Thursday, November 27, 2014

What High Tech Employee Shortage?

Noah Smith looks at the law of supply and demand and explains why there can't be a shortage of high tech workers.   If the demand for high tech employees exceeded the supply, wages for high tech workers would rise and the supply of workers increase in response to higher wages. However, the real wages for high tech workers have not increased since 1999.  This suggests that we have an over-supply of high tech workers.  High tech firms continue to pretend that a shortage exists so that they can bring in lower priced labor from overseas.  They are more interested in growing profits and their stock price than anything else.  The supply shortage that they use to increase the number of green card workers is a fiction.

Its easy to understand the motivation of high tech managers and their interest in increasing profits.  Smith raises a more interesting question, however, about economics.  Economists are trained to place the efficiency of the economy above all other concerns.  In fact, the recent attention that economists are devoting to the distribution of income, is a departure from the traditional focus of the profession on efficiency.  In fact, that assumption that wages are determined by the marginal productivity of labor,  precludes any discussion of income maldistribution.  According to this doctrine, everyone's wages are fairly earned by their contribution to production.  The rising share of income going to a small percent of the population suggests that more attention needs to be given to the institutional changes that have occurred in the rich nations.  The managers of our large corporations have figured out how to increase their share of the income.  This has little to do with their marginal contribution production.

Obama's Environmental Legacy Based Upon 1970 Law

This article describes how President Obama is using the Clean Air Act, which was passed in 1970, to empower the Environment Protection Agency to reshape the production of electricity.  Rules imposed by the EPA will spell the end of coal as the source of energy.  EPA rules will also require the auto industry to produce more energy efficient cars by 2025.

The Clean Air Act was approved by the Senate without a single dissent from the Republicans.  It was also used by two Republican presidents to limit air pollution.  Unfortunately, the Republican Party has been purchased by the most reactionary sectors of the US economy.  It no longer represents the national interest.  It gets the majority of its funding from the energy sector and it has been working hard to link the use of coal and oil to lower energy prices and job creation.  It has also aligned itself with a variety of media outlets to misinform the public about the risk of global warming and the impact of pollutants on the health of US citizens.

Sunday, November 23, 2014

Travel Time

I will be on the road for a few days.  Will be back on the air after Thanksgiving.  Enjoy your holiday.

In Praise Of Keynes

Bloomberg Business Week provides a clear and cogent description of the macro economy that was invented by Keynes (with some help) to explain the Great Depression and the problem of restoring full employment.  Keynes viewed the economy in terms of the spending by households, business and government.  Recessions occur when one or more of these sectors decide to spend less and increase their savings.  The "Paradox of Thrift" explains why savings, which is necessary in an economy, and is regarded as a virtue when it applies to individuals,  can lower aggregate demand below the level required for full employment.  Ordinarily, the central bank can use monetary policy to restore spending and increase employment.  Conventional monetary, however, loses its effectiveness when interest rates approach zero.  Keynes explained how fiscal policy can prime the pump and create the conditions for aggregate demand to rise to the level required for full employment.  He also argued that governments should run budget surpluses in good times so that they have the means to run budget deficits during deep recessions.

The success of Keynesian theory in explaining the recovery from the Great Depression led to wide acceptance of his theory.  Some economists, particularly those at the University of Chicago, objected to Keynesian theory for a variety of reasons.  They favored a view of the economy that did not require an active role by the government.  They also wanted to explain the macro economy in the terms of the micro theories that they knew and loved.  That is, they hoped to reduce macro economic theory to micro theory as one might reduce chemistry to physics.  Over time, they won the debate within the academy and most of the research in macroeconomics was focused on the development of models based upon the key assumptions embedded in microeconomics.  They won the academic debate, but the models founded on micro economic assumptions have been less than useful in forecasting macroeconomic events like recession and inflation.  Nevertheless, economists schooled int this tradition have powerfully resisted the use of fiscal policy to restore aggregate demand.  They favor supply side theories which argue for structural changes in the economy.  Unfortunately, structural changes take a long time to implement.  Moreover, the intent is to make a nation's economy more competitive so that growth can be restored by increasing exports and running current account surpluses.  Keynes argued that this could not restore global economic growth. It is impossible for every country to run trade surpluses because the sum of surpluses and deficits must be equal to zero.

Saturday, November 22, 2014

GOP Led House Panel Concludes That Government's Response To Benghazi Attack Was Appropriate

After several year of accusations about the flawed government response to the attack on the Benghazi Embassy, the GOP led House committee concluded that the government agencies and the military  responded heroically to the attack.  Apparently, the GOP and Fox News have decided that they milked that "controversy" for all that it was worth.  They may be gearing up for a rationale to impeach President Obama. In any case, Fox News, which breathlessly reported on the government mistakes at Benghazi for several years needs some fresh material.  Anything that the executive branch of the government does when it is headed by the opposition party is potentially grounds for impeachment.  It is not supposed to function without approval from the party that lost the presidential election.

Friday, November 21, 2014

Wall Street Bankers Testify At Senate Hearing On Unfair Commodity Trading

Wall Street investment banks are essentially gamblers.  They place bets on the price changes in a host of commodities, interest rates, and assets such as stocks and bonds.  Every gambler would like to have better information about the direction of prices than other gamblers.  Regulations which used to prevent banks from owning the commodities that they traded were eliminated in the Clinton Administration with strong support from Republicans.  There was no gridlock in Washington on bank deregulation which enabled investment banks to enter into previously forbidden markets.  This Senate hearing was about the potential for insider information that might enable Wall Street banks to influence the price of commodities that are actively traded on the commodity futures market. 

