senate and Congressional seats favors the GOP by a wide margin.  Our elections campaigns may become interesting material for graduate students majoring in marketing.  We will read stories that tell us that one can't sell a bad product with advertising, and others that tell us how one campaign had more compelling ads than others.  May the best marketers win.

The top GOP contenders are now beating the bushes to attend a meeting hosted by a billionaire who will listen to their stories so that he can select candidate with the best chance of winning the election.  If candidates cannot line up the financial support necessary to run an effective campaign they are out of the race before the election campaign begins.  I don't think that this is the form of democracy that our founders envisioned.  However, it is the best way to achieve the patrimonial society that we seem to cherish.

American Patrimony

Paul Krugman has praised Thomas Piketty's new book but he begs to differ with Piketty on the role of wealth in the US.  Piketty argues that the rapidly rising incomes of corporate executives are primarily responsible for rising inequality in the US.  He does not believe that inherited wealth in the US is as great as it is in Europe.  Krugman points us to a couple of slides which show that the concentration of wealth in the US has reached the peak that existed in the "Gilded Age".  Moreover, the data show that the top 1% is not really the issue.  Wealth has been concentrated in the top 0.1%.  The degree of inequality within the top 1% is very high.  The upper middle class has lost ground to the top 0.1%.  This is the patrimonial society described by Piketty in which inherited wealth perpetuates inequality and reduces the role of merit in the economy, and in government.

I don't know why Krugman has chosen to pick on this point of difference with Piketty.  The growth in executive compensation has certainly been a major source of inequality in the US.  It has also influenced the investment decisions made by corporate executives who place the growth of the stock price above all other considerations.  Krugman could be more helpful if he focused on what might be done to reverse the trends that we have observed in the US.  He is aware of the tax policy decisions that have benefited the top 0.1% and many economists argue that they have been good for the economy.

The Implications Of Capitalism In The 21st Century

Thomas Piketty's book has been receiving the attention that it deserves in America now that it has been published in English.  The book is over 700 pages and it is filled with data that are used to reach the conclusions made by Piketty that growing inequality is inevitable under our current form of capitalism.  John Cassidy provides us a service by summarizing Piketty's book without bogging the reader down with many of the details.   Moreover, Piketty did not write the book to make the case that nothing can be done about the rapid rise in inequality.  He shows how politics and economics are necessarily connected.  The seeds of growing inequality have been determined by the political choices that we make.  We could choose to have less income inequality if we could overcome the powerful forces that have shaped our current form of capitalism.  Piketty discusses some of those changes in his book.  The debate is no longer about whether inequality is growing.  The question is what can be done about it if we would prefer a more equal and democratic society.  We can't have rising inequality and democracy as well.  Democracy is not defined by running elections.  This is especially true when running for office requires huge sums of money provided by those who benefit from our current form of capitalism.

Monday, March 24, 2014

What Are Corporations Doing With Their Retained Earnings?

Many of our politicians tell us that we need to cut corporate taxes so that they can make investments that promote economic growth and create jobs.  Corporations have found ways to cut their tax burden but they have not invested in the economy.  Instead they have purchasing their own stock.  In fact, corporations have been the major purchasers of equities.  In makes sense for top management to purchase their own stock because it drives up the value of their stock options.  This is an easier way to increase executive compensation than making risky investments in new products or markets. 

Sunday, March 23, 2014

A Southern Strategy For Democrats

The GOP has exploited divisive social issues in the South to win elections.  This article, written by a student of the human mind, uses an example from a political race in Georgia to demonstrate what to avoid and what Democrats should emphasize in their campaign. It sounds like good advice to me.

Greg Mankiw Makes The Case Against Obamacare And Increasing the Minimum Wage

Mankiw reminds us that the science of economics is similar to that of medicine when it was a more primitive practice.  Some of their policy recommendations may have unintended consequences and any policy changes that they recommend will favor some over others.  Consequently, it is difficult to determine a course of action that maximizes social welfare.  He makes his point by pointing out some of the problems of using utility theory to evaluate the best course of action.  He suggests that economists who advocate policy changes should be more humble about the consequences of their policy advice.

Mankiw has selected two policy issues that should leavened with a dose of humility.  The Affordable Care Act and proposals to increase the minimum wage may have unintended consequences and they may favor some over others.  Therefore, given the primitive nature of our science, we might be better off if we avoided making "radical" changes.  Conservatism may be the best course of action.

Curiously, Mankiw selected two policy changes promoted by Democrats that should be reconsidered because of unintended consequences that he described.  He has been less humble about policies advocated by his favorite political party.  When he was in the Bush Administration he defended the outsourcing of jobs by arguing that outsourcing jobs was similar to importing products.  Therefore, both are examples of free trade which increases social welfare.  He has also used economic theory to defend the rapid increase in the compensation of CEO's.  Our incomes are determined by the marginal product of our labor.  Therefore, the rapid rise in CEO compensation is justified by an increase in their productivity.  Apparently, we live in a meritocracy and it would be foolish to advocate "radical" changes designed to reduce inequality based upon merit.

We have seen "radical" changes in policy advocated by Mankiw's favorite political party.  I do not recall any cautions, and calls for humility, when the Bush Administration made substantial changes in tax policy, or when Bush tried to transform Social Security into a private system.  Mankiw seems to be very selective about the application of humility by economists when they advice politicians.  

Paul Krugman Has Finally Connected The Dots On US Tax Policy

What should have been apparent to economists, now makes sense to Paul Krugman.  The Republican Party has promoted tax policies which dramatically reduce taxes on wealth.  It started with Ronald Reagan, but it accelerated under George Bush.  The capital gains tax, the tax on dividend income and the inheritance tax were all reduced in the Bush Administration.  Paul Ryan's Republican Road Map would eliminate taxes on wealth.  Of course, top executives are not stupid, they have modified their compensation plans accordingly.  Most of their compensation is in the form of stock options.  They are taxed at the lower capital gains rate, instead of the tax on earned income, when they cash in their options.  Private equity managers and hedge fund managers have also managed to have much of their income taxed at the lower capital gains rate.

