Wednesday, April 30, 2014

Greg Mankiw Debates Piketty On National Public Radio

NBR featured a debate between the Chairman of Harvard's Economics Department, Greg Mankiw, who is also the Vice President of the American Economic Association.  Mankiw's textbooks are also among the best selling economics texts in the US, and he has been an economics adviser to George Bush and to Mitt Romney.

Piketty was asked to summarize his book.  He has become quite good at summarizing a very long book that is loaded with data.  He reviewed the historical data on income inequality, and the concentration of wealth, and he suggested that the future of is not determined by the past.  It is possible for the democratic system to modify the future so that we do not duplicate the level of inequality that existed in the 19th century.  In his view, capitalism should be the slave of democracy instead of the other way around.  It is not too late to reverse the current trends in which rising inequality reduces the influence of the middle class which is an essential ingredient of an effective democracy.

Mankiw complimented Piketty on the success of his book.  He then shifted his focus to what he called the "false narrative" of the book.  He argued that the concentration of wealth does not follow from a high rate of return on capital.  People can choose to spend their income or to save it.  We need to encourage people to save their income, and to invest it, rather than tax it away.  He then followed Milton Friedman in arguing that economics is a positive science and not a normative science.  Economists should not be in the business of determining the appropriate degree of income and wealth inequality.  Piketty's normative statements about the level of inequality are best left to philosophers. Economics should remain a pure science and not return to its historical roots as political economy.  He then state his objections to the wealth tax that Piketty proposed.  Instead of taxing the wealthy, we need more programs to encourage savings and investment among lower income Americans.  That is the best way of reducing the concentration of wealth.  We should also take steps to improve the educational system.  That will equalize economic opportunity which is superior to policies designed to equalize the results of the market system which, according to Mankiw, rewards people according to their productivity.  Mankiw also argued that a tax on consumption would be better than a tax on income or wealth.  Piketty reminded him that George Bush made the tax system less progressive when Mankiw was his adviser but he did not advocate a consumption tax to replace the lost tax revenue.
He also could have also asked him to explain why conservative economists are usually asked to advice republican politicians if there is no connection between the "positive science" of economics and the normative outcomes of the political decisions that are made.  Piketty is too much of a gentleman to embarrass a prominent economist in public.

(the link to the radio broadcast is an arrow in the top left hand corner of the webpage)

US Government May Seek Criminal Charges Against Two Large Banks

Banks have been protected from criminal charges by a problem that has made many banks "too big to jail".  The Justice Department has searched for ways to punish banks without putting them out of business.  A criminal charge might put a bank out of business if bank regulators were forced to revoke their charters if the bank were found guilty of a criminal offense.  Sentiment in the Justice Department has been changing about bringing criminal charges against large banks.

BNP Paribus is France's largest banks.  It is accused of doing business in Sudan and in Iran after they were blacklisted by the US government.  Credit Suisse is Switzerland's largest bank. It is being targeted for assisting US citizens to evade taxation by the use of tax shelters.  Prosecutors have been having discussions with their US regulators to find ways to bring criminal charges against them without revoking their charters.  HSBC had avoided criminal charges for enabling money laundering, and JP Morgan avoided criminal charges for aiding and abetting the Madoff Ponzi scheme.  They were handed billion dollar fines instead of being charged with criminal offenses.  That practice may be coming to an end.

What Are Critics Saying About Piketty?

Conservative critics have started to come out from under the rocks.  This article reviews some of the responses.  It was difficult to determine the winner of the worst critic award.  The Wall Street Journal made a strong effort to win the award, but the winner may be the critic who admitted that she had not read the book, but that she did not like what she had read about the book.  There have even been some criticisms from the left.  They tend to support most of Piketty's arguments but they have a different public policy response in mind.  They believe that public policy in the US had led the reduction of inequality following the end of WWll.  It included more than progressive taxation.

How Did The US Become A Mass Incarceration Society?

In 2012 the US incarcerated 2.2 million individuals.  That is five times the average incarceration rate of OECD nations.  This article explores some of the reasons for the high rate of incarceration in the US.  It would appear that the answer is simple.  The incarceration rate rose rapidly beginning in the 1970's; the rate tripled as a result of public policy decisions.  The 1970's was a period of civil disobedience and heavy drug use.  Getting "tough on crime" became a popular political slogan.  Being tough on crime also meant getting tough on drug use.  Mandatory sentences became a standard practice in almost every state.  Social science research also contributed to the increase in the incarceration rate.  An important study by criminologists concluded that rehabilitation did not work.  It was better to keep criminals in prison than to release them so that they could commit another crime.  The difference between the US incarceration rate and OECD nations was also affected by a weaker social safety net in the US.  What the US did not spend on the social safety net was spent on prisons.

The incarceration rate in the US has declined in the last couple of years.  Some states have even released prisoners because of overcrowding.  The high cost of incarceration may cause many states to reconsider some of their policies which mandate prison sentences.

Tech Giants Settle Antitrust Suit

64,000 engineers filed a class action suit against Apple, Google, Intel and Adobe.  The suit contended that the firms had agreed not to poach engineers from each other.  The engineers argued that this reduced their potential wages.  The tech giants agreed to a $300 million settlement which amounts to only a few thousand dollars for each of the plaintiffs in the suit.  It would appear that the tech giants were the winners in this settlement.  It is pretty clear that they cooperated with each other to restrict competition for talented engineers.  The settlement is small change to these companies and for the engineers.  There is a link to the documents pertinent to the suit and the settlement in the article.

Tuesday, April 29, 2014

Pfizer Pursues Acquistion That Will Enable It To Reincorporate In UK

This article describes Pfizer's pursuit of a UK competitor in the drug industry.  Pfizer would reduce its tax burden substantially by reincorporating in the UK.  It would also be able to repatriate billions in foreign profits that it would have to pay taxes on if it brought them back to the US.  In an age of globalization, multinational corporations like Pfizer have no loyalty to any particular nation.  They are effectively corporations without a country.  Pfizer's CEO claimed that his mission is to increase shareholder value.  Pfizer's shareholders have no national identity either.  Money has no home.

Monday, April 28, 2014

The Elevation Of Ignorance And Fear In Our Electoral System

One of the problems with our political system is evident in Georgia.  The NRA, which is a lobbyist for gun manufacturers has had a profound influence on politics in the US.  It has created an alarm among citizens with a powerful emotional attachment to guns, that the government is intent upon disarming them.  This increases their contempt for government "elites" who don't understand ordinary people and it makes them susceptible to politicians who prey on their anxieties.  In the confederate states, and in much of rural America, politicians have discovered that they can win elections by easing restrictions on the right to bear arms.  The state legislature in Georgia has passed a law which grants its citizens the right to bear arms when they go to church. It has also made it easier for its gun toting citizens to enter public buildings bearing arms.  Its hard to imagine how this is in the public interest but it has been a proven way to get elected in Georgia.  Even worse, it tramples upon the rights of the emotionally undisturbed to attend public events without having to worry about some crazy person who can use a weapon to overcome a feeling of powerlessness or to express their unhappiness with government. 

The Problem Of Scarcity and The Problem of Distribution In Economics

Capitalism has two central problems: the problem of scarcity and the problem of the distribution of output.  The problem of scarcity has been the central assumption in economics.  We assume that capital and resources are scarce and we assume that competitive markets allocate scarce resources to their most efficient use.  Why worry about distribution when we should be focused on maximizing the output obtained from scarce resources?

One of our scarce resources is capital.  The stock market was created as a way to aggregate capital and distribute it to its most productive use.  This article suggests that capital is no longer scarce. The retained earnings of our large corporations are sufficient to fund investment.  They are using their retained earnings to buy back their stock and to distribute dividends to shareholders.  The financial crisis was not a problem of capital scarcity.  The system lost its capacity to distribute capital from places where it was ample to where it was needed.  Why do we need the stock market when there is no scarcity of capital?  Stock values don't even provide a good signal as to where we should be increasing our investments.  Moreover, corporate executives are not adept at allocating capital to its most productive use.  Allocation may be a bigger problem than scarcity.

We do, however, have a distribution problem than can effect the output of the economy and social well being.  The unequal distribution of wealth and income is associated with fluctuations in demand which leads to business cycles which are often difficult to moderate.  It is also clear that a small number of households have more than they need to have a happy life, and a large percent of the global population is denied access to the necessities of a happy life.  Unfortunately, we don't have a good solution for the problem of the maldistribution of resources.