Three of the Wall Street investment banks acquired ownership positions in some commodity markets in which they trade.  One of the banks was fined for manipulating the energy market through its ownership position in that market.  It has exited that market, and along with one of the other banks, plans to exit other ownership positions that it has in commodity markets.  The exception is Goldman Sachs.  In particular, it was questioned extensively about its ownership of an aluminum warehouse that enabled it to influence the supply of aluminum and therefore the price of aluminum.  Large purchasers of aluminum testified that Goldman's ability to influence the supply of aluminum had an effect on the prices that they paid.  Since Goldman could influence the price of aluminum, its traders also might benefit from insider information in the futures market if they knew what its warehouse might be doing.  Goldman executives were insulted by any insinuation that its traders might have information that was unavailable to its counterparties who traded in the futures market.  They argued that there is a Chinese Wall between its traders and the aluminum warehouse which prevents the passage of information between them.  With the exception of a Senator from Ohio, who defended Goldman, a Republican Senator and the Democratic Chairman of the committee, were skeptical.

The theatrics in the Committee hearing were interesting.  The executives from JP Morgan Chase and Morgan Stanley agreed that it was not a good idea for them to own interests in the commodities that they actively traded.  The executives from Goldman Sachs, which has not agreed to exit the commodities business,  were not contrite.  They fired back at members of the committee who attacked their integrity.  In effect, they acted as if they were superior to members of the Senate who were raising questions about the potential for insider trading.  Perhaps that it is the real order in the hierarchy that exists between government and Wall Street bankers.

Wednesday, November 19, 2014

Robert Lucas Fails to Understand Understand the Business Cycle

Robert Lucas developed the rational expectations theory that dominated economic thinking in the US, and apparently in Germany as well.  His views are graphically illustrated by a long term trend line that shows the economy sticks close to the trend line over time.  External shocks to the economy may lead to small blips below the trend line but market forces will return the economy back to the trend line without government interference which only distorts the market.  In fact, the rational agents, that are assumed to exist in his theory will any efforts by government to stimulate the economy.  For example,  if the government runs a budget deficit they will expect that taxes must rise in the future to reduce the deficit.  Therefore, they will reduce their spending and save money to pay for the future taxes that they anticipate. 

The US economy is not operating the way Lucas imagines that it should operate.  It experienced a deep recession and it has not returned to the Lucas trend line.  In fact, most projection of future growth are below the Lucas trend line.  The shock from the Great Recession seems to have had a permanent effect on potential growth in the US.  The power of the Lucas theory, and the models of the economy that have been developed to reflect his views, have a force in economic thinking that is resistant to empirical reality. 

German Ideation About Economics And Recession

Economists in the US have very different views about macroeconomics.  The Chicago School belittles Keynesian ideas that place a decline demand as the cause of recession and the use of fiscal policy to stimulate demand.  This article describes the dominant view of economics in Germany.  It argues that the German view precludes the idea that a decline in demand can be responsible for recession.  Consequently, fiscal stimulus will only make things worse.  Apparently, fiscal stimulus violates an underlying moral impulse in German economic thinking. Bad things happen in the economy because people misbehave.  Economic thought in Germany is like the Chicago School in its worship of market efficiency, and economic models that that have been developed to reflect the efficiency of markets.  Again, consistent with the Chicago School, the economic models which are based upon the efficiency of markets, are not subject to empirical test.  It does not matter that the economy is not behaving as it should behave in accordance with the elegant economic model of the economy that idealizes the real world.  This seriously restrains policy options in the eurozone.

Tuesday, November 18, 2014

Japan Falls Into Recession: What Does This Mean?

One of the differences between economics and most of the physical sciences is that controlled experiments cannot be used to economic theories.  Natural experiments occur, however, that provide some insight into economic theory.  The economic experiment in Japan provides an opportunity to examine economic ideas more closely.  The government has used monetary and fiscal policies to stimulate an ailing economy with limited success. It seemed to work for awhile but the economy contracted by 1.6% in the last quarter. What went wrong?

The government has used an aggressive monetary policy that is similar to that used by the Fed in the US.  It was even more aggressive than US policy given the relative sizes of the two economies.  It was expected that pumping more money into the economy would arrest the price deflation that accompanies deep recessions.  The anticipated increase in price inflation has been less than expected.  This flies in the face of some economic theories which claim that price inflation is a consequence of an excess supply of money.  Inflation would only occur if the money were spent by consumers or by business.  That happened for awhile but consumer spending has unexpectedly declined.

Fiscal policy can be used to stimulate an economy but it is more difficult to use fiscal policy when the ratio between government debt and GDP is very high.  Japan has the highest debt ratio of any advanced economy.  That may have led the government do reduce spending and increase taxes.  Japan tried to increase tax revenue by raising the sales tax.  Consumers responded by reducing their spending and the economy has shrunk.

One interpretation of this experiment is that monetary policy and fiscal policy won't work to restore an economy in recession.  Conservatives, and many business executives,  argue that structural changes in the economy provide the best opportunity for restoring growth.  They generally recommend tax cuts for business and a reduction in government regulations which limit business opportunities.