A good detective might have looked at this evidence and concluded that these changes in tax policy shifted the tax burden from those who earned their incomes from wealth, to those who earned their incomes from labor.  It might even suggest that the wealthy had more influence over tax policy than wage earners.  The publication of Thomas Piketty's book has forced some economists to recognize the obvious.  It makes more sense to accumulate and inherit wealth than it does to earn income from wages.  Piketty argues that we are on a path to recreate the rentier society that many deplored when the holders of wealth were aristocrats who earned their incomes from rents on inherited estates.  They have been replaced by holders of financial assets.  Piketty outlined some of the policy changes that might reverse the course that we are on.  The rentier society is inevitable unless regional tax policies are put in place to shift the tax burden from wage income to a taxes on wealth, and to eliminate the use of tax havens which shift the tax burden to those who cannot easily take advantage of tax havens.
Perhaps some economists and politicians will be able to figure out the obvious.  They will face fierce opposition from those who benefit from the current regime but it will be a battle worth fighting.

Saturday, March 22, 2014

Paul Krugman Jumps On The Piketty Bandwagon

Krugman has written a review of Piketty's book (not included in his post) but he has picked up on two points.  His first point is that Republican political policies can be interpreted as support for the kind of economy that Piketty envisions.  He calls this "patrimonial capitalism".  I have described it as the Downtown Abby economy, because of the familiarity that many have with the popular TV series by that title.

Krugman's second point is that Piketty's analysis is more appropriate for Europe than it is for the US.  Piketty agrees that income inequality in the US has more to do with the rapid rise in top management compensation than it does in Europe.  He also argues that the rise in compensation has less to do with merit than it has to do with compliant corporate boards.  He also suggests that it coincided with the changes in tax policy.  The steep cuts in the top marginal tax rate encouraged executives to campaign for wage increases.  Piketty is certainly correct in his analysis but Krugman would like to have seen more attention paid to the differences between the US and Europe.  Perhaps Krugman will discover how his profession solved the "agency problem" by arguing that top executives should be compensated with stock options so that they would pursue the goal of increasing shareholder value.  Corporate executives have milked that idea for all that is worth.  They have become large shareholders of the corporations that they operate and they have focused their attention on managing financial metrics that increase the stock price.  If the focus on short term financial engineering causes the stock price to fall, they can have the strike price on their stock options lowered by cooperative directors who they have carefully selected and placed on the compensation committee of the corporate board.

The Decline in Productivity And Potential Output In The UK

Simon Wren-Lewis posts a graph which shows that the potential output of the UK economy may have been permanently reduced.  The economy will not return to the long term trend of economic growth that it experienced prior to the recession.  The decline in productivity, which is the result of weak investment, is part of the reason for reducing the potential output of the economy.

Wren-Lewis is particularly critical of the policies employed by the government that contributed to this problem.  He puts the blame on Chancellor Osborne who has put electoral politics ahead of the national interest.  He was able to sell the public on the virtues of austerity, that worsened the recession, and to then take credit for the partial recovery which followed the curtailment of austerity measures, with the help of a cooperative media.  This does not auger well for the future of the UK.  It will have to adapt to declining living standards, and to a form of democracy that depends upon a misinformed public.  Perhaps we can call this the Rupert Murdoch economy.

Friday, March 21, 2014

NSA Spying May Be Harming US Tech Firms

The extent of NSA spying revealed by Snowden has made many customers wary of US technology firms.  Some potential customers fear that they have been too cooperative with NSA.  Its hard to estimate the cost to US tech firms because its hard to attribute lost sales to NSA, but many of the tech firms have spent billions in an effort to assure customers that their data are secure when US products are used to store and move data.  In any case, several tech executives have been making their concerns known to the White House.  Its difficult, however, to restore trust once it has been lost.

The Current Shape Of The New Cold War

Russia responded to the events in Kiev by annexing Crimea which had a loose relationship with the government in Kiev.  The US responded to the annexation by announcing sanctions described in this article which are directed at oligarchs and politicians associated with Putin.  Officials in Europe, expressed displeasure with the annexation but they have not announced strong sanctions against Russia.  They have, however, signed an agreement with the Ukraine government that strengthens the bonds between Ukraine and many nations in Western Europe.

The actions taken by Putin have increased his popularity in Russia, and it may have helped him in his efforts to create a more united Russia. He has announced that he has no further interest extending his ventures into Eastern Ukraine.  The European agreement with the new government in Kiev presents a new problem for him.  Can he allow Ukraine to move into the Western European orbit?

The current sanctions announced by the US will create a nuisance for Putin and his major supporters, but they were not enough to stop them from annexing Crimea.  They may have a more effect on politics in the US which require the government to demonstrate a show of force.

It is clear that the economic  integration between Russia and Western Europe has suffered a setback.  What is not clear is how the integration between Europe and the government in Kiev will progress. 

Premature Deindustrialization

The pattern of development in most countries is to move from agriculture to industrialization and then to deindustrialization followed by a services economy.  That has happened in most of the Western economies, and it is beginning to happen elsewhere.  One of the problems with this pattern is that convergence between the rich and poor countries depends upon the income levels at which deindustrialization occurs.  Premature deindustrialization at low levels of income presents a number of development problems.  Productivity growth slows down, and many of the institutions that are essential for effective democratic government fail to develop.  This traps nations at a low level of income and with ineffective governance.  Apparently, an extended period of industrialization is a prerequisite for income convergence between rich and poor nations.  The bargaining that takes place between labor and management on the shop floor also sets the pattern for the political compromises that are necessary in democratic governance.

Wednesday, March 19, 2014

American Association For The Advancement Of Science Report On Climate Change

This report, from the most prestigious science organization in the US, does an excellent job of describing the science of climate change, and our understanding of the risks from climate change.  The report makes it clear that there is no debate within the scientific community about the relationship between climate change and human behavior.  Although it is difficult to predict exactly what will happen as our planet warms,  we are already witnessing some of the changes that have resulted from the 1.4 degree temperature increase.  Unless we take actions today to reduce the emission of greenhouse gases, some of the damages may be irreversible.

There is little in the report that is not well known by those who are concerned about climate change.  The language, and organization of the report, however, should help the general public better understand the science, and the risks, from climate change.  We think nothing of insuring ourselves against the risk of unlikely events like a fire, or an automobile accident. The scientific community asks us to insure ourselves against the highly probable risks from climate change.

This report can be used as the gold standard in our discussions about climate change.  The public has been led to believe that there is doubt in the scientific community about the causes and the implications climate change.  There is no debate within the scientific community. The AAAS  has ended the debate.

Monday, March 17, 2014

Three Reviews Of Thomas Piketty's New Book

Capitalism in the 21st Century was released in English one week ago.  It is making its way into the mainstream of economic thought.  These three reviews, which take different slants on the book,  are just the beginning.  There will be critics of the book but it will challenge the economics profession.  It has ignored the problem of income and wealth distribution for too long.  One can't read Piketty's book without wondering why the lessons in the book have been ignored, or by trying to refute the evidence that Piketty used to reach his conclusions.