What Jobs Have Grown During Recovery?

The US has been adding jobs in low paying industries.  Around 40% of the jobs added have been added to low paying retail areas like fast food.  A smaller percent of new jobs (9%) have been added in professional areas that pay higher wages.  Job growth in areas that provide middle class wages has actually been negative.  The focus of government has been on helping out families with low paying jobs.  If this trend continues, the nature of our society will change dramatically.

Sunday, April 27, 2014

Solar Energy Power And Koch Brother Power

Over 25% of new electric power generation capacity is from renewable energy sources.  The use of solar power has been stimulated by programs which enable consumers to use solar panels to cut their energy costs.  The Koch brothers have been using ad campaigns to discourage the use of solar power.  (Apparently, this is what we mean by freedom of speech in America. Money talks.)They have no interest in having the free market determine the outcome.  Their love affair with the free market only works when it benefits their financial interests.  In red states like Arizona their ads compare solar power with the healthcare mandates in "Obamacare".  Anything that can be connected with Obama in red states is usually a winner.  However, that does not influence homeowners who have been able to reduce their energy costs by putting solar panels on their roofs.

Windpower Versus Koch Brother Power In Kansas

The battle for the environment has been taken to the state level.  A variety of conservative activist groups are trying to roll back EPA mandates and state supported targets for the use of renewable energy.  This article describes the conservative organizations, aligned with the fossil fuel industries, who are leading the roll back effort at the state level.  This article provides details on the battle underway in Kansas.  The Koch brothers are headquartered in Kansas, which is a Republican state, but environmentalists in Kansas are holding their own in the battle.

Kansas is not the only state where efforts to roll back mandates and EPA regulations are underway.  A conservative organization called ALEC is the umbrella organization.  It is active in a number of states.  It claims to be a defender of "free markets".  Its definition of free markets is synonymous with the business interests of the fossil fuel industry. Government mandates which set the percent of energy produced by renewable energy reduce the value of their vast reserves of coal and oil.

Saturday, April 26, 2014

Why We Should Strip Banks From The Power To Create Money

Martin Wolf, writing in the Financial Times raises a huge question that has a long history in economic thought.  Money is created in our economies when banks make loans.  They acquire an asset which is some form of an IOU.  They make an entry in the borrowers bank account which then increases the supply of money. In our fractional reserve banking system they can also make loans which exceed the value of their deposits. Banks also provide a payments system which is a public service.  Wolf argues that banks should retain the payments system but that government should directly determine the money supply.  The reason for making this change is that our current system is fraught with peril.  We always have financial crises that have to be solved by central banks which provide liquidity and solvency to the failed system.

One of the arguments against this proposal is that banks play an important role in the economy.  They allocate our savings to their most productive uses when they make loans.  Wolf responds to this point by showing that only about 10% of business investment funding comes from bank loans.  The majority of bank loans are devoted to the funding of commercial real estate investments.  Wolf also realizes that his proposal will not go anywhere in our current environment.  He understands, however, that our next financial crisis is just around the corner.  Maybe it will be reconsidered in the next crisis.

What's Wrong With The Neo-Classical Production Function?

This article describes the neoclassical production function and it provides an example of how that model might be used in a simple case.  It then raises questions about the application of the neoclassical model in making important policy decisions.  It is a good lead in to the post that follows.

Natural Resources And Economic Growth Theory

This article has two powerful insights.  The first insight is that economic growth theory has a focus on sustained growth.  It looks at the factors of production and some externalities and asks how they might keep the growth rate at a desirable point.  Environmental economists add another variable to the economic growth model.  They integrate natural capital into the growth equations in order to determine the growth rate of a sustainable economy.  Natural capital is a key input into the growth model and it places limits on the production function.  A sustainable economic growth model must include natural capital in its equations.

The second insight in the article is that there has been a bifurcation within economics between environmental economics and traditional macroeconomics which largely ignores natural capital. As a result the great majority of macroeconomics courses pay little attention to natural capital.  That role is assumed by economists who specialize in environment economics.  Very few students take those courses in relation to the numbers of students who take traditional macroeconomics. Therefore, it is critical to our future that we integrate natural resources into traditional economic growth models.  We need a focus on sustainable growth rather than an exclusive focus on sustained growth.

Pikkety and The Pareto Distribution of Wealth

Paul Krugman has developed an important insight from Pikkety's book.  He explains how Pikkety's notion of the patrimonial economy or society flows from a basic concept in his book.  Piketty's key concept is that the difference between the after tax return on capital (r) and the rate of economic growth (g) determines the distribution of wealth and income.  Krugman argues that the value of r-g determines the Pareto distribution of wealth and income.

Along the way, Krugman also pokes a large hole in one of David Brook's criticisms of the book that he probably has not read.  Yes, some of the super- rich like Bill Gates and Warren Buffet donate a large share of their wealth to charities.  And Yes, some family heirs will make bad decisions and lose much of their inherited wealth.  That still leads to a Pareto distribution of wealth and income that is determined by the value of r-g.  Krugman has done his homework and he is impressed by Piketty's awareness of the problems in his theory and the arguments that he has used to overcome the problems.

Walton Family Foundation Spent $1 Billion On The Privatization Of Public Education

Everyone knows that the super-rich spend a lot of money funding the political campaigns of their supporters.  This article describes the influence of the Walton Family Foundation on the public education system.  There are two popular ways in which public education is being privatized.  The original concept for privatizing public education came from the conservative economist Milton Friedman.  He advocated the use of vouchers to privatize the system.  Public funds would be used to issue vouchers to families so that they could purchase education from private schools.  That movement didn't take off but the Walton foundation is supporting that concept as well as charter schools which have been growing fast in some areas of the country.  Local school districts fund charter schools by providing a share of the local school budget to private schools.  The charter schools usually have the option of admitting selected students for enrollment.  This strategy is most effective in poor school districts because it gives parents an option to remove their child from public schools that must accept all students for attendance, and place them in a charter school that has the option of selecting the better students.  In effect this creates a two tier system of education.  Motivated parents send their children to the charter schools, while less motivated parents keep their children in the regular schools.

The Walton Foundation also funds efforts to measure school performance and to evaluate teacher performance.  The measurement programs support the privatization effort by providing information to parents about school performance is typically below average in poor school districts.

As one might imagine this movement has been very controversial. By and large, the research on charter schools shows mixed performance outcomes.  Some schools perform above average and some do not achieve better than the publically operated schools. 

The important point in this article is not about the relative performance of privatized schools.  The article shows how an ideologically motivated family of billionaires can sprinkle a billion dollars around in the vast public school system and have an enormous effect on the education system.  The Walton's have obtained a huge bang from the billion dollars that they have invested for the purpose of siphoning public funds into for profit private schools.

Friday, April 25, 2014

Thomas Piketty and Cognitive Dissonance in America

This post in the Financial Times (via Doug Hendren) describes the rockstar reception given to Thomas Piketty in the US.  Much of the information that Piketty wrote about in his book was already known, largely because of his own research in collaboration with other economists.  His book has raised everyone's level of understanding about the growth in inequality and its consequences.

One the consequences of Piketty's book is that it elevated the level of cognitive dissonance in America.  One of the eternal myths in America is about everyone's opportunity to get rich based upon merit and hard work.  Cognitive dissonance is elevated when we encounter evidence that causes us to question firmly held beliefs.  Piketty argues that super-managers in America are over compensated by compliant boards.  The growth in their income cannot be justified by an appeal to their productivity which is almost impossible to measure.  We do not live in a simple meritocracy.  Moreover, the concentration of wealth and income will be passed on to future generations which will be able to live very well off of inherited wealth without the need to become productive.  This is another blow to the myth of meritocracy, and getting ahead as a result of productive labor.  Another blow to this myth is delivered by another source.  Social mobility in America is below that of many European countries. Growing inequality and limited social mobility is not good for cognitive dissonance in America. The US has the highest level of income inequality relative to its peer group and it has the lowest level of social mobility.

Why Did The FCC Give A Gift To Cable Providers?

The FCC has come out in favor of allowing cable companies to charge higher fees to content providers.  Companies like Netflix would have to pay a higher fee to Comcast which has a service that competes with Netlix.  It is not surprising that FCC has changed its position on this issue.  All we have to do is look at the new members appointed to the FCC.  They have been lobbyists for the cable industry.