Another interpretation is that monetary policy, which works well during modest recessions, does not work as well when interest rates have fallen to zero and cannot fall any further.  Deflation makes this worse because it increases the real interest rate which makes borrowing more expensive.  Inflation would lower the real interest rate but Japan and Europe have not been able to bring the inflation rate up to their 2% target.  Fiscal stimulus worked during the Great Depression, but it is politically difficult to use when it increases the government debt to GDP ratio.  Market forces can also limit the use of fiscal policy when investors in government debt demand a high premium to compensate for the risk of default.  Japan has been able to borrow at low interest rates because investors do not expect it to default on its debt.  It shares this advantage with other countries such as the US, England and many countries in the eurozone.  For these countries, the limit on fiscal stimulus is due to political and legal restrictions.  They have not taken advantage of historically low interest rates to invest in their economies.  The focus has been on cuts in government spending which have proven to be contractionary. 

Recession in Japan, along with an increasing risk of recession and deflation in the eurozone have increased concerns about the global economy.  China has been growing at more than 7% but this is much lower than it has grown during its decade of rapid growth.  Slow growth in China has had a profound effect on nations which provide raw materials and intermediate products to China.  The US has had decent growth which has been stimulated to some extent by a rise in military spending which is not resisted by the Republican Party.  This places the US in a familiar position as the "consumer of last resort"

While there has been much concern about the decline in global growth, there has been one bright spot in the economic picture.  Corporate profits in many parts of the world have been very good despite the decline in economic growth.  Stock prices and real estate prices have also increased despite the gloomy economic picture.  Consequently, some people have done well but many have not done as well.  This increases the risk of political uncertainty in many parts of the world.

Monday, November 17, 2014

Mirrow Mirrow On The Wall Which Rich Nation Is The Stingiest Of Them All?

The answer to that question is easy to answer.  America is the most unequal rich nation in the world.  The only income group that did not experience a decline in income between 2000 and 2013 is the top 10%.  The real income of the bottom 90% declined during this period.  The decline was greater for the groups near the bottom of the distribution.  The low income groups were called "moochers" by Mitt Romney during his presidential campaign because they qualify for government programs that supplement their income.  He told a group of wealthy contributors that his political party is their political party and that he would cut their taxes and the government programs which made life a little better for the "moochers".  What he did not tell them was that the federal government collects much less tax revenue than other rich countries, and that it redistributes less money to its less advantaged citizens than any of the countries in OECD.  The distribution of income, including benefits from social programs,  is less equal than the distribution of market income in the US.  It is the least equal among OECD nations in the distribution of total income which includes government subsidies.

It did not help Romney's campaign when his statement was leaked to the public.  Some of the "moochers" may have decided not to vote for him.  He told his wealthy backers what they wanted to hear but his campaign never recovered from the publicity given to his comment which was only intended for his major contributors.  His political party cannot win elections unless it convinces a lot of the "moochers" to vote for its candidates.  Unfortunately, his political party is well funded by its wealthy supporters.  It has been able to convince many of the "moochers" to vote against their economic interest.  Like most people, they hate taxes and they have lost trust in government.  They also don't want their tax dollars to fund programs that help the "wrong kind of people".  They identify more with the rich than they do with the class to which they belong and to which they expect to leave when they get rich. 

The mid-term elections in the US will only increase the level of inequality in America.  The war against the "moochers" will get even worse with Mitt Romney's political party controlling Congress and many of the state houses in our country.  The American Dream was once somewhat connected to reality.  Today it is mostly a dream.  The nation that inspired the rest of the world with the dream of democracy is losing its ability to inspire, and to lead, as the dream of democracy fades during its move into the "New Gilded Age".

Sunday, November 16, 2014

The New Machine Age And The Labor Market In Western Economies

One of the explanations for growing income inequality, and high unemployment, is that the labor market has been altered by the advance in technology.  In this view, technology complements labor and it increases the demand for skilled labor faster than the education system can supply skilled labor.  The shortage of skilled labor leads to a skill premium that increases the wage gap between skilled and unskilled labor.  The solution to this problem is to increase the supply of skilled workers by expanding education.

This article looks at the evidence for the skill premium hypothesis and provides an alternative hypothesis about the new machine age and its impact on wages and employment.  It argues that capital is a substitute for skilled labor, rather than a complement, and that most Western nations do not have a shortage of skilled labor.  Therefore, rising income inequality cannot be explained by a skill premium that results from an imbalance between the demand for skilled labor and the supply.

If there were a shortage of skilled labor in Europe one would expect that wages for skilled labor would be increasing.  In fact, the skill premium has been declining in Europe.  This suggests that the supply of skilled labor is growing faster than the demand for skilled labor. Moreover, with the exception of Germany, the education system has been increasing the supply of skilled labor.  The unemployment rate for skilled labor in the UK has doubled between 2000 and 2012 and it has tripled in Spain and Italy.  The unemployment rate for skilled labor in Germany has not increased because its education system has not expanded its output of skilled labor.

Prior to the 1980's the labor share of global income was fairly constant at 70%, and 30% of global income went to capital.  The share of income going to labor has been falling since the 1980"s.  Labor's share of income has dropped to 58%.  That is hard to explain by asserting a shortage of skilled labor.  One study shows that half of the decline in labor's share of income due to the substitution of capital for skilled labor.  We may have an over supply of highly educated workers.  This explanation is supported by the rising numbers of recent college graduates who are unemployed or under employed.  Many college graduates are now taking jobs that were previously filled by less educated workers.  In the US, there was a skill premium during a period of slower growth in skill development by the education system.  The skill premium in the US has been flat since 1999 as the education system increased the number of college graduates.