Sunday, March 16, 2014

Sixteen Large Banks Sued By FDIC

The Federal Deposit Insurance Company  (FDIC) insures the deposits of US banks.  Many of the banks that they insured have failed, and their failures have cost the FDIC a lot of money.  The insured banks had entered into derivative contracts based upon the LIBOR rate.  The banks named in the suit are charged with breach of contract on the LIBOR derivatives.  They have been accused of conspiring to manipulate the LIBOR in a manner that negatively affected the banks insured by the FDIC.

Joe Stiglitz Tells Us Why We Should Worry About Free Trade Agreements

The US has been negotiating a trade agreement with its trading partners in the Pacific Region.  Negotiations are also being discussed between the US and its Transatlantic partners.  Joe Sitglitz is not happy about these trade agreements.  In the first place, they are conducted in secret.  The public has no opportunity to evaluate the agreements that are negotiated by those who represent the world's largest corporations and industries.  They are all interested in the same thing.  That is, protecting intellectual property rights and making globalization more profitable for the multinational corporations and industries that they represent.

Stiglitz reminds us that our economies are shaped by laws and institutions.  The winners and losers in any economy are determined by the laws which define how the global economic game must be played.  Consequently, the laws that determine the shape of globalization should be open to a public debate.  They should not be conducted in secret.  Unless of course the multinational corporations, and the governments which assist them in shaping the global economy in their interest,  see no reason to allow the public to protect its interests.  After all, the global economy is operated for the benefit of different group of citizens.  The citizens of the global economy are the multinational corporations and the industry groups that represent them.  The role of the sovereign nations is to provide trade negotiators to represent their industries and corporations in the negotiations which shape the global economy.  The elected governments of our sovereign states are in the business of providing valuable services for their most important constituents.

The economics profession is also an enabler of this process.  Free trade is one of the ten commandments of its religion.  Joe Stiglitz, whose background is in international trade, has lost his faith in the commandment.  He explains the differences between the assumptions about it is supposed to work and how it really works in practice.  Free trade became one of the ten commandments of the economics profession when England was developing its colonial system.  It was very good for England, but the benefits were not equally shared with its colonies.  Today, it is no longer conducted to benefit specific nations.  Multinational corporations are the primary beneficiaries.

Saturday, March 15, 2014

GE's Sustainable Growth Report

GE has made a point of going beyond shareholder value in its annual report.  It has a section on its commitment to Citizenship.  Sustainable growth is one of its three areas under citizenship.

The German Constitutional Court And Economic Theory

The German Constitutional Court ruled in January that the European Central Bank's bond buying program is illegal according to EU law.  Its ruling was based upon an economic theory that was proven to be flawed during the financial crisis.  The efficient market hypothesis (EMH) assumes that the market will determine the best possible price for financial assets.  If the EMH is correct, then the ECB's purchase of sovereign bonds reduces the yields on sovereign debt in violation of the theory.  The market should be allowed to determine the price (and, therefore the yield) on government bonds. The court also argued that the ECB's purchase of government debt mixes monetary policy with fiscal policy.  It would restrict monetary policy to maintaining price stability.

The University of Chicago's economics department, and its school of law, has a program which trains lawyers to apply economic theory to legal cases.  The economic theories that are taught to the law students assume the correctness of theories that have been developed by economists in the university's conservative economics department.  The EMH is one of those theories.  Conservative economic theory developed in Chicago appears to be alive and well in the German Constitutional Court.  This article argues against the use of a theory that has been discredited by recent history.  It also argues against the limitations that the German court would place on the ECB's function as a lender of last resort. 

Friday, March 14, 2014

Talks Between Kerry And Lavrof In London Go Nowhere

The Russian Foreign Minister said the US and Russia do not share a common view of the situation in the Ukraine.  Russia supports the referendum that will be conducted Sunday in Crimea which enables its citizens to determine its relationship with Ukraine.  The US does not support the referendum.  Russia also has different view of the interim government in Kiev.  It believes that the elected government was deposed by forces supported by Western nations.  Russia does not recognize the government, and most Western nations have supported the interim government which does have its share of far right nationalists in leadership positions. 

The British Prime Minster, who hosted the meeting in London, indicated support for the US position on Ukraine which he believes to consistent with that of Britain and the EU.  The British government, however does not support the efforts of the US to freeze the assets of Russian oligarchs held in its large banks.  The City Of London, which is similar to Wall Street, is one of Britain's major industries, and it competes with other nations which enable the wealthy to hold their assets abroad and to avoid taxes.

Department Of Justice's Inspector General Report Critical Of Mortgage Fraud Performance By Justice Department

This article summarized the Inspector General's Report on how the Justice Department performed in detecting and punishing the perpetrators of mortgage fraud.   The good news is that Inspector General did the job that we should expect.  The bad news is the Justice Department boasted about its performance by presenting inaccurate information to the public about its success.  It also wasted $196 million that was provided to the FBI to detect and prosecute those who committed mortgage fraud.  The Inspector General found that, despite being granted more funding to battle mortgage fraud, the number of agents assigned to mortgage fraud declined, and the number of pending investigations declined between 2009 and 2011.

Few will be surprised by this report.  The financial crisis would not have occurred without widespread mortgage fraud which enabled mortgage originators to earn large fees by passing on fraudulent mortgages to investment banks which packaged them into securities which they fraudulently misrepresented to their customers.  This was probably the largest instance of criminal fraud in history.  The Justice Department did not do its job.  It was more concerned about potential damage to the banks and bankers than it was to the pursuit of justice.

Warren Buffet's Compensation Plan Is Not The Typical CEO Compensation Plan.

Warren Buffet received a 15% raise that increased his compensation to almost one half million.  He is one of the lowest paid CEO's in America.  On the other hand, he is one of the richest persons in America.  His wealth does not come from a high salary or from the award of stock options which are not awarded by Berkshire Hathaway.  He is wealthy because he founded the company, and he holds a large share of founder's stock in a company whose stock price has grown with the profits that it produces over a number of years.  His compensation plan differs dramatically from that of CEO's who are not company founders.  The boards of most companies award generous stock options to their CEO's who become major shareholders in the firm.  The rationale for the award of generous stock option grants is that this aligns the CEO's compensation with that of other shareholders. Apparently, the CEO's in previous generations, who were not compensated with huge stock option grants, were not properly motivated.  One wonders why they were so successful.