Business leaders love to complain about government regulation.   What they don't tell you is that they lover government regulation when it works to their advantage.  That's what lobbyists do.  They do what they can to obtain favorable regulations that increase the monopoly power of their clients.  The new FCC rule is great for the cable industry but it will reduce innovation by content providers by raising the cost for new entrants.  Large firms, like Netflix will survive but the new rule will increase the barrier to market entry.

Let The Right Wing Panic Begin

The popularity of Piketty's book has created a panic among the usual subjects.  Paul Krugman describes the panic in conservative think tanks, and in the expected places like the Wall Street Journal which compares Piketty to Stalin.  Others have accused him of Marxism, even though his work has been criticized by Marxists.  In the post that follows, David Brooks, writing in the NYT, calls him a Quasi-Marxist. Apparently, a Quasi-Marxist is anyone who is critical of rising income inequality. I am waiting for Piketty to be compared to Hitler.  That would complete the unholy triumvirate. There are not many economists who have made it into the unholy triumvirate.

David Brooks Does HIs Job: Piketty's Book Has Initiated Class Warfare Against The Super-Rich

If there is anything that David Brooks dislikes it is what he calls class warfare against the super-rich.  The class that he opposes is his own class.  That is, the class of highly educated professionals, many of whom are envious of the super-rich. He believes that they should care more about the life of those in poverty.  They should leave the "job creators" alone and improve the human capital of the poor.  He is more comfortable with class warfare between the middle class and the poor than he is with the growing concentration of wealth and income at the very top of the pyramid. He would prefer to "improve" the education system and not tinker with the distribution of wealth and income.

He claims to have read Piketty's book which he damns with faint praise. His criticisms of the book are a collection of those which have been made by conservative economists.  They are fair criticisms of the book, but they have not been ignored by economists who have considered them and determined that Piketty is also well aware of them and has handled most of the criticisms in his book.

Brooks really dislikes Piketty's proposal for a wealth tax.  If he had read the book, he would have learned that Piketty is aware of the political problems with a wealth tax, and he would have learned that Piketty's wealth tax is rather modest. It does not confiscate the accumulated wealth of the super- rich. Brooks gives a nod of preference to raising the inheritance tax. That would not be inconsistent with the views of Piketty, or with economists who are concerned about the concentration of wealth and income at the very top of the pyramid.  Increasing the inheritance tax, however, would be opposed by his favorite political party.  It is as politically naive as Piketty's wealth tax.

Thursday, April 24, 2014

What's Next After Piketty's Book?

Thomas Piketty's book has done what no other economics book has done.  It has become the number one best seller at Amazon.  It has clearly touched on a sensitive nerve.  Inequality has been rising everywhere, but economic theory does not have a good explanation for this phenomenon.  Even worse, there are theoretical reasons for believing that it should not happen.  The issue of income distribution has been placed in the backwater of the economics profession.  This raises a question about Piketty's book.  Will economists continue to ignore the issue, or will it have an impact on research and theory?  At a deeper level it raises a question about capitalism itself.  That is, can it be shaped to provide a more equal distribution of income.   Piketty's solution is to use tax policy to deal with the fundamental contradiction between the return on capital and the return on labor income.  That may not be easy in countries like the US.  We have reduced taxes on investment income and the inheritance tax has been cut dramatically.  In particular, stock ownership can be passed on from one generation to the next so that there is no tax on the increased value of the stock.  Someone who purchased a share of stock for $50 dollars, that has doubled in value to $100, passes that stock on to an heir at the current market value.  No tax has been placed on the capital gain, and if the new owner sells the stock for $110 dollars, a tax will placed only on the $10 gain.

Piketty's book may also increase the focus on institutions in economics.  For example, corporate executives have accounted for much of the increase in income inequality.  Corporate boards have made the compensation changes that are responsible for the rapid increase in executive compensation. Therefore, it is impossible to understand the issue of increasing income inequality with looking at the issue of corporate governance.  

CUNY Video Of Piketty, Krugman, Stiglitz Discussion Now Available

For those of you who were not able to watch the video live, CUNY has made the video available on its You Tube channel.  This is a link to the video

The US Tax System Favors Those With Incomes Above $10 Million

Households earning over $10 million have a much lower effective tax rate than households with incomes between $500,000 and $10 million.  That is because Reagan and Bush reduced the tax rates on investment income.  Those with incomes over $10 million receive much of the their income in dividends and capital gains which are taxed at a lower rate than income earned from wages.  Tax policy in the US has been modified by Congress to favor rentiers.  There is no evidence that taxing investment income at lower rates than earned income benefits anyone but the rentiers. 

The majority of Americans have their investments in tax deferred retirement funds.  They pay no taxes on capital gains and dividends until they begin to draw their money out of those accounts.  It is taxed as ordinary income when it is received in retirement.

The Obama Administration made modest changes in tax policy to fund the Affordable Care Act. Those changes will primarily affect the super rich who get the lion's share of dividend income and capital gains.  It is not surprising that Republicans oppose the Affordable Care Act.  The super rich are forced to help pay for the healthcare of people with whom they have no social contact.  There are not enough super rich voters to influence elections in the US.  They depend upon the politicians, whose campaigns they fund, to whip up opposition to policies that they do not like.  They are good at convincing lower income voters that policies designed to benefit them are bad policies.

Wednesday, April 23, 2014

Robert Samuelson Wrote An Article That Makes Sense

An economist who won the Bates Award, which is given to a promising economist under age 40, published a study which explains the source of bias in the media.  Samuelson summarizes the study and I cannot detect the conservative bias that is common to the op-eds that he publishes in the Washington Post.  Maybe is need to take a closer look, but the study makes sense.  It argues that the media do what most businesses do.  They try to make a profit.  That means building a large audience that attracts advertisers and revenues. 

The study found that the bias found in the media reflect biases held by their target market.  The media understands their target market and they give them the slant on the news that they want. Major media outlets, like the Washington Post serve a very large and diverse market. That probably explains why the Washington Post provides a platform for conservatives like Samuelson and George Will, who write for the their audience, as well as couple of liberals.  The New York Times plays a similar game by giving us Paul Krugman and David Brooks.  Cable news plays the same game.  MSNBC targets a liberal audience and Fox News has helped to build its conservative audience by feeding it a steady diet. 

Adam Smith And Thomas Piketty Have A Lot In Common

Adam Smith is one of the most selectively read moral philosophers in the world.  Conservatives revere an Adam Smith that have worked hard not to understand.  This article provides quotes from Adam Smith that have much in common with Thomas Piketty.  Smith had contempt for rentiers who were able to afford lavish lifestyles without needing to work and produce output.  They were living off of inherited capital.  Moreover, large fortunes were frequently earned either from monopoly's granted by the sovereign,  or by collective action by firms to depress wages in order to increase profits.  Smith believed that Holland's economic success was related to the low level of profits in Holland.  The profits were low as result of competition and efficiency. 

It may be a stretch to compare Smith too closely to Piketty, but it is wrong to contrast Piketty with the imaginary Smith that conservatives have created.

Is There A Class System In America?

Conservatives are reacting to the attention given to Piketty's book by arguing that America is classless society and that any discussion of income class in the US is Marxist, and therefore unspeakable.  In a sense conservatives are correct.  America was conceived as a classless society relative to the aristocracies that prevailed in Europe.  Unfortunately, the tables have been turned.  There is a very clear relationship between income class and support for government spending in the US.  In Europe, there is little relationship between income class and support for government spending.  The wealthy in the US are unique.  They don't consume public services and they don't want to pay for them.  This graph shows American Exceptionalism for what it is.

Robert Solow Provides The Best Summary Of Piketty's Book

Robert Solow is a Nobel Laureate who achieved fame by developing the Solow model of economic growth.  Piketty used the Solow growth model to describe the history of economic growth, and to forecast future growth.  The economic growth rate is central to Piketty's explication because inequality is a function of the relationship between economic growth (r) and the the rate of return on capital (g).  When the return on capital (g) rises relative to (r), capital income rises as a share of national income.  Since capital ownership is highly concentrated, inequality must increase as a result.

Solow carefully analyzes Piketty's thesis , and he describes the assumptions upon which it rests. He then tests the assumptions, and he offers his views on how they hold together.  By and large, he gives the nod to Piketty.  He disagrees a bit with Piketty about the solution to the problem that he describes.  Piketty argues that a modest progressive tax on wealth, which lowers the ratio of (g) to (r), will reduce the growth on inequality.  Since the wealthy will use tax havens if they are easily available, it is necessary to have regional policies that will limit the use of tax havens.  Solow thinks that this might work in Europe, but that it won't work in the US.  He thinks that it might be easier to restore the inheritance tax in the US, and to increase the progressiveness of the tax system.  In other words, we only have to repeal the changes that Reagan and Bush made to the tax code.  The rise in inequality in the US was made in Washington.  It can be unmade in Washington if we have the political will.