It would appear that the "New Machine Age" has affected the labor market in a serious manner. However,  the solution to the problems associated with the advance of technology does not suggest that they can be resolved by producing a larger number of college graduates.  Access to higher education is more of an equal opportunity problem than anything else.  College graduates do have better employment opportunities than non-graduates;  the rising costs of higher education in the US, along with a decrease in state funding for higher education, has exacerbated the equal opportunity problem in the US.  It has also increased the debt burden on middle class families whose wages have not kept pace with the increase in the net cost of higher education. 

Unfortunately, the skill premium explanation for rising income inequality is more consistent with neo-liberal economic theory which assumes that we have a meritocracy.  The market is rewarding merit and it would distort the market if we tried to change it.  The solution is to produce more merit.  It is more convenient to shift the debate to problems in the merit production system than it is to examine structural and institutional changes that are reducing labor's share of global income.

Saturday, November 15, 2014

Changes In Political Campaign Spending And American Democracy

This Washington Post article provides some interesting data on campaign spending in the last election cycle.  The editorial raises some important issues about the transformation that is taking place in our electoral system.  The spending on 33 Senate races in 2012 was $259 million.  Spending on 33 Senate races in 2014 increased by 32% to $342 million.  The rapid growth in campaign spending increases the influence of outside groups that are providing an increasing share of the spending.

Another of the issues is that outside spending exceeded the campaign spending by the political parties in 25% of the Senate races.  Moreover, "dark spending" by outside groups, which do not have to disclose their donors, provided 71% of the non-campaign spending for the 10 winners of the 11 competitive Senate races.  The 11th race in Louisiana has not been decided.

One of the arguments for the Supreme Court decision that led to the increase in outside spending claimed that it would better inform the public.  More people would be allowed to exercise their right to free speech, by voting with their advertising dollars, and the public would consider the sources of the information provided in the ads.   The rise in "dark money" funding negates that argument.  Transparency has been lost in the funding of political campaigns.

Welcome To Age Of Failure

Adam Davidson likes to come up with "big ideas".  He argues that we are just moving into the age of computers and an increase in the rate of innovation.  An increase in the rate of innovation provides the seeds for an increase in the rate of failure.  He contrasts the era into which we are moving with the era of the corporation which provided more stability.  The goal of the corporation was to get as much revenue and profit out of existing products which would be gradually updated over time.  The stock market also spread the risk of failure among large numbers of investors.  Secure corporations were also able to provide secure jobs.  According to Davidson the era of the secure corporation is giving way to an era of innovation and failure.  Everyone will have to be more innovative and society will have to find ways to reduce the risk of failure.

US Tax Policy And Inequality 1979-2011

The impartial Congressional Budget Office released a report on income inequality and tax policy over a 33 year period.  Tim Taylor does an excellent job of describing the results.  He includes a few graphs, which can be enlarged to view more clearly, that illustrate the changes over 33 years.

His first point provides a dramatic illustration of the importance of understanding the difference between using an average or the median to describe the central tendency in the data.  The average income in the US is $80,600.  That looks great compared to any other nation.  On the other hand, the median income is only $49, 800.  That is because the very high incomes at the top of the distribution have a powerful effect on the average.  For example, if Bill Gates walked into a room, the average income in that room would skyrocket.  The median is a much better measure of the central tendency when the data are dramatically skewed in any direction.  The most frequently used measure  used to compare the well being of nations is per capita income.  That is an average, and it is much better to use median income per capita to get a more accurate measure of central tendency.  Moreover, the difference between the average and the median increases as the data are skewed in any direction.  It is a good way to determine distributional changes over time.

We frequently break distributions down into five quintiles, each of which contains 20% of the distribution.  The bottom four quintiles realized a gain of 16% in income over the 33 year period.  The top quintile had 56% increase in its income.  Taylor is not terribly concerned with that difference because some of it can be explained as a return on skill.  When we look only a the top 1%, however, it is hard to explain the pattern as a return on skill.  The income pattern for the top 1% rises and falls with stock prices.  Obviously, it is not explained by rises and falls in the skill of the top 1%.  Conservative economists, like Greg Mankiw at Harvard, claim that the income gains made by the top 1% are the result of a rising premium that the market places on skill.  Therefore, it would be a mistake to make an effort to alter the natural force of the labor market.  Mankiw is a very smart economist but he would have a very difficult time explaining the pattern that the CBO data describe so well.  The top 1% receives much of its income from stock ownership and that market is much more volatile than the premium that the labor market places on skill.

Tax policy is used by most nations to moderate the unequal distribution of market income.  The US has a moderately progressive federal tax system much like that of other nations.  Over 33 years changes in tax policy have reduced the overall federal tax rate for the top 1% from 33% to 29%.  That group has seen its income rise much more than other groups and its average tax rate has been reduced by 4%.  Each of the other income groups, which have progressively higher tax rates has seen their average tax rate decline by only 1%.  It is pretty clear that the top 1% have had more influence on the federal tax rate than other income groups.  Moreover, cutting taxes for the top 1% has not had much of an effect on the incomes of the remaining income groups.  In fact, cutting the tax rate for the top  may have been a factor in causing the income share of the top 1% to accelerate much faster than all of the groups below the top 1%.  Much of its growth in income has come from gains in capital income which is taxed at lower levels than wage income.  The data illustrate that changes in market income are driving the growth in income inequality.  Tax policy has had only a modest effect on reducing the distribution of after tax income.  Moreover, federal tax income has declined for all income groups over the 33 year period.  That has had a powerful effect on the ability of government to provide public services without borrowing money.  Politicians love to cut taxes and its easier to maintain federal spending by selling US treasuries than by collecting the needed income via taxes.