My major point is that CEO's today expect their compensation to make them as wealthy as company founders like Warren Buffet, Henry Ford, Steve Jobs etc. etc. who built successful companies from the ground up.  They, and their boards, believe that managing an existing firm with a strong position in an industry is similar to founding and growing a successful firm. Therefore, they should receive huge stock grants which enable them to become as rich as company founders.  Warren Buffet believes that if most of the CEO's, who are so amply rewarded with stock options, were placed in firm with a weak position in an industry, or in a weak industry, they would not perform like company founders.  That is why, Warren Buffet, who serves as a director on a number of corporate boards, is never asked to serve on their compensation committees.

Fear Of Wage Growth

Rapid growth in wages can trigger inflation.  Higher wages stimulate demand which might grow faster than supply.  The result is demand push price inflation.  Paul Krugman is concerned that central bankers may be oversensitive to any sign that wages are increasing.  They tend to worry more about preventing inflation than they are about the high rate of unemployment.  One consequence of the over concern about wage inflation is that policies designed to fight predicted price inflation could produce an even less desirable outcome.  We could end up with price deflation which Japan has battled against for many years.  It is much more difficult for central bankers to reverse a price deflation spiral than it is to reduce price inflation.

Warren Buffet's Company Downscales It Reinsurance Business

Warren Buffet is one of America's most successful investors.  His company owns one of the largest reinsurance companies in the world.  Reinsurance firms sell insurance to insurance companies which need to protect themselves against catastrophic loss.  For example, an insurance company that sells homeowners insurance may want to protect itself against widespread loss from a natural disaster.  It will protect itself by purchasing a policy from a reinsurance firm.  One of the reasons that Warren Buffet has reduced his exposure to catastrophic loss in the US is that he expects catastrophic losses from natural disasters to increase in the US.  He has discussed this concern on a number of occasions.  His other concern, is that low interest rates do not enable him to hold safe assets, like US bonds, that would enable his firm to pay for catastrophic losses that it might incur.

Warren Buffet is also a long term investor in the stock market.  He does so because he believes that the firms in which he invests will increase profits over the long term.  Unlike most investors, he is less concerned about short term fluctuations in stock prices.  He only sells a stock when he believes that it has become overpriced, or when he has lost confidence in the long term prospects for the firm.  That is one of the reasons why he is one of America's most successful investors.  He should be a model for most investors. 

Why Russia Means More To Europe Than To US

Russia is very large trading partner with Europe and it is only a very small trading partner with the US.  Moreover, Russia is the largest supplier of oil and other energy products to Europe.  Any disruption of European trade with Europe would have serious implications for Europe.

Thursday, March 13, 2014

The Global Economy From An Industry Perspective

This is an important article.  It shifts our focus away from the competitiveness of national economies by looking at aggregate national data.  We live in a global economy and large corporations are major actors in the global economy.  Each of these corporations competes within an industry that has no national boundaries, but their competitiveness is related to conditions that exist in nation states. This study makes an effort to determine national competitiveness within specific industrial sectors.  It also shows how the decision making behavior of corporations is determined by the industry in which they compete.  Economists tend to view the firm as a homogenous entity without attempting to determine how those decisions are affected by the industrial sector to which they belong.

Why Do The Rich Get Richer And The Poor Get Poorer?

Thomas Piketty's new book answers that age old question.  The rich do get richer but the poor also get richer over time.  However, it seems as if the only the rich get richer because they get richer at a faster rate.  Piketty's book describes the fundamental dynamic in capitalism that enables the rich to get richer at a faster rate.  The rich own most of the wealth in society and the income that they receive on their capital grows much faster than wage income.  The ratio between income from capital and income from wages has varied over time.  Piketty found that the level of income inequality in a society is correlated with that ratio.  The higher the ratio, the greater the level of inequality.  He argues the the low levels of inequality that we experienced after WW ll was an anomaly.  A lot of capital had been wiped out by the Great Depression and wars.  Moreover, wage income grew faster than usual due to rapid economic growth during the post war period.  The growth in inequality that we are currently experiencing can be explained by the rapid growth in capital and slower growth in wage income since the 1970's. This dynamic is not the result of a market failure.  The return on capital is determined by a very competitive global market for capital.

The battle that we have seen within the economics profession in recent years has been over the explanation for business cycles.  In general, one school of thought argues that they are determined by market forces but subject to occasional shocks.  Moreover, government intervention will not produce an economic recovery.  The other wing of the profession believes that monetary policy and fiscal policy should be used to moderate the business cycle.  It also supports the use of social welfare programs that provides basic necessities to citizens who cannot afford them.  Piketty raises a new problem that we need to solve.  Unless we do something about a dynamic that is built into capitalism, there will be new threats to capitalism itself.  He believes that tax policies can be used to maintain capitalism and our democratic form of government.  He is not optimistic about our prospects, however.  Sovereign states will be unable to make those changes on their own.  Capital is mobile.  It will seek refuge in states that compete with high tax states by keeping taxes low.  Moreover, political power is related to economic power.  States with high levels of inequality are not effectively governed by democratic forces.

I am on the board of a Homeowner's Association that is dealing with an issue that provides a simple illustration of the dynamic described by Piketty.  Our buildings are on leased land.  We pay $1.2 million per year in rent to the landlord. That cost is distributed among the building owners.  Every 15 years the land is reappraised and we pay 8% per year on the reappraised value.  We are negotiating the appraisal process right now with the landlord.  Our rent will obviously increase because of inflation and market forces.  No matter what the outcome of the appraisal process, I was struck by the importance of capital ownership.  The owner of the once vacant land, about the size of city block, has received an income of $1.2 million per year without having to do any work to improve or maintain the land.  The landlord has earned $18 million over the 15 year period of the lease without having to do any work.  That is more than most of the building owners have earned in a lifetime of work.  Even better, the landlord will get a hefty raise under our new lease without making any additional effort.  Piketty's book sends us a message.  If nothing is done to change this dynamic our grandchildren will live in a society dominated by the owners of capital who can watch the value of their capital grow much faster than wage income. 

Piketty is also aware of the problem of global warming.  He believes that it is even a more important problem than income inequality.  The question is whether the dynamic of capital accumulation is controllable.  Will the owners of capital and sovereign governments be able organize themselves to preserve the natural capital upon which the economy and the future of civilization is dependent?