Tuesday, April 22, 2014

Tom Sargent's Graduation Speech

This is a critique of a graduation speech from 2007 that has been recirculated by economists who like some of the political implications.  The 12 items in the speech are rather uninteresting but a point by point critique is provided.  I preferred the humorous translation that Yoram Baumann made to Greg Mankiw's 10 principles of economics.  Mankiw invited him to Harvard to entertain his students. At least he has a sense of humor.

The post that follows is a deeper critique of the graduation speech.

Economics And Cognitive Science

A highly respected economist made a graduation speech in 2007 that extolled some of eternal verities of economics.  It has received a lot of attention from economists who praise it and from some who dislike all, or parts of the speech.  This article goes to the heart of the matter.  Some the eternal verities in the speech are simply common sense.  For example, everyone knows that we frequently face trade offs.  If we do one thing, we may not be able to do another thing.  At a deeper level, most of our economic models make multiple assumptions about the thought processes that humans make when they make decisions, or when they make projections about the future.  Of course, they qualify this by assuming bounded rationality, or by assuming a typical agent, but the implication is that economics is a branch of cognitive psychology.  With few exceptions, however, there is little contact between economic theorizing and cognitive theory.  The psychology implicit in economic theory is hundreds of years old.  The profession hangs on to it, however, because without the implicit psychology it might be regarded as philosophical speculation, and it would be difficult to quantify.

Monday, April 21, 2014

Rising Home Prices In UK and Secular Stagnation

Secular stagnation is a global concept.  Interest rates are kept low to encourage growth, but low interest rates decrease the monthly cost of a mortgage.  Consequently, home prices are rising faster than wages or rents in London.  When prices rise faster than fundamentals, we have an asset bubble in housing.  Since people expect that housing prices will continue to rise, housing becomes a more attractive than other assets.  This accelerates the bubble in housing.  Eventually other asset prices will inflate and we can't raise interest rates without affecting growth in the real economy.

Germany Cannot Be A Giant Switzerland

The crisis in Ukraine has unsettled the German government.  It is the largest economy in Europe but it values peace and order.  This article describes the anxiety in the German government that has resulted from the disclosure of US spying and the crisis in Ukraine.  Putin has revealed a view of the "New Russia" which implies that he does not accept national borders.  Germany respects national borders, and it looks to the European Union to maintain harmony.  Whether it likes it or not, Germany is at the center of the crisis with the New Russia.  It is in not a giant Switzerland that can sit back and enjoy the peace and order that existed before the events in Ukraine.

Robert Samuelson Views Pikkety's Book As Class Warfare

To the surprise of nobody,  Robert Samuelson provides his analysis of Piketty's book and concludes that increasing taxes on the wealthy is class warfare.  Moreover, he argues that increasing taxes on the super-rich will slow down economic growth. 

Taxes on the super-rich were much higher in our recent past, and the economy grew faster in the high tax period than it has been doing since taxes on the super-rich were reduced.  This does not suggest that higher taxes on the super-rich is good for economic growth.  It does indicate however that lower taxes on the rich do not increase the economic growth rate.  Tax policy seems to have a weak relationship to economic growth.

Samuelson also displays his customary ignorance about class warfare.  When politicians make the tax system less progressive it is not class warfare.  We only have class warfare when politicians are asked to make the tax system more progressive.  For Samuelson, and most conservatives, class warfare is a one way street.  It is only conducted against the super-rich. 

How To Limit Employee Wages In Silicon Valley

Software engineers earn good wages and many would like to enjoy their standard of living.  This article describes a suit by software engineers against several of the tech giants in Silicon Valley.  They are charged with engineering an agreement that would limit labor competition in Silicon Valley.  Wages tend to rise when the companies compete with each other for the best talent.  They are accused of agreeing not to recruit software engineers from the consortium of companies that are a party to the agreement.  This article provides some the information that the companies would like to exclude from a potential trial.  The information might influence the jury and the companies would not like it to become public.  After all, constraining labor market competition is not part of the prevailing neoliberal ideology.  On the other hand,  the easiest way to increase profits and shareholder value is to constrain wage growth.  Most of these companies also use the patent system to limit competition.  Managing the rules of the competitive game is in the interest of the management of these companies.  They are also large shareholders.  Perfect competition is not in their interest, nor is it in the interests of any market participant.  Corporate strategies are devoted to reducing competition in their selected market segments.

Piketty Puts Paris Back In The Economic Spotlight

Everyone is trying to capsulize Piketty's book into a few digestible points.  This article provides a couple of easy to digest points that should not be lost among the many points in a very long book.  The economics profession is similar to other academic professions.  They are dominated by a focus on technical elegance.  It might be called a dominance of technique or methodology.  The importance of the problems that are selected for research is less important than the choice of technique and the elegance of the application of that technique to the dominant paradigm in the profession.  Piketty left a job at MIT and returned to Paris to work on more important problems when he became aware of neo-liberal trap that constrains economic research in the US, and in much of Europe.  Thankfully, Piketty found an elegant way to frame a very important problem.

Piketty has been criticized as a determinist because he argues that inequality is inevitable under our current form of capitalism.  Nothing could be further from the truth.  He rejects the idea that economies are a creature of nature.  They are designed by humans in order to achieve certain goals.  He argues that the rules of the economic game can be altered by the democratic process.  His preferred solution to the problem of inequality is to make the tax system more progressive.  His primary concern is that democracy itself is at risk unless it can reshape an economy that is not serving the public interest.  He does not want to revisit the 1930's. 

How Do Plutocrats Get Into Heaven?

We have two kinds of plutocrats.  We have the bad plutocrats like the Koch Brothers who use their wealth to purchase favorable government policies.  We have some good plutocrats who want to help the poor.  The former mayor of New York City is a good plutocrat.  This article describes his motives and the policies that he advocated to gain access to heaven.  He is compared to good plutocrats from previous generations who had similar motivations.  The reforms that they advocated were directed towards improving the morality and behavior of the poor.  They were not interested in lessening the income gap between themselves and the poor.  In their view, the world needed plutocrats to guide their behavior in a way did not threaten plutocracy itself.  Plutocracy is not that much different from aristocracy.  The good plutocrats and the good aristocrats were guided by enlightened self-interest.

Sunday, April 20, 2014

Bill Moyers Interviews Krugman About Pikkety's Book

This is a link to the video of the interview.

Debt Deflation In Europe

Inflation in Europe is very low.  It is below the ECB target of 2% and it is negative in country's with high total debt (household plus government debt).  That is not good for households and governments with a high debt burden.  The debt must be repaid with more expensive euros.  Its a mystery to Paul Krugman.  He can't understand why low inflation is a priority in nations with a high debt burden.  It is not good for economic growth and economic growth is the best way to reduce debt.

Saturday, April 19, 2014

How Should We Deal With Excessive Leverage In Banking?

Excessive leverage was an important cause of the last financial crisis.  Banks need to have a cushion of assets to absorb potential losses.  They did not have an adequate cushion in the last crisis so they were rescued by central banks which provided the cushion.  According to this article in the Financial Times,  UK banks have increased their leverage ratios again to dangerous levels (33:1).  They do so for two reasons: Bankers have an incentive to hold less equity as a cushion because their compensation is based upon the return on equity.  Politicians are reluctant to require reduced leverage because they fear that banks will reduce lending instead of raising more equity.  That would be bad for the credit based economy.  Consequently, the banking system is setting the stage for the next financial crisis.  Moreover, the problems that we see in the UK are similar to those in many other countries.

The other point, made in this article, is that an alternative method of reducing risk in the banking system is a mistake.  It argues against policies which attempt to control the flow of global capital in order to reduce risk in the banking system.  Prudential banking is preferred is preferred to capital controls.