There are a variety of government programs which redistribute tax income to lower income groups.  All income groups receive some income from government programs.  For example, Medicare provides healthcare benefits to all senior citizens independent of their income.  On of the odd results that we observe is that US citizens in the bottom 20% receive the lowest share of federal income redistribution.  Moreover, total amount of income redistributed by federal programs has been declining.  That is why those with low incomes in most other rich countries are much better off that low income citizens in the US.  They redistribute more income to their citizens than the richest country in the world. 

Friday, November 14, 2014

Paul Krugman Explains Why The Climate Agreement With China Is Really Important

The carbon emission agreement between the US and China is not perfect but it removes an objection that is used by Republicans to defend their friends in the energy industry.  Krugman recites the line of arguments used by the political party, that might be better known as the "Screw the Planet Party".  It is clearly not a conservative party because it does not want to preserve the planet for future generations.  It is more concerned about winning elections and preserving the campaign contributions that it receives from businesses that place the value of the energy reserves on their balance sheets above anything else.  The 2016 elections will be a battle over the future of our planet.

We are more than familiar with the arguments that have put into the mouths of Republican leaders by  the reactionary industries that support them.  Krugman restates the obvious objections to their claims. However, the agreement with China shows that its leaders have a real concern about the damages that are being done to their environment today.  The Republicans can no longer claim that a global policy on carbon emissions is not possible because China will not comply with any agreement.  Krugman also shows how tariffs can be use enforce global agreements.   

Wednesday, November 12, 2014

US And China Reach Agreement On Carbon Emission Targets

President Obama left his meeting with Chinese leaders with an agreement that both nations will put plans in place to reduce carbon emissions.  China is the largest emitter of carbon and the US is the second largest carbon emitter.  This article describes the agreement as well as reactions to the agreement.  China is motivated to reduce its reliance on coal because it is causing serious air pollution problems today.  It will not be easy for China to shift its rapidly growing economy to cleaner sources of energy.  The US has a different problem.  The Republican Congress will fight every effort that the administration makes to alter its energy sources.

The Demise Of The White Democratic Voter

72% of white voters without a college degree voted for the Republican Party in the mid-term elections.  Those voters used to vote for democrats.  This article describes the GOP plan to increase its share of votes from this group.  The Republican senate candidate won that election by winning more than 80% of the votes from white evangelicals.  That was enough to overcome the wide margin that the democratic incumbent had among the rest of the electorate.  In Maryland it was a different story.  This time it was tax policy.  Maryland, which is traditionally a blue state, elected a Republican Governor.  He told voters that he would not raise their taxes in order to increase spending on social programs. 

Voter turnout for the mid-term elections was at its lowest level since 1942.  Typically low turnouts provide an advantage to the political party that has the most motivated voters.  The most highly motivated voters in mid-term elections have been voting Republican in the most recent mid-term elections.

Tuesday, November 11, 2014

The GOP Controll Congress And Its Time To Pay Back Their Energy Industry Funding Machine

The GOP controlled Congress is quickly moving to reward its energy industry sponsors.  They have two immediate plans to do so.  The House, which has control over the budget, will move to reduce funding for the Environmental Protection Agency which is using its regulatory authority to reduce carbon emissions.  The head of the House Committee that overseas energy policy is a climate change skeptic who has published a book that is popular in the GOP base, which includes many who also do not believe in the theory of evolution.  The GOP will also push forward proposals to approve the Keystone Pipeline which will move dirty oil from Canada and northern states to New Orleans.

The Great Wage Slowdown For Which Neither Party Has A Plan

The average middle class worker earns less today than when Obama took office.  That is one of the reasons why the Democratic Party was clobbered in the mid-term elections.  Neither party has offered a plan to rectify the situation, but that did not matter to Republicans.  They ran against a president that they have successfully discredited.  Nothing inspires their base more than hatred for the other team.  The Democratic Party has not inspired its traditional base, and it doesn't have George Bush to run against.  Both party's talk about reforming education, which seldom works,  and other solutions which may be useful in the long run, but the public is not interested in the long term.  Some states and localities increased the minimum wage enough to make a difference, but democratic candidates did not capitalize on republican opposition to an increase in the minimum wage.

The Republican Party has traditionally positioned itself as the tax cutting party.  In fact, they have made major changes to the tax code.  Their tax cutting strategy is very simple.  The made major cuts in taxes that benefit business and the super rich, and they threw a few bones to the middle class in the process.  President Obama made some progress in reducing the tax breaks for the super rich, while retaining the middle class tax cuts, but the public still believes that the tax code favors the super rich.  Tax cuts for the middle class,  partially paid for by higher taxes on the super rich, offer a short term solution for middle class households whose wages have not grown.  That would be a winning political strategy for Democrats but it would make it more difficult for the party to raise money for its political campaigns.  The super rich donate to both political parties.  There are a few enlightened billionaires, who believe that they should pay higher taxes, but they are few in number.

Monday, November 10, 2014

Was The Democratic Campaign Against The Koch Influence Effective?