Wednesday, March 12, 2014

FTC Opens Investigation Into Herbalife

It looks like the hedge fund manager who shorted Herbalife's stock got his wish.  Its stock price fell by around 15% after the FTC notified Herbalife that it would be subject to an investigation.  The distribution strategy employed by Herbalife is quite common.  Herbalife probably would not have been subject a FTC investigation without the campaign conducted by the hedge fund.  Perhaps it would be a good time to short the stock of companies whose distribution practices are similar to that of Herbalife.

Coca Cola's Sustainability Report

This is a link to Coke's sustainability report.  It may be of interest those who are interested in the approach that Coke and many other corporations are taking on sustainability.

An Interview With Thomas Piketty

This NYT interview gives Thomas Piketty an opportunity to provide an overview of his approach to understanding income inequality.  It is based upon an historical analysis of inequality.  He found that income inequality was higher when the rate of return on capital exceeded the rate of growth in output by a factor of 5-6.  The long term growth in real output is around 1.5%.  The rate of return on capital can be much higher.  For example, the well managed endowments of Harvard and Yale provide a real rate of return after all expenses of over 7%.  One of the reasons for the high rate of return is that each of these endowments is very large.  The fund managers can take more risk with a portion of the funds, and both Harvard and Yale have the resources to hire the best managers who are able to evaluate a wide variety of investment opportunities.  Capital ownership is more concentrated than wage income and those with larger shares of capital, like Harvard and Yale,  earn a higher return on the their assets.

Ironically, income inequality was greatly reduced by the unfortunate events of war and the Great Depression which destroyed enormous amounts of accumulated capital. The period after WW ll was a period of rapid growth in output in relation to the return on capital.  That led to greater income equality during the post-war period.  Slower growth in output since 1970, and a higher rate of return on capital has led to the rise in inequality since 1970 in Europe.  The rise in inequality in the US is also the result of institutional changes.  Top management has been able to capture a larger share of compensation from cooperative boards.  The rise in management compensation is unrelated to growth in productivity, or in corporate performance relative to industry performance according to Piketty.

Hopefully, we will not have to depend upon war and depression to reduce the growth in inequality.  It is possible to accomplish this through democratic process but it will be strongly resisted.  Piketty believes that it will take a coordinated effort by governments to implement changes in tax policy that are required prevent a continuous rise in inequality as global growth stabilizes at 1.5% and the return on capital remains much higher than the growth in output.

It should not escape our attention that Piketty's form of historical research, and his focus on distribution, departs dramatically from the bulk of the research in the economics profession.  Historical research is viewed as unscientific by many economists, and the profession is more concerned with building mathematical models of an abstract economy that has never existed.  It is unlikely that Piketty's research will have much of an impact on the profession which views itself as the queen of the social sciences because of the attention that it gives to mathematical models.  Moreover, the kind of changes that will required to reduce the growth in inequality will require assistance from other social scientists who better understand many of our institutions and our forms of social organization.

Tuesday, March 11, 2014

A Transcript Of The Senate Intelligence Committee Chairperson's Senate Speech

This speech by the Chair of the Senate Intelligence Committee is quite revealing and it raises serious questions.  Chief among those questions is the ability of Congress to provide oversight to the CIA.  It is pretty clear that the CIA has interfered illegally with the Senate investigation.  It has also used its "assets" in the press to provide false information to the public.  The CIA does not want to public to know the extent to which its interrogation and deployment program violated the intent of the law which authorized its action, and the CIA does not want the public to know facts about how the interrogations were conducted because of their heinous nature.  The CIA is enabled to operate above the law in countries in which it conducts covert operations.  Apparently, the CIA believes that it can operate above the law in the US.  Its management views Congress and the executive branch as a hindrance to the operation of its internal government which it regards as superior to our elected government.  Otherwise it would not conduct covert operations against the Senate Intelligence Committee.

Its Time For Economists to Read Thomas Piketty's New Book

James Kwak describes one of the old problems that economists are fond of fighting about. That is, the relationship between income redistribution programs and economic growth.  He does not say anything about that issue that I have not previously posted.  Consequently, I have posted a quote from the last paragraph in his article which makes an important point that most economists have ignored.

"Indeed, there’s a strong argument to be made that a capitalist society needs systematic redistribution to survive. Thomas Piketty’s new book—which I plan to read the next time I have time to read a 700-page economics book—free markets generally produce higher returns on capital than on labor, which means, to a first approximation, that people with capital will get richer faster than people with only labor. In a world where the political system is open to money, this means that the capitalists will also accumulate a disproportionate share of political power, leading to the type of extractive society described by Acemoglu and Robinson in Why Nations Fail. Which is not a world that most of us would want to live in."
I hope that Kwak and the rest of the profession take the time to read Piketty's book.  It goes well beyond the usual debates between conservatives and liberals.  It also goes well beyond the stale debate between Marxists and liberal economists. Piketty's book represents a real challenge to the economics profession.  It must return to the concept of political economy which it abandoned many years ago in favor of its bad imitation of physics.

Mark Thoma Argues That Inequality is Not Inevitable In Capitalism

Mark Thoma praises capitalism for its ability to provide consumers with products and services that they desire at low cost.  He makes the usual argument about the unequal distribution of income by stating that some inequality is necessary as incentive system, but that we may have reached a tipping point, for example, in which the difference between $9 million and $10 million is not much of an incentive.  He also describes some of the costs of rising inequality.

His solution to the problem of rising income inequality is a defense of the the social welfare programs that redistribute income.  He describes it as an insurance system.  Some people get lucky and do not require insurance benefits, their premium payments are used to provide benefits for those who are unlucky.  In other words, social welfare programs are a form of insurance in which the lucky help to defray the costs that impact the unlucky.  Capitalism with social insurance programs is the best of all possible worlds. 

He mentions Thomas Piketty's new book Capitalism in the 21st Century which makes a very different argument about rising inequality, that Thoma apparently fails to recognize.  Piketty claims that rising inequality is inevitable unless substantial changes are made to our political economy.  Piketty focuses his attention on the concentration of capital which grows much faster than wage income.  When the return on capital is 5-6 times the growth rate of income we reach a tipping point in which inequality accelerates.  We reached that point prior to the 19th century, and many Western countries are approaching that point.  The risk is that we return to a political economy in which "rents" from capital, which accrue to a small minority, are the primary source of inequality.  Our social insurance programs provide no solution for that problem.  Piketty challenges the economics profession to address the real problem of rising income inequality instead of wasting its time building abstract models of an economy that fail to recognize the relationship between wealth concentration and inequality.  His book describes some of the difficult changes that are becoming necessary if we want to preserve our democratic system in an economy which does not recognize national borders.