Sweden Put Itself Into A Deflationary Spiral Thanks To Very Serious Central Bankers

The central bank in Sweden decided that there was a threat of inflation.  Therefore, the bank did the prudent thing and used monetary policy to raise interest rates.  The serious people in Sweden applauded the move and everyone was happy.  On the way to the bliss, promised by the very serious people, Sweden discovered that it got more than it had asked for.  Prices began to fall and they have not stopped falling.  Sweden is now in the throes of a self inflicted price deflation.  The very serious people who engineered the deflation argue that it could not have been predicted.  One economist warned about the danger of deflation and he was put out to pasture.  Sweden will now learn a simple lesson.  Monetary policy can easily put a halt to price inflation.  It is much more difficult to reverse a deflationary spiral.  Consumers will delay purchases in the hope that they can purchase later at lower prices, and the cost of debt increases because it has to be repaid with a more valuable currency.  Wages may also have to be cut as producers receive lower prices for their products.  Consequently, demand collapses further and the the next round of price cuts commences.  Welcome to Japan.

Friday, April 18, 2014

The Dalai Lama Visits The American Enterprise Institute

At least one person at the conservative AEI appreciated the message delivered by the Dalai Lama.  He was probably atypical because he had previously participated in Buddhist practices.  On the other hand, his message in this article is worth repeating.  He seems to agree with Dalai Lama that the goal of capitalism should be to increase well-being.  Capitalism, in its many forms, has clearly led to growth in output.  Some of that output has been made available to the poor in many parts of the world.  The real question is whether the mission of our largest corporations is consistent with the goal of increasing well-being.  There is no apparent relationship between the mission of increasing shareholder value and increasing well-being.  That can be accomplished by increasing revenues and cutting costs.  The economy will grow but the output of the economy may not have a strong relationship with well-being and there is no reason why it should be more equally shared.  Shareholder value and economic efficiency have no relationship to morality.  The Dalai Lama would applaud a form of capitalism that include moral principles that went beyond the self interest of corporate managers and shareholders. It would be an achievement if the AEI would make a contribution to that goal.

Thursday, April 17, 2014

Business Investment In Advanced And Emerging Economies

Business investment in emerging markets has outpaced investment in advanced economies by a wide margin.  We have secular stagnation in advanced economies which discourages investment even when interest rates are very low.  Many large corporations are using their cash to buyback their stock or by paying higher dividends.  Apparently, they do not see a better way to reward their shareholders.
One of the problems with this picture is that growth in many emerging markets has been dependent upon exports to advanced economies.  Falling demand for imports in advanced economies has led to slower growth in many emerging markets.

George Osborne Provides The Reason For High Unemployment

The Chancellor of the conservative government in the UK, speaking at the conservative American Enterprise Institute, offered his explanation for high unemployment.  His explanation is fairly consistent with those popular with conservatives in the US.  The basic argument is that the economy has shifted in the direction of high technology and there is a shortage of skills.  The solution to this problem is better education and training.

Unfortunately, President Obama tells a similar story.  His is a bit more nuanced.  He is promoting an underfunded training program as the solution for high unemployment.  However, he also places some blame on businesses that are hoarding cash instead of investing in growth.

Focusing on education as the solution to high unemployment is popular with governments because it makes sense to many voters, and it enables them to avoid the real problems in their economies.  The only exceptions to this rule is when governments offer tax incentives to businesses in the hope that the tax incentives will stimulate investment.

Wednesday, April 16, 2014

The Politics Of Inequality in The UK

The conservative government is planning to cut the inheritance tax prior to the coming elections.  This is good policy for the conservative government but the real question is how the Labour Party will respond during the election cycle.  Many in the Labour Party believe that it is impossible to run for election on an anti-business platform.  Business interests certainly would view opposition to cuts in the inheritance tax as anti-business.  However, there is considerable public awareness of growing inequality and a declining standard of living.  What should Labour do? 

If the Labour Party does not have a workable plan for reducing income inequality it might be foolish to place a bet on using it as an election strategy.  In the US the public is aware of growing inequality but it does not like taxes or income redistribution.  On the other hand, the public is supportive of equal opportunity.  The Obama Administration has attacked the problem of growing income inequality by proposing policies intended to equalize opportunity.  Perhaps that would be the better way for the Labour Party to exploit the problem of income inequality.

Does GDP Measure What It Is Supposed To Measure?

John Kay, writing in the Financial Times,  agrees with the critics who make the obvious points about the poor relationship between the output that is measured and our well-being.  He argues, however, that this is beside the point.  He gives several examples which show that GDP is not even a good measure of what it intends to measure.  For example, the way that financial output is measured is both poorly understood and misleading.  Financial output grew during the financial crisis and it also grew after the crisis because of the way in which it is measured.  Kay concludes that the way in which we measure GDP made Ireland look much better than it was prior to the collapse of its economy.  If we had better measure, its collapse might have been prevented.

Thomas Piketty At CUNY With Paul Krugman And Joe Stiglitz

This is a link to a panel discussion with Thomas Piketty and a distinguished group of discussants which includes two Nobel Prize winners (Krugman and Stiglitz).  The video streaming begins at 6:00 PM( Eastern Time) April 16th. Paul Krugman has left Princeton to take a position at CUNY which has an institute that specializes in research on income inequality.  Joe Stiglitz has written a book on the costs of income inequality.  This should be a very stimulating discussion.  The attention that is being given to Piketty, after the publication of his book in English, is amazing.  It is bound to influence the economics profession which has basically ignored the issue of income inequality.

The Price Of Solar Energy Is Nearing The Price Of Energy From Coal

Paul Krugman supports the use of a carbon tax or cap and trade to reduce carbon emissions.  Conservatives should support these market based mechanisms to reduce carbon emissions but most of them have been captured by the fossil fuel industry which is fearful of government intervention in their market.  He is also critical of left leaning advocates who argue that we cannot reduce carbon emissions and grow the economy at the same time.  Krugman believes that we can alter the mix of output which enables us to do both.  A services economy is less energy intensive.

What really attracted Krugman's attention, however is graph which shows that solar energy prices have been dropping so rapidly that it is on its way to replacing the use of coal to provide electricity.

Tuesday, April 15, 2014

Will The Rise In Home Prices Increase US Inflation?

Core inflation, which excludes food and energy price changes, is the inflation rate that the Fed uses to adjust interest rates.  Since home prices are over 40% of core inflation, one would expect that they are highly with core inflation.  This graph shows that core inflation rates tend to lag changes in home prices.  The growth in home prices has been accelerating.  This suggests that we should soon see an increase in core inflation that might trigger the tightening of monetary policy in the US. 

However, there are a lot of other factors which affect the inflation rate.  Wage inflation is usually associated with rising prices.  We are not witnessing wage inflation yet in the US.  Wage inflation does not usually occur when we have high unemployment rates.

Meet Thomas Piketty Live In The US

Thomas Piketty was given an opportunity to share his ideas with a sophisticated audience.  After his presentation a panel discussion, which included Nobel Prize winner Robert Solow, responded to some the questions raised in his book.  The video is quite long but the response by Robert Solow, as well as Piketty's answers to a couple of questions, is well worth the time.  Solow dealt with the deeper issues raised by Piketty as one might expect from one of the best economists that we have produced in America.  The rest of the panel focused primarily on policies that might increase the equality of opportunity to become a rentier, and how to take greater advantage of wasted human capital.  One of the most obvious ways to deal with the concentration of income is to restore the inheritance tax that was cut dramatically in the US.  That came up at the end of the discussion only as an aside.

Piketty has been pessimistic about our chances to increase the tax on wealth but he made a good point about making the system we have more progressive.  One way is to alter the property tax in the US which is very regressive.  For example, suppose that we have two homeowners that own a $500,000 home.  One person has no mortgage on the home, the other homeowner has a $400,000 mortgage and therefore, has only a $100,000 ownership in the property.  They would both be taxed, however, at the assessed value of the home even though there is a 5:1 ratio in their property ownership.  Piketty argues that they should not pay the same tax.

There was some discussion about the implications of rising inequality.  Some argued for policy changes such as a higher minimum wage, fewer restrictions on unionization,  increased income redistribution, etc.  These are all worth doing but Piketty raised the more serious problem with rising income inequality.  It is hard to have rising income inequality and maintain a democratic society.  Some might disagree with Piketty,  none of the other concerns came close to the threat to a democratic form of government.  We may not expect democracy to work perfectly.  The wealthy will usually have influence on government.  On the other hand, trends in the US suggest that democracy is not working as well as it has in the past. 

How Did Your Raise Compare With CEO Pay Raises?

Most Americans have not seen their paychecks grow very much in recent years.  The median raise for CEO's last year was 9%.  That increased the median income of CEO's to $13.9 million (exclusive of perks).  The growth in CEO pay, relative to that of most Americans, is one of the reasons for the rapid growth in income inequality in America. 