The Democratic Party spent a lot of campaign money on ads attacking the billionaires in the Koch family who spent millions supporting Republican candidates.  This article evaluates the effectiveness of that strategy.  Some say that it did not work, and others say that it was not used enough.  In some states it worked where the Koch money was portrayed as "out of state influence" instead of largess from billionaires.  That worked in New Hampshire where the Republican candidate for the Senate, who migrated from Massachusetts to New Hampshire to run for the Senate,  was described as an out of state candidate.  It was not universally effective because the Democratic candidates were also supported by very wealthy individuals.  The public believes that both parties are influenced by the super rich.  If you raise this issue with conservatives they will quickly refer to George Soros and his billions as the Democratic counter example.  Neither party can raise the funds that are required in political campaigns, which increase every year, without support from wealthy individuals.  The constantly rising cost of running political campaigns prices ordinary people out of the market.  The pricing system, after all, is a rationing system.  Most people can't afford a Mercedes and they can't afford to fund political campaigns that become more costly every year.  The only real solution is for government to limit campaign spending.  The GOP would not support the required legislation, and the conservatives in the Supreme Court declared that the intent of our founding fathers, who had the difficult task of inventing a democracy, believed that political advertising is a form of free speech that is granted in the Bill Of Rights.

Why Does The Supreme Court Believe That The ACA Might Have Restricted Subsidies To State Run Exchanges?

The Affordable Care Act requires every citizen to purchase health insurance.  They can purchase the insurance through state run exchanges or from federal exchanges.  Since some Americans cannot afford insurance, the government provides subsidies based upon their income.  It is fairly obvious that the ACA was not designed to restrict subsidies to state run exchanges and to deny them to citizens that use the federal exchange.  The US Supreme Court believes otherwise.  It has agreed to hear a case in which the claimants argue that citizens who use the federal exchange are not entitled to subsidies.  If the Supreme Court decides for the claimants, the Republican Party would have achieved what it was unable to achieve through legislation.  They will have effectively repealed the ACA.  Subsidies would only be available through state exchanges and GOP controlled states have not developed exchanges for their citizens.  Citizens from GOP controlled states who are entitled to subsidies would no longer be able to purchase affordable healthcare insurance.

The Republican majority in the Supreme Court has decided to hear the case because Republican justices in state courts have ruled that the intent of the law was to restrict subsidies to state run exchanges.  That interpretation would require the court to argue that the law, which only works with subsidies for those with low incomes,  was not intended for all Americans.  Such an interpretation is only possible in court system that has been politically corrupted.

How Can The Democratic Party Reverse The GOP Takeover Of Government

The NYT described the extent of the GOP landslide in the mid-term elections, and gave several democrats an opportunity to articulate a solution.  This article focuses on the economic message that the Democratic Party has failed to deliver.  Simply put, the real issue is not the size of government, that the GOP has used successfully,  it is who government works for.  The majority of Americans do not believe that the government works for them.  The Democratic Party has not convinced them that it works better for them than the Republican Party.  Each of the political parties claims that it represents the American ideal, and the American dream, but the public does not believe either of them.  If the government does not work for them, why they should they support a big government?  This article suggests some of the populist messages that the Democratic Party might back up with real policy proposals.  The public also questions the competence of government.  The public believes that the Republican Party is the party of big business but it is also more competent when it comes to getting things done.  George Bush and Ronald Reagan certainly delivered on their policy proposals which were terrible for the majority of Americans but they got it done.  The Obama Administration delivered on healthcare reform but the let the GOP turn it into a problem instead of solution.

Sunday, November 9, 2014

The Marketplace And Democracy In America

This article describes how the mid-term elections were funded.  Some of the funds were "dark money".  The names of the contributors are not made public.  The other major source of funds is from political action committees.  Both of the political parties received funds from these types of organizations but much more of the funding went to Republican candidates. All of the funds came from very rich individuals and business interests.  In other words, the marketing campaigns for the human products up for sale were designed and paid for by those who can afford to buy political favors.  The US Supreme Court has defended this marketplace by declaring that laws that had prevented the market from operating violated the US Constitution.  Political advertising is a form of free speech according to the Supreme Court.  The consequence is that the wealthy contributors to these organizations have the exorbitant privilege of deciding which politicians are able to run for election. No candidate can run a campaign without their financial support.  They are a barrier to market entry and the size of the barrier increases in relation to the level of spending on political campaigns which has been growing at a rapid pace. Consequently, the candidates who enter the market are free to support the interests of those who enabled them to run for election. There are differences between the candidates who enter the market which reflect the special interests of their major contributors.  There are also many similarities which reflect the common interests of the special interest groups.  Much of the marketing that follows in the election campaigns then takes the form of attack ads on the opposing candidate.  The research that is required to shape the attack ads is also funded by those whose "free speech" has been enhanced by their ability to pay.  The public often gets to select the candidate who they dislike the least.  The differences between the political parties have changed over time but they reflect the changes in campaign funding.  The Democratic Party used to be strong supporters of organized labor.  That support has weakened along with the decline in labor union membership in the US.  The Republican Party has also responded to changes in its political base.  Much of its funding still comes from business interests but they can't win elections without the support of right wing populist groups like the Tea Party.  It has not been easy for the GOP to align those interest groups. 

This is a rather cynical description of politics in America.  Winston Churchill told us that it is not a perfect system but it is better than the alternatives.  My point is that it has become less perfect in America as it has taken on more of the characteristics of an oligopolistic market system. 