Frankly, I am terrible disappointed that Mark Thoma and Paul Krugman have paid such little attention to the problems raised by Thomas Piketty. 

Democrat Politicians Begin To Fight Back Against The Koch Brothers

This editorial in the NYT describes some of the speeches by Democrats that tell the public what they stand for.  The Senate Majority Leader made that very clear.  His speech on the Senate floor described the Koch brothers as oligarchs who are spending millions to turn our government into a country that primarily benefits oligarchs.  The Koch brothers own the 14th most polluting industrial plants in America and they pay off GOP politicians so that they can pass the cost of their toxic waste on to taxpayers.  One of their ad campaigns is described as a defense against the war that the government is conducting against coal.  They have also been spending millions on ads that make false claims about the Affordable Care Act.  The GOP's campaign in 2014 will be built around protecting Americans from the ACA.

Monday, March 10, 2014

Should We Ban The Use Of The "Middle Class"?

Paul Krugman tells us that a conservative politician who was one of GOP candidates in the 2012 presidential election cycle is so upset about "class warfare" in the US that he wants to forbid the use of the term "middle class".  He is probably correct to worry about the use of that term.  The Democratic Party has decided that it makes sense to defend the middle class in America and it may be an effective tactic. 

The rest of the Krugman post defends the use of income redistribution to moderate the impact of income inequality.  One of the major arguments against income redistribution comes from economic theory which suggests that it distorts the labor market.  The rich won't work as hard if they get taxed and the unemployed have less of an incentive to find a job.  Krugman cites an IMF study which shows that income redistribution may cause some people to work less hard but it does not have a negative impact on economic growth. 

The economic research on the effects of income redistribution on economic growth reported by the IMF is helpful for those, like Krugman, who support income redistribution.  On the other hand, the economics profession, as a whole, tends to avoid the topic of income redistribution.  The profession takes the position that market determines the distribution of income and economists have no expertise in morals or the concept of fairness.  Those judgements are not a part of the positive science of economics.  In other words, economics is like the natural sciences.  It stands outside of politics and moral philosophy.  This assumes that the economy is part of nature, and that political philosophy and moral judgements have nothing to do with the 'science" of economics.  That's a pity because it is false, and also because economic data should be used to help us to understand how the creature that we have created really works.  If the thing that we have created does not work as we would like it to work, the profession should help us to make it work to better serve our purposes.

Who Cares About Inequality?

Simon Wren-Lewis comments on a post that attempts to explain why there is not more public outrage about the rise in inequality in much of the Western world.  He quotes from an article by Justin Fox that broadens the discussion.  I like the Fox article that was on his Harvard Business Review blog.  However, I thought that another quote from the Fox article was even deeper:

"The business culture is triumphant. Not just for those in authority but for most of society, business is at the center, and that’s pretty much okay with everybody. It doesn’t feel remarkable to us for the same reason fish don’t notice water; we live in it. But step outside the moment and look at commerce’s role in the culture. It’s unprecedented."
One of the major points in the Fox article was that there has been a long tradition of outrage about the super-rich in the US.  Some of the outrage is documented in his article.  Therefore, there is nothing unusual about the attention that is now being given to this subject.  Some of the super-rich who believe that they are being victimized by something new in America fail to understand our history.  The real anomaly in America is that the business culture has become so dominant that we don't even notice it.  Corporations have purchased the naming rights on all of our major sports arenas;  Corporations sponsor all of the shows that we watch on TV;  Many corporate executives have rock star celebrity, and some, like Donald Trump, have their own TV shows. The high incomes of the executive class, and the hedge fund crowd have encouraged many of the graduates from our elite colleges to take their place in the new "Gilded Age".  We worship the life style of the rich and famous and many Americans expect that they might win the lottery.  It has taken 40 years to transform the culture of the America from the idealist culture that existed in a different era.  This will not be changed overnight.

A Hedge Fund Works Hard To Win A Billion Dollar Bet

This article describes the efforts of a hedge fund to put a company out of business.  The hedge fund manager argues that his intentions are noble.  He claims that Herbalife is based upon a pyramid scheme that targets minority groups.  The company's growth depends upon continuously recruiting sales people to sell its products.  The new sales reps must purchase inventory from the company when they take the job.  Most of them fail to earn back their initial investment. 

There is nothing unique about the business model employed by Herbalife.  There are a number of companies that do the same thing.  Some people suspect that hedge fund's manager's motivations may not be very noble.  He has placed a billion dollar bet the company's stock price will collapse.  His short position on the stock has already cost him millions but he is not the kind of person who loses a bet graciously.  The tactics that he has employed to drive the stock price down are ruthless and dishonest.

Herbalife has defended itself by using some of the same tactics used by the hedge fund.  It has employed lobbyists with connections in Washington to neutralize the lobbyists hired by the hedge fund.  One of the things that we can learn from this article is that we do not have a monolithic business lobby in America.  Much of the lobbying that takes place in Washington pits one business lobby against other another business lobby.  This is very good for the lobby industry, and it also benefits politicians who have to raise money to fund their election campaigns.  It also drives up the cost of running a successful campaign.  This feedback loop is part of the problem with electoral system.

Saturday, March 8, 2014

CIA And Congress Clash Over Interrogation Report

The Senate Intelligence Committee did a study of the CIA's interrogation and detention program.  It was critical of the methods used by the CIA and it raised questions about value obtained by the use of waterboarding.   The CIA had commissioned its own study under former Director Penetta.  It raised similar questions about the effectiveness of the program.

The CIA responded to the Senate Intelligence Committee Report by questioning its findings which are similar to the CIA's Penetta Review.  The CIA responded by scouring the digital logs of the computer network used by Senate staffers.  They believe that the staffers may have illegally discovered the report.  The Senate Intelligence Committee has accused the CIA of interfering with its mandate.  The Justice Department has been placed in the middle to determine the outcome of the battle between the Senate Committee and the CIA.  In any case, it seems clear the Senate investigation of the CIA program, and the CIA review of the program, came to similar conclusions.  The CIA pushed the limits of acceptable behavior and got very little out of it.

Foreign Affairs Features Articles On Ukraine Crisis

Foreign Affairs features articles about events in Ukraine in its current issue.  This article attempts to explain Vladimir Putin's motivations his chances for success.  There are other articles on this topic as well in the current issue.  While there is no general agreement in the featured articles, they do represent a selection of current thinking on the issues by the foreign affairs establishment in the US.