Economic theory suggests that CEO pay is determined by their marginal contribution to revenue.  Therefore, there is no reason to be critical of the growth in their income.  Economists who make that argument must live in a different universe.  It is impossible to measure the marginal product of most employees in a large corporation.  If one lives in this universe, the most obvious explanation for the rapid rise in CEO pay is weak corporate governance.  Corporate boards, working closely with compensation consultants, have rigged the system to yield the results that we observe. One of the contributors to this article was a compensation consultant who claims that he has turned into a critic to atone for his sins as top consultant.

There is not much that government can do to the change the behavior of corporate boards.  However, governments can make the tax system more progressive, and they can do more to collect taxes from elites who take advantage of tax havens.  That will not happen as long as most Americans remain silent.

Tax Day For Corporate America

Its very common to hear complaints about the high tax rate that US corporations are burdened with.  This article provides a few examples of loopholes in the tax code that reduced the effective corporate tax rate from 35% to 12.6% in 2010 (the last year that this statistic was reported).  This is one of the reasons why the DC area has been experiencing rapid growth.  The lobby industry has been growing rapidly because it produces a high rate of return for its clients.  Ordinary citizens are not among their clients.  The tax burden is shifted from those who are represented by lobbyists, to most of us who have little voice in Washington.  That includes many small businesses which are faced with another disadvantage if they compete against large corporations.

Monday, April 14, 2014

Why Hedge Funds Are The Greatest Source Of Risk In Financial Markets In Bad Times

This study by the Federal Reserve Bank Of San Francisco explains why hedge funds are a greater source of systemic risk in a financial industry that consists of commercial banks, investment banks, insurance companies and hedge funds.  The study found that spillovers from problems in hedge funds affect the entire financial system.  There are fewer spillover effects in the system between the other participants in the financial industry.  Hedge funds are less regulated that the other industry participants and there is less public information about their operations.

Who Benefits From High Speed Trading?

Michael Lewis wrote a book about high speed trading that has become a top seller on Amazon.  This review of the book does a good job of summarizing the book which describes the mission of Wall Street banks.  The object is to make money by any means possible and to stay one step away from the SEC which consistently fails in its mission which is to insure that trading is a fair game.

Bankers defend high speed trading by arguing that it increases the liquidity of the market.  This form of liquidity is equivalent to sewage.  It provides no value to society.  The liquidity defense reminds me about a comment that Keynes made about the fetish of liquidity.  He contrasted an investment in the stock market with an investment in the real economy.  An entrepreneur does not create a business in order to sell it as soon as possible.  It is very illiquid but it may provide a valuable service to society.  The typical Wall Street investor prefers highly liquid investments so that money can be made on rapid turnover.  The connection between real businesses and the ownership shares in those businesses are often at cross purposes.

Charles Koch Makes The Mistake Of Defending Himself

Good attorney's are very careful about putting their clients on the witness stand.  Some do good job and others make their situation worse.   The Wall Street Journal provided a platform for Charles Koch to defend himself.  The editors of the WSJ did not do him a favor.  He presents himself as one who suffers from character assassination by "collectivists" and those who adhere to the philosophy of a German philosopher who had an influence on Hitler.  His critics, who inform the public about the millions that he is spending to influence politics in the US, and to misinform the public about global warming are the enemies of the individual.  He of course is the individual, and his critics should not be believed because they are "collectivists".  His defense is to assassinate the character of his critics who attack his character.  It is no wonder that he is spending millions to put those who share his philosophy in government.  He shares the philosophy of his father who was a founder of the John Birch Society that was built upon paranoia.  It fell apart when it went too far in its battle against "collectivism" in the 1950's.  It accused President Eisenhower of being a communist sympathizer.  It was not a good idea to make that accusation about a Republican president who was also a war hero and a very popular president.   Making the same accusation about his critics tells us more about why we should worry about Charles Koch than we should worry about his critics.

The Financialization Of The Economy And Inequality

Paul Krugman, has connected the growth of finance with the growth of inequality.  He contrasts the political decision by the governor of New Jersey to scuttle a project to build another tunnel between NYC and New Jersey, with the expensive private investment in a fiber optic network that connects the commodity futures market in Chicago with the trading floors in NYC.  The tunnel between NYC and New Jersey would have improved public transportation.  The fiber optic network cut milliseconds off the communication time between trades in Chicago and trades in NYC.  It serves no public service.  It enables traders in NYC with a faster network to gain advantage against traders with slightly slower communications.  That is a sum-zero game.  One trader's gain is another trader's loss; nothing worthwhile is added to the economy.  However, fortunes are made on Wall Street, The City of London and elsewhere by traders engaged in sum-zero speculation.  Growth in the financial industry is not correlated with growth in the economy but it is correlated with the growth in income inequality.

In theory, the banking industry is supposed to allocate savings to their most productive use.  It seems to be performing another function.  It creates asset bubbles which eventually collapse at great cost to the losers, but which provide opportunities for the winners to get very rich.  The bankers get paid large sums in both directions.  They operate the casino, and they have inside information which gives them an advantage in trading on their own accounts.

The global economy is still recovering from the housing bubble which was created by bankers and their allies who securitized mortgages and sold them to pension funds and other investors around the globe. The food chain between the origination of mortgages, packaging them into securities and selling them to investors was corrupted by fraud. Fortunes were also made trading derivatives like credit default swaps which were supposed to insure the safety of the securities.  Its hard to argue that the banking industry performed its theoretical function of allocating savings to their most productive use.  The government was also a partner in this enterprise.  It could not have happened without the easing of regulations which were developed to prevent a repeat of the financial crisis in the Great Depression.  It was a depression made on Wall Street.

The dotcom boom was also enabled by Wall Street.  Venture capitalists invested in high tech start ups and they got their payoff when Wall Street banks took them public.  Some of these start ups have survived and they are a valuable part of our economy.  Many of the start ups, which were underwritten by Wall Street banks, failed but the bankers made large fortunes on the winners and the losers.  They operated the casino, and their analysts helped to sell the start ups to the suckers.  They and their favored customers got rich in the process.  The suckers were attracted to market by greed as the stock prices for many of the unsuccessful star ups rose rapidly after their IPO.  The early investors, favored by the bankers, got rich by selling the initial shares to the suckers who got into the market late.  The boom was also enabled by the media which fueled the speculation with stories about the riches being made.  The audience for one the financial news networks during the boom exceeded that of CNN which was the largest cable news network during the boom.  They are a critical part of the financial industry which is supposed to allocate scarce savings to their most productive use.  We have learned that the most productive use of savings is to enable bankers and their allies to prosper at the expense of the suckers.  They are the predators and most of us are the suckers.

The large global bankers also play an important role in managing the wealth of their largest customers.  They operate subsidiaries which help the super-rich to avoid taxes by hiding their wealth in tax havens.  The tax revenues that we don't collect from the super-rich must be collected from the rest of society, or social welfare programs must be reduced.  The bankers play a critical role in the process of predation.  Making money is their only goal.  They don't keep score on the damages from predation.

Sunday, April 13, 2014

What Is The Cost Of Moving From A Market Economy To A Market Society?

This session at INET raises a very serious question.  We seem to conflating a passion for a market economy with a market society in which everything is for sale.  In a market society there is no place for our notions of morality.  Nobody would want an amoral society but we seem to be aimlessly drifting in that direction.  For example, the US Supreme Court has decided that limits on campaign finance violate the rights of the super rich to purchase the favors of politicians.  Freedom to spend is equated to free speech.  Milton Friedman coined a phrase which captures this idea.  He called it "Freedom to Choose". This INET video ought to be part of every introductory economics course.

UN Report Stresses Urgency Of Reducing Carbon Emissions

This is the conclusion of a report delivered in Berlin on the need to accelerate efforts to reduce carbon emissions.  It is the third report on this issue in the last few months.  The warnings are clear, but we continue to drag our feet on this issue.  We are trying to grow a global economy, that is dependent upon fossil fuels, in order satisfy our short term needs.  In doing so we will leave a less habitable planet to our children and grand children.

If climate targets are to be met, the report said, annual investment in electrical power plants that use fossil fuels will need to decline by about 20 percent in the coming two decades, while investment in low-carbon energy supply will need to double from current levels.
The report warned that if greater efforts to cut emissions do not begin soon, future generations seeking to limit or reverse climate damage will have to depend on technologies that can permanently remove greenhouse gases from the air — in effect, they will be undoing the damage that will have been caused by the people of today.
But these technologies do not now exist on any appreciable scale, the report said, and there is no guarantee that they will be available in the future, much less that they will be affordable.