Saturday, November 8, 2014

Elizabeth Warren's Agenda Has Not Been On The Agenda Of Either Political Party

Senator Warren has been a lonely voice in the Democratic Party.  She describes the issues which she believes to be the real issues that the public would like Washington to address.  They used to be part of the Democratic Party's platform.  Its not clear that the Democratic Party could be successful with an old fashioned populist agenda today but it may be worth a try.  The GOP has a tried and true agenda of cutting taxes and reducing budget deficits by cuts in government spending on programs that benefit less fortunate Americans, especially if they are the wrong kind of people.  The Democratic candidates in the mid-term elections had little to say about the issues that bother Senator Warren and many Americans.  Its hard to raise campaign contributions with that message and the media don't want to touch it either.  Their business is dependent upon advertising revenues which come from the same folks who fund the election campaigns.  That may explain why the public, which bitterly opposed the Wall Street bailout, voted for the political party that opposes the laws that were passed to reduce the systemic risk that still prevails on Wall Street.  The GOP has successfully made its opposition to Wall Street reform part of its anti-government agenda. Frankly, its not easy to be pro-government when public respect for government has fallen to new lows.  If there were more Elizabeth Warrens in the Democratic Party there might be some hope for a party without an economic message.

Which Republican Party Won The Election

The GOP increased its control of the House and gained control of the Senate.  The real battle in Washington may be between establishment republicans, who are motivated to show the nation that they can govern, and an even more radical House that is focused on wiping out what remains of the Obama legacy.  They were sent to Washington by a Tea Party which has a better understanding of what it dislikes than a desire to make Washington work.  This article provides a glimpse into the battles that we can anticipate in Washington within the GOP and between the GOP and the Obama Administration.

Friday, November 7, 2014

Latest Employment Report By BLS Is Positive

Calculated risk provides the details on the latest report from the BLS.  It shows a steady growth in jobs and slight decline in the unemployment rate.  The labor market participation rate is up to 59.7% which is its highest level since July, 2009.  The only negative in the report is that wage growth has been slow.  Employers have not been forced to raise wages in order to attract new workers.  More detail on low wage growth is provided in one of my posts below.  Job growth has been more rapid in low wage service sector jobs than in higher wage sectors.

Inside The Justice Department Settlement With JP Morgan Chase

This article (via Manan Shukla) provides another look at the $13 billion settlement between JP Morgan and the Justice Department over securities fraud that was turned into a civil suit.  The US Attorney General declared victory by announcing the largest CIVIL lawsuit settlement in history.  In a speech at NYU Holder claimed that it was almost impossible to hold individuals responsible for criminal crimes in large corporations because the bad behavior is highly dispersed across the corporation.  In other words, the corporate culture, and not any individual or group of individuals can be held responsible.  We also learn the $4 billion of the settlement is not paid by JP Morgan; it is paid for by the holders of the mortgage securities who were forced to provide better terms to homeowners  in default or at risk of default on their mortgages.  JP Morgan is also able to reduce its taxable income by $7 billion when it takes a write off on the settlement.  It is just another cost of business.

Most of the details in this article were provided by a former JP Morgan attorney who was an eye witness to the packaging of mortgages that did not meet JP Morgan's underwriting standards into securities that were sold to investors.  Her warnings about legal problems that might result were ignored by JP Morgan executives in charge of compliance.  JP Morgan did not want to get stuck with the bad mortgages that they had purchased.  This was an act of fraud, and JP Morgan settled out of court with investors who bought those securities when they requested testimony from the attorney who had warned about the bad mortgages.  JP Morgan and many other banks and loan originators were actively involved in criminal activity and the Justice Department used the threat of disclosure by the JP Morgan attorney to get Jamie Dimon to increase his offer of settlement from $3 billion to $9 billion.

George Bush's Ownership Society Cult Back In Control Of Government

George Bush promised Americans that he would create an ownership society.  It would be a society in which more Americans owned assets and would have a greater stake in the society.  This article looks at the policy changes that Bush implemented and their impact on the ownership society that he promised.

The major changes made by the Bush Administration were in tax policy:

* Taxes on dividend income were reduced by as much as 57%
* The tax on capital gains was reduced from 20% to 15%
* The estate tax was effectively eliminated for couples with estates below $10 million
*  Stocks passed on to the heirs at their current value;  no tax collected on the increase in value.

Bush argued that these policies would encourage more Americans to own stocks in his Ownership Society:

* In 2000 one in eight Americans owned stock.  By 2012 only one in fifteen Americans owned stock.
* Only one income group reported an increase in capital gains on stock between 2000 and 2012.  It was
   the 2.1 million group of taxpayers that reported negative income from other sources.
* In 2000 50% of capital gain income went to the top one tenth of 1%.  In 2012 62% of capital gain
   income went to that small group.
* In 2000 18% of dividend income went to the top one tenth of 1%.  By 2012, that group's share of
   dividend income rose to 38%.  Their income from dividends increased from an average of $246K
   to $1,169,660.

Bush's "Ownership Society" clearly benefited a small sliver of society; it failed to spread the ownership of stock to a broader segment of society.  His policies had the opposite effect.  They concentrated the ownership of stock held by those with incomes above $2,000,000.  Moreover, they  were able to pass the appreciation of those assets on to heirs with no tax on the appreciation.

Bush also encouraged Congress to allow individuals to obtain a mortgage on a home with no down payment.  We saw what happened when those mortgages were packaged into securities and sold to investors.  Instead of increasing home ownership, the percent of Americans owning homes in 2013 fell to its lowest level since 1995.

The Mid-Term elections have returned political power to the political party that promised to create an "Ownership Society" but implemented policies which had the opposite effect.  The public has little respect for either political party, but they typically throw out the incumbent party when it they are unhappy with government.   The Obama Administration was dealt a bad hand when it inherited the Great Recession, but it failed to gain the confidence of the public.  The electorate turned against the party in power and put the advocates for Bush's "Ownership Society" in control of the government.  It will advocate the same policies that concentrated income and asset ownership under Bush and which were not substantially reversed by the Obama Administration.