Global Stock Index Reaches All-Time-High

The MSCI global stock index closed at an all-time-high yesterday.  It is up 17.5% since last year and more than $36 trillion has been added to equity values since 2009 when the recovery from the financial crisis began.  It is striking that stock values have risen so dramatically during a period of slow economic growth.  Large corporations have been able to grow profits during a period of low growth, and asset values usually rise when interest rates are low.  Large holders of stock have done much better than those who depend upon growth in wages.

What Do Conservatives Stand For?

Dana Milbank has been attending CPAC which provides a platform for conservative cheerleaders.  The one thing that conservatives agree upon is that they hate President Obama.  Their 2014 political campaign is based upon hatred for our president and the healthcare plan that they have named after him.  The top Republican in Congress was not even invited to CPAC.  Many in the CPAC crowd blame him for making a deal to prevent the nation from defaulting on its debt.  They wanted to use the threat of default to win concessions from the president that they have demonized. 

Milbank found that CPAC is more about things that they don't like, than it is about what they are for.  There are 26 potential candidates for the Republican presidential nomination.  They share little in common with the exception of hatred for the president who defeated them in two elections. 

Is America a Center Right Nation?

One way to answer the above question is to reference the label that people select when they are asked by pollsters whether they are conservative or liberal.  The percentage of Americans who identify themselves as conservative is rising.  That leads us to believe that we are a center-right nation.  Paul Krugman refers us to a political science blog which raises a question about that conclusion.  The basic problem is that people call themselves conservative for at least two reasons.  Some identify with traditional family values.  Others are economic conservatives.  Those who identify with traditional family values are not necessarily economic conservatives.  No political party based upon economic conservatism could win elections in the US because they are few in number.  That is why the GOP bases its political campaigns on divisive social issues.  And that is why they argue that America is a center-right nation.  We are center-right in name only (An obvious play on Republicans In Name Only or RINO).

Friday, March 7, 2014

Paul Ryan's Speech Against The School Lunch Program And The Big Lie

The Washington Post's fact checker researched the source of a great line used by Paul Ryan to win applause from his conservative audience.  He discovered that the person who provided Ryan with the line had apologized for misrepresenting the story when she had used it publically.  The Post fact checker concluded that Ryan should not have used the story in a major speech without checking on the source.  Ryan did not do his homework.  The story was too good for him to pass up.  It was about a boy who did not want to accept a school lunch.  He wanted a brown bag like the like the other kids because it showed that their mother's care about them.  Kids don't want lunches provided by government.  They want to be taken care of by their parents.  Government is the enemy of family values and personal responsibility.

Ryan has a history of making things up when it may help him to further his career.  His budget proposals are loaded with misrepresentations of fact.

Henry Kissinger Provides His Advice On How To End The Crisis In Ukraine

Henry Kissinger was Richard Nixon's Secretary of State.  He offers his description of the issues in Ukraine, and in Russia, and he discusses some of the necessary ingredients of a strategic approach to a solution.  He understands that some these ingredients will not be popular.  In his view, Europe must play an important role in developing a solution that would enable Ukraine to be a bridge between Europe and Russia; it should not be forced to choose between Europe and Russia.  The West should also avoid the demonization Putin.  Unfortunately, that has already started in the US.  Even worse, the GOP has demonized President Obama as well as Putin.  Its hard to imagine how any solution would be acceptable to the GOP if it made life easier for the GOP's demons.

An Overview Of The Ukraine Economy

This article describes some of the key economic issues in Ukraine.  It is not surprising that the country has had internal political problems.  It would take a strong and capable government to deal with its economic issues.  Instead its government has been part of its economic problem.

Ukraine's per capita GDP was $3,800 in 2012.  This puts it into the lower middle income bracket with countries like Albania.  The Ukraine economy is trade intensive.  Imports and exports account for more than half of its GDP.  A country pays for its imports with exports.  If it imports more than it exports it is forced to borrow money to fund its trade deficit.  Ukraine's major export is steel and its major imports are energy products.  The demand for Ukraine steel is sensitive to economic growth in the nations that import its steel.  Demand has been weak during the global economic crisis.  On the other hand, its demand for energy imports remained high.  Furthermore its currency depreciated by 40%.  That means that it had to pay its imports with a depreciated currency, and it was receiving less for its steel exports which were priced in its depreciated currency.

The depreciation of Ukraine's currency also increased the cost of its debt service to nations with a stronger currency.  It had to purchase the foreign currencies with its depreciated currency to service its debt.  This has weakened its banking system which had borrowed from nations with a stronger currency.  It had to pay back its loans in the foreign currency which it had to purchase with its depreciated currency.

Given the economic issues in Ukraine it had become dependent upon support from the IMF and from Russia which supplied it with energy products.  According to the IMF the Ukraine government was not very effective at making the structural changes in its economy which it had promised to make in return for its financial support.  Instead the government increased subsidies to the government owned energy company.  It will not be easy for any government which ends up in charge of the Ukraine economy to deal with its economic imbalances.

Thursday, March 6, 2014

Updates From The Conservative Political Action Committee Conference

These are some of the things happening at the annual meeting of the right wing in US politics.  They feed red meat to their populist constituents. Its always interesting to observe the changes in their diet.  It always has right wing meat and potatoes but it does reflect fashion changes.

TV And Public Opinion In Russia And How It Is Different In The US

The media in Russia reflect the views of the state.  Public opinion in Russia about Ukraine is pretty consistent with the policies of the state.  The media play a very different role in the US but the effect is similar.  Public opinion is consistent with the diversity of views presented by the media.  The state is not  the dominant source of news and opinion in the US.  The owners and managers of the media operate a business.  They depend upon advertising revenue to run their business.  Advertising revenue, in turn, is dependent upon on the size and mix of the audience.  When there were only three major networks in the US, each of them reflected the central tendencies of the national audience.  The news shows also reflected the views of those in the news room.  They were trained as reporters and they did their best to report the news.  They also tended to reinforce the dominant themes in the country.  Lyndon Johnson knew that the war in Vietnam was over when he saw that Walter Cronkite had turned against the war.  Walter Cronkite was a barometer for enlightened public opinion in the US.  The government in the US is dependent upon public opinion and the news media reflect and help to determine public opinion.