Saturday, April 12, 2014

Darrel Issa Acts Like Joe McCarthy But We Should Not Worry

Joe McCarthy is infamous for the witch hunts that he used to gain power during the cold war.  He got away with his tactics because the public shared his concerns about the threat of communism.  Politicians who attacked him lost elections.  This article describes the behavior of Darrel Issa who abused his power as the Chairman of a powerful House committee during his "investigation" of the IRS which he accused of discriminating against conservative groups which had requested exemptions from taxation.  Issa has lied and distorted information during his hearings.  He has been accused of behaving like Joe McCarthy.  Issa is a demagogue like Joe McCarthy but he is not feared.  Therefore, according to Dana Milbank, we don't have to worry about him.  I'm not sure that I agree with Milbank.  Issa holds a powerful office and he has abused his power.  We always have to worry about people like Issa who hold positions of power.  The press ought to be much more aggressive about holding Issa accountable for his behavior. 

Justice Stephens Educates Us On The Meaning Of The Second Amendment

This article, written Justice Stephens, describes the original intent of the second amendment to the US Constitution.  He also adds five words to the amendment which makes the original intent absolutely clear.  Our founders did not protect the right to bear arms so that governments could not legislate laws which are needed to protect innocent people from dangerous people who use guns in harmful ways.  The intent of the amendment was to secure the rights of individual states to arm state militias.  This was important to the states during the formation of the federal government.  The states did not want to provide the federal government with monopoly access to military weapons.  The National Rifle Association has been successful in distorting the meaning of the second amendment in ways that contribute to the confusion that exists in this country.

Wealth Is Not Only Highly Concentrated, Much Of It Is Not Taxed

Paul Krugman is getting an education.  One of Thomas Piketty's students provided him with fresh data on the distribution of global wealth which indicates that wealth concentration today is similar to that of the "Gilded Age" that preceded the Great Depression.  Moreover, much of the wealth held by the super-rich escapes taxation.  Everyone knows that the wealthy use tax havens to hide their wealth from tax authorities.  What we have not known is the extent of the wealth that is hidden in tax havens. Piketty's student provided a study which provides a striking estimate of hidden wealth. Switzerland alone has around $2 trillion of assets owned by foreigners.  Other countries like Luxembourg, Ireland, Panama, island states close to Britain, and others in warmer climates,  are partners in the tax avoidance scheme.  The typical pattern is for a wealthy household to set up a fake corporation in a place like Luxembourg.  The corporation purchases assets like mutual funds for the corporation and sends them to a bank in Switzerland.  The household which collects the income from the securities held by the shell corporation is invisible to national tax authorities.

Krugman provides links to the papers that describe the concentration of wealth and the extent to which tax havens are used by the super-rich.  These research papers help us to understand why Thomas Piketty believes that the growth in income inequality may be inevitable.  Taxation is the only way to dilute the concentration of wealth.  As long as much of the world's wealth is hidden in tax havens it is not subject to taxation.  It would take global cooperation to eliminate the use of tax havens, and that would be resisted many national governments and by tax haven countries.

Perhaps the only way to put an end to the use of tax havens by the wealthy is for ordinary citizens to use the same strategies.  It is relatively simple to set up a shell corporation and put one's assets in the corporation and to use the subsidiary of one of the large global banks to hold the assets owned by shell corporation.  That would get the attention of national governments.

Thursday, April 10, 2014

How Should We Explain Slow Growth In The US?

The conventional way to measure economic output, or GDP, is to add up the sources of output.  Consumption is about 70% in the US, and business investment, government spending and net exports make up the rest.  The conventional explanation of recessions, from a demand perspective, is to blame recessions on inadequate business investment.  Therefore, central banks can lower interest rates, which makes it less expensive for businesses to fund investment.  If that doesn't work, the alternative is to increase government spending and run budget deficits.  The concept of secular stagnation has been used by Larry Summers, Paul Krugman and others to explain the slow recovery in the US.  It is based on the concept of the "liquidity trap".  We have a liquidity trap when the central bank has lowered interest rates to zero but we also have low inflation.  In that situation real interest rates will be somewhat below zero but the real interest rates need to be more negative in order to stimulate investment spending.  One way to lower the real interest rate in a liquidity trap is increase the inflation rate.  Central banks, however, have a target rate of 2% inflation, and they have little interest in raising that target.  Therefore, economists like Summers and Krugman argue that fiscal policy is needed to stimulate the economy.  That happens when governments run large budget deficits.  That is not politically possible in the US.  So secular stagnation is the consequence.  We are in for a long period of slow growth and high unemployment.

Dean Baker points to another problem that may be responsible for high unemployment.  Net exports are negative in the US.  That is because we import more than we export. Net exports currently reduce GDP by 3%.  In an economy the size of the US that is a big number.  Moreover, it reduces GDP by an amount that is much larger than any amount that we could expect to gain from an increase in business investment.  Economic theory suggests that trade deficits are self correcting.  The dollar should fall in value relative to the value of the currencies our trading partners with whom we have a trade deficit.  The less expensive dollar will make US exports less expensive and the trade deficit should disappear.  That has not happened.  The US has been running large trade deficits for many years.  Dean Baker believes that we will continue to have high unemployment as long as we run large trade deficits.  It is difficult to overcome this problem without raising questions about globalization and the virtues of free trade.  Consequently, the only alternative is to run large budget deficits to compensate for the trade deficit. We are doing the opposite in the US. 

Paul Krugman's Review Of Capital in the 21st Century

Its only April but Paul Krugman's review of Thomas Piketty's important book is in the May edition of the New York Review of Books which has just been released.  It is a well written and succinct review of Piketty's 700 page book.  The book is well worth reading because it is rich in detail, but Krugman's review captures the essence of the book.

Wednesday, April 9, 2014

Investor Sentiment About Greek Debt Is Improving

Greece was the weakest of the peripheral countries at the onset of the financial crisis.  It still has a 25% unemployment rate but investors seem more willing to purchase Greek debt.  After surging to a 35% interest rate at the peak of investor risk aversion, interest rates are back to where they were 4 years ago.

Putin Is Using The CIA's Playbook In Ukraine

The CIA conducted a series of covert operations during the Reagan Administration's war against the "Evil Empire".  The covert operations were effective in Poland and other areas in which Russia had an interest.  This article suggests that Putin, whose experience in KGB is helpful, learned a lesson.  Covert operations work and they are difficult to counter.  The Ukraine operation has all of the earmarks of a covert operation which is being conducted by someone who understands them. 

Political Science And Oligarchy

Majoritarian Pluralism has been the dominant framework in political science.  It assumes that organized interests influence political decisions but ordinary citizens also play an important role.  Politics is viewed as a tug- of- war between organized interests and ordinary citizens that is mediated by electoral democracy.  This article is by a political scientist who operates within the Majoritarian Pluralism framework.  He reports on a study which provides quantitative evidence in support of a framework which assumes that monied interests have a greater influence on politics than ordinary citizens.  The implication is that political scientists may need to reconsider the dominance of the Majoritarian Pluralism framework.

I am not very familiar with the discipline of political science but it reminds me of what has happened in economics.  The distribution of income has not been an important topic in economics.  The focus in macroeconomics has been on the dynamics of growth and the development of mathematical models which rely upon macroeconomic assumptions about how the factors of production interact.  In many of these models, income distribution does not matter, and it is assumed that most government interventions will not have a positive effect on the business cycle.  It would appear that political science and economics suffer from a common problem.  The dominant frameworks in these disciplines shape research efforts, and professional career paths, in directions that fail to describe the real world of political economy.  One should not expect either of these disciplines to assist citizens in understanding the political economy.  It has been excluded by the choice of the dominant frameworks.  Furthermore, one wonders how helpful political science will be if it adapts an alternative framework that attempts to quantify what seems obvious about the role of elites in the political economy. What kind of democracy do we have when no candidate can run for important offices without raising huge sums from elites to run very expensive campaigns?  The first election than any candidate must win is the race for campaign contributions.  What happens next is also importantly influenced by the media which focuses more on the horse race than it does upon clarifying the real issues.  The media has adopted a framework which is more like reporting on sporting events. In essence the media must be understood as a business.  Revenue is dependent upon audience size and advertising.  Its hard to build a large audience, and attract advertisers without understanding the market.  There is not a large market for abstract content and information which runs counter to common belief systems.

How Not To Build Public Support For The Mitigation of Global Warming

Ted Nordhaus is an economist who accepts the hypothesis that human behavior is the cause of global warming.  He has his own approach to the problem, from an economic perspective and from a mitigation perspective.  In this article, he and a colleague suggest that scare tactics about global warming tend to polarize debate on the issue.  Conservatives become more skeptical about global warming when atypical weather events are used as evidence for global warming. 

The psychology of global warming denial, and our understanding of the best means of persuasion, are not well understood even by Nordhaus and his colleague.  The real message in this article is that a greater use of nuclear energy should be a part of any solution, and that conservationists who oppose increasing the use of nuclear power are making a mistake.

Are Conservatives Really Different From Liberals?

Paul Krugman acknowledges that liberals as well and conservatives have biases. Moreover, they both tend to favor information that confirms their biases.  He argues, however, that there is an important difference between liberals and conservatives.  Liberals are readier to accept disconfirming evidence, and many liberals suffer from a Hamlet complex.  They are uncomfortable holding strong positions on many of their biases.  Krugman provides several examples to support his claim that conservatives are less susceptible to disconfirming evidence and that they are more certain about their belief system than liberals.  Krugman's expertise is not cognitive psychology, but he has been trying to understand why many conservative economists continue to hold firmly to their positions on many economic issues when the predictions that they have made have been wrong.  He offers a couple of explanations,  but his conclusion that conservatives biases are more firmly held than liberal biases is probably more accurate than the explanations that he offers.

The Maldistribution Of Medicare Payments To Doctors

Medicare collects an enormous amount of data on the payments that it makes to medical doctors.  It plans to release this information to the public.  There is a link to an interactive data base that allows the public to search the data base by physician name to find the total amount of Medicare disbursements made to any physician under Medicare Part B.  One of the findings in the data is that Medicare disbursements are concentrated in a relatively small number of physicians.   One quarter of the physicians receive 76% of the disbursements, and 2% receive 23.6% of disbursements.  The data also provide information about the distribution of payments in relation to areas of medical practice.  One specialization that has received a lot of attention is ophthalmology.  More payments have gone to this specialty than any other specialty, and one physician has received $21 million in Medicare disbursements.  He has a very large practice that specializes in a treatment for a common eye problem among the elderly.  He is more of a business person than a physician and he is under investigation by the government.  He also has non-medical investments in the Dominican Republic and a close relationship with a US senator.

The New "Washington Consensus" At The IMF

The IMF has long been criticized for imposing fiscal austerity on the nations that it assists.  It now recognizes that fiscal austerity does not produce sustained economic growth.  In particular, cuts in government spending are often counter productive.  The IMF has also changed its outlook on inflation.  For example, the IMF believes that some countries would be better off with a bit more inflation.  Central banks have tended to set inflation targets at 2% even when it is counter productive.  The IMF has also recommended that some countries set capital controls in order to stabilize their economies.  Taken together, these changes suggest that the IMF no longer adheres uncritically to the neo-liberal orthodoxy that has dominated economic thinking in the IMF, and which has formed the basis for its Washington Consensus. 

The IMF has gone beyond the Washington Consensus in another matter that has been receiving a lot attention lately.  IMF researchers have found that high levels of income inequality impede sustainable economic growth.  Furthermore, it has found that income redistribution does not impede economic growth, and that it can contribute to economic growth and social stability.  This is a big jump for the IMF, and it may not go over well in many countries that are placing an emphasis on reducing budget deficits and the curtailment of spending on the social safety net.  Income inequality, and social instability that results from income inequality, have become the new enemies of sustainable economic growth.

Monday, April 7, 2014

Larry Summers Wants The IMF To Be Empowered To Fight Secular Stagnation

The IMF shares Larry Summers' concerns about the medium term prospects for economic growth.  Congress has an opportunity to empower the IMF to play a vital role in the global economy.  Summers argues that quantitative easing (QE)  has been helpful in preventing a global depression.  It has certainly increased asset values and it has rewarded financial activity, but it has encouraged spending at the expense of demand for products and non-financial services. 

Summers' provides an overview of many of the problems that he observes in the global economy and he suggests some of the things that governments and the IMF might do to deal with the problem of secular stagnation, which is a problem of insufficient demand.  He argues that taking some of his suggested steps will have a multiplied effect on demand, and he warns that a failure to do so would have a multiplied effect on secular stagnation.

Critics Are Beginning To Respond To Piketty

Brad DeLong posts two criticisms of Piketty's book.  One is a predictable criticism from the conservative National Review.  Piketty's research is about a fundamental contradiction in capitalism  His book is about the consequences of that contradiction.  That is, inequality is built into capitalism because the return on capital, which is highly concentrated, grows faster than the economy and national income.  Since Karl Marx also wrote about a fundamental contradiction in capitalism, Piketty must be a Marxist, and therefore he must be wrong about capitalism.  This cannot be a serious criticism for a couple of reasons.  In the first place, Piketty was trying to explain something very real.  That is, there is a long history of income inequality in capitalism.  His book has received a lot of attention because it contains a lot of historical data which attempts to explain an important historical relationship between the return on capital and the growth of the economy.  Piketty's solution to the problem of income inequality is to use the tax system to redistribute income.  He does not argue for overthrowing the system of private property.  Therefore, he has been criticized by Marxists for making an effort to maintain the system of private property.

The second critique of Piketty comes from an economist who shares many of the concerns that Piketty has about growing income inequality and the concentration of wealth.  In fact, he has written extensively about that problem and he has developed his own methods for measuring income inequality.  His critique is primarily about Piketty's definition of capital.  His argument is that Piketty does not distinguish between productive capital and other assets.  He thinks that the title of Piketty's book should be Wealth In The 21st Century.

The comments following DeLong's post are worth reading.  Most, if not all of the comments, are about the distinction between capital and wealth.  The first criticism was ignored but it will probably be the most frequently used tactic against Piketty's explanation of the relationship between income inequality and capitalism.  Its a lot easier to dismiss Piketty as a Marxist than it is to attack his explanation for income inequality.

Sunday, April 6, 2014

Why Has The Labor Force Participation Rate Declined In The US?

Glenn Hubbard is the Dean of NYU's Business School, and he was an economic adviser to George Bush and Mitt Romney.  The Wall Street Journal provided him with a platform to explain why the labor force participation rate has declined in the US.  Hubbard begins his explanation by arguing that Obama's fiscal stimulus failed to create enough demand in the economy.  Monetary policy may have kept the recession from worsening, but it did stimulate enough demand either.  Fiscal policy and monetary policy are effective when we have cyclical unemployment but they are not effective when structural problems in the economy are responsible for unemployment and the decline in the labor force participation rate.  He then moves to his list of structural problems in the economy and he suggests some reforms that might address those problems.

The most simple explanation for the drop in labor force participation rate is that the unemployed have not been able to find jobs.  We also know that the long term unemployed are less attractive to employers.  Hubbard has a more complex explanation.  He places the blame on government policies which decrease the incentive for workers to take the jobs that are available to them. He also argues that the unemployed lack the skills that are required by employers.  His list of government policy failures is extensive.  It was a mistake to extend unemployment benefits  because they reduce the incentive to work.  Social Security disability benefits are also a problem because they discourage the disabled to work. The payroll tax also discourages elderly workers from taking the jobs that are available.  He argues that they would have a greater incentive to work if the payroll tax were eliminated because it would increase their net pay.  The earned income tax credits only apply to families so they do not encourage single worker to take the low paying jobs on offer.  Hubbard acknowledges that globalization has made low paying jobs more scarce in the US, but his solution is to provide training to low skilled workers so that they can compete for the jobs that have gone overseas. 

For some reason Hubbard also argues that the Affordable Car Act is responsible for the decline in the labor force participation rate.  He echoes a claim by many of the Republican's in Congress.  Hubbard provides a graph of the labor force participation rate which makes a strong case against his claim.  The labor force participation rate dropped steeply at the onset of the recession and it continued to fall during the slow recovery.  The Affordable Car Act, which has only recently become available, cannot be responsible for the decline in the labor force participation rate.

In summary, the lack of jobs is not responsible for the decline in the labor force participation rate according to Hubbard.  He pus the blame on government policies which discourage the incentive to work and he argues that the labor force lacks the skills demanded by employers.  Dean Baker responded to the Hubbard article and the comments that follow his post suggest that Hubbard's economics are clouded by his ideology.