Things changed with the advent of cable news in the US.  The news anchors are no longer reporters.  They are primarily talking heads who read the news which is fed to them.  Each of the cable news networks has carved out the audience which it targets with its news reports.  At one extreme there is Fox News which is owned by Rupert Murdoch.  The media which he owns in the US, Britain and Australia reflect his style of journalism.  The news must be sensationalized to attract a large audience.  It also reflects the political and economic views of Rupert Murdoch.  The managers that he hires understand how he wants to run his business.  They provide yellow journalism to its selected market.  Politics in the English speaking countries is shaped to some extent by Rupert Murdoch.  He shapes the state rather than the other way around as it is in Russia.

At the other extreme are cable shows like The Daily Show and the Colbert Report.  Its audience is smaller and different from the Fox audience.  In fact, it would be hard for them to operate without Fox News.  They devote much of the time on their shows making fun of what is reported on Fox News. The other cable news networks have been influenced by the market success of Fox News.  They have had a difficult time determining how much they want to be like Fox, and how they want to be different.  MSNBC has tried to be the alter Fox News but it has been less successful than Fox in building an audience.

The major news networks are also important but it is telling to observe the advertisers that they attract.  Their advertisers understand the mix of their audience.  It is large, but elderly and very much in the political middle.  The guests on their shows are carefully selected to present an equal dose of  center right and center left political viewpoints.  The center has also shifted over time.  As the right wing has moved further the right, the left has moved in the same direction.  The center left in the US today looks pretty much like the Republican Party used to look before it became dependent upon right wing populism. 

In the last analysis the media in Russia and the media in the US do a poor job of educating the public.  The media in Russia is controlled by state, and the state in the US is dependent on popular opinion that is created by commercial enterprises.  We have more diversity in the US, but with few exceptions, the meals are pretty bland.

Wednesday, March 5, 2014

Paul Ryan Tells Us That Medicaid Is Responsible For Unemployment

Paul Ryan cites economic research that leads him to conclude that Medicaid is responsible for unemployment.  The assumption is that those who qualify for Medicaid choose not to work because they receive free healthcare from the government.  Paul Krugman read the literature that Ryan cited and he is using that literature to show his students that Medicaid, and other government programs like food stamps, are not responsible for unemployment.  Ryan, of course, is not trying to convince folks like Paul Krugman that government safety nets cause unemployment.  His conclusions will be broadcast to an audience that has not read the literature.  Many will welcome Ryan's conclusion because it reinforces their belief about the economic "distortions" that result from income redistribution.  They do not want the government to encourage the lazy poor to remain lazy.

Is There An Optimum Level Of Income Inequality, Or Do We Want A Society Like Downtown Abbey?

This opinion piece in the New York Times looks for an answer to the question of an optimum level of income inequality from economists. It cites the work of three conservative economists and several  liberal economists with opposing views on the topic of inequality.  As one might expect he found that conservative economists do not have a problem with our current level of inequality.  One economist even argues that the government safety net is responsible for our unemployment problem.  He argues that income redistribution destroys the incentive for the unemployed to take the available jobs.  This is consistent with the ideology of many economists who believe that we would not have unemployment if market forces were allowed to work their magic.  Greg Mankiw from Harvard assumes that market forces are doing what they are supposed to do. The top 1% is being being rewarded for its greater contribution to society.  Presumably, Mankiw believes that the contribution to society of the top 1% has been growing rapidly over the last few decades.  They must be much more productive than our top earners in previous generations because they are earning a lot more.  Mankiw agrees, however, that a dollar of marginal income is more important to those with low incomes than it is to those with high incomes.  Therefore, he uses utility theory to justify a more progressive tax policy.  The top 1% would work less hard if we paid them less, and that would effect economic growth.  It may not be a bad price to pay however for the increase in the marginal utility of the poor.  

The liberal economists review some studies which show that moderate levels of income redistribution does not slow down economic growth, and that high levels of income inequality may impede economic growth.  One study also raises questions abut Mankiw's assertion that the top 1% would not work as hard if their taxes were raised.  The top marginal tax rate has moved around considerably over time.  There is not an apparent relationship between the top marginal tax rate and economic growth.

One economist even argues that there is an optimum distribution of income.  He believes that it is described by an inverted U shaped curve.  That is probably true, but few economists would agree about where to set the optimum level on the curve.

The article concludes that economists are polarized on the issue and that income inequality is essentially a political issue.  He does not believe that our political system is capable of addressing the issue of income inequality.  Both political parties are dependent upon campaign contributions from those who believe that they benefit from income inequality.  One almost wonders why the article was written.

Public opinion on income inequality varies widely.  Perhaps it is a mistake to frame the issue around income inequality.  Many Americans might agree with Greg Mankiw that we have a meritocracy, and the we need a very unequal distribution of income that rewards merit.  There is little support, however, for economic system that rewards individuals who do not have to work for their high incomes.  Few American's would like us to have a Downtown Abbey economy in which generation after generation is able to live lavishly on inherited wealth.  Thomas Piketty argues, in Capital In the 21st Century, that this is just where we are headed in Europe, and a bit less so in the US.  The rich are able to save a large portion of their earnings, and they invest their savings in a variety of financial assets.  The value of those assets grows much faster than income.  Those assets will be inherited by future generations that will not need to work in order to live extremely well.  Those who are unable to save much of their income will not be able to accumulate wealth that they can leave to their heirs.  The implications of that dynamic can have a distorting effect on a meritocracy.  Many with large inheritances do not have a strong incentive to work hard. Those who depend upon their labor for income may not see the opportunity to acquire great wealth through their labor.  It may be easier to marry into wealthy families.  Piketty provides some data on this trend.  For example, in 1900 France inherited wealth was 24% of national income.  That percentage fell to 4% by 1950.  In 2010 the percentage had increased to almost 15% and it is trending upward.  A similar trend is apparent in Britain and Germany.

Piketty makes an important point about our movement toward a rentier society similar to what we observe in Downtown Abbey.  This movement has little to do with market imperfections and monopoly.  The rent from inherited income is a consequence of a pure and perfect market for capital.  Capital yields income or "rent" and it grows much faster than labor income.  The concept of rent is built into any market economy in which capital is privately owned.  In the days of Downtown Abbey most people understood their role in the society.  Thankfully, few blamed the poor for not becoming entrepreneurs and as rich as the aristocracy who live lavishly on inherited rents.  Of course, if we assume that we live in a meritocracy, it is easier to blame the poor for not becoming wealthy, and we cannot blame the rich for being rich. We don't live in a pure meritocracy, however, we live in system that does reward merit, but it is also influenced by forces which have nothing to do with merit.  It is important to understand those forces and to make a decision about what kind of society in which we want to live.