Job And Wage Growth Study By Cleveland Federal Reserve Bank

This study by the Cleveland Federal Reserve Bank examines job and wage growth in the US before and after the the onset of the Great Recession.  The transition from a manufacturing economy which accounted for 37% of the jobs at the end of WW ll, to a services economy in which only 10% of the jobs are in manufacturing, has affected wage growth.  Prior to the recession wage growth was similar across the job sectors.  Following the recession, the fastest growth of jobs has been in the services sector.  Wage growth in the services sector has fallen below its average prior to the recession, and it is well below the rate of wage growth in the slower growing sectors of the economy.

It may seem counter intuitive that the fastest growing sector of the economy has experienced the slowest growth in wages.  That is explained by the high level of skill diversity in the services sector.  Much of the job growth has been in low skill services which pay low wages.  It would appear that structural changes in sector growth in the US economy may account for the low rate of wage growth following the Great Recession.  In addition to slow growth in higher wage manufacturing jobs, there has been slow growth in government and other service sectors which pay higher wages.

Thursday, November 6, 2014

Teaching Economics To Business Students And To Citizens

Noah Smith majored in physics in college and he ended up getting a PhD in economics.  He now teaches economics and finance to business students.  He often writes about economics from the perspective of the philosophy of science.  The social sciences are often guilty of copying the surface characteristics of the physical sciences to distinguish their disciplines from the liberal arts.  The economics profession, which deals primarily with things that can be quantified, considers itself to be the queen of the social sciences because of the progress that it has made in applying mathematics to its discipline.  In this article, Smith reflects on the problems of teaching economics to business students.  I can sympathize with Smith's problem because I have faced similar problems in my career.

Smith teaches game theory to his students but he believes that may not be useful.  Nash won a Nobel prize in  economics for applying game theory to a practical problem but it assumes that the participants in the game are rational.  In that respect, it adheres to the major assumption in the discipline.  That is, it assumes that the players in the game are rational, and that they will figure out to make rational decisions that maximize their outcomes.  Smith points out that business people may not always act rationally.  They may prefer to destroy their competitor even if they might suffer a loss in the process.  There is not always a victor in warfare.

Smith raises an interesting point but it goes well beyond the problem of teaching game theory.  Many of the important decisions made in a business are significantly affected by emotion and uncertainty about the future.  I recall a discussion that I had with the manager of the computer chip division in the firm in which I worked.  He compared his business opportunity to the calculator business developed by Texas Instruments which had become a mature business with a modest volume.  He was a very smart and sophisticated manager, but he could not imagine that his business could evolve to the point in which a company like Apple could sell 35,000,000 smart phones in the first week after releasing the latest version of its product.

The CEO and founder of the firm suffered from a similar lack of vision.  IBM was by far the largest firm in the computer business.  His firm had risen very quickly to the number two position in the industry.  He did not like being in second place.  He wanted to become number one.  Therefore, he invested over one billion dollars in developing a mainframe computer that would be less expensive than IBM's mainframe which provided the majority of IBM's revenue and profits.  His engineering staff did not support that strategy.  They understood that the business would move in the opposite direction.  That is, in the direction of very small computing devices.  They were unable to alter the CEO's opinion and we all know how the industry has evolved.

My approach to teaching economics was influenced by my experience in business.  Every firm participates in an economy that moves through business cycles.  It is important to understand  the business cycle and adapt one's business to an environment that often contains bad weather.  Economists are not as good as weather forecasters in predicting the future, but it is important for a business leader to understand the economic and political climate in which they operate.  Moreover, few of my students will become top executives, but they will all be citizens who need to have a good understanding of political economy.  They need to understand the strengths and weaknesses of economic ideologies which have powerful social effects that are often unrelated to their validity.

The financial crisis provided a perfect opportunity for teaching economics in an MBA program because the students were motivated to learn more about it.  It was a once in career teaching opportunity to make the teaching of economics relevant.  They learned about the failures of  government regulators, whose inaction allowed predatory mortgages to be originated and packaged into securities that were blessed by the rating agencies and sold to poorly informed investors.  Economic ideology, and a poor understanding of the incentive system that motivated the financial industry to make self destructive decisions, was responsible for much of the damage.  The students also learned how the Federal Reserve and Treasury struggled to rescue the badly damaged financial system that would not have survived without government support.  What they did was not perfect but it prevented a second version of the Great Depression.  The students also learned about the development of the shadow banking system that had evolved over time to be as large as the banking system that is described in economic textbooks, but not subject to the safe guards that prevent runs on the banking system.  In passing, they also learned that the financial system was regarded as external to the functioning of the economy and was not significantly represented in the economic models used by central banks to manage the economy.

The collapse of financial system led to a recession that was comparable to the Great Depression.  The recovery has been slow and incomplete.  It provided an excellent opportunity to explore monetary and fiscal policy.  One of the most valuable lessons provided by the Great Recession was the similarity of the political and economic debates to the debates during the Great Depression.  These debates exposed some of the ideology that influences how the economics profession looks at the use of monetary and fiscal policy.  It is not a pretty picture but economics, in practice, cannot be understood in the absence of politics and ideology.  The economy does not operate in a test tube.

I only added my personal experiences to Smith's comments on teaching economics to business students to amplify his concerns about relevance.  Almost none of the information and concepts that were useful in teaching students about the financial crisis, the Great Recession that followed, and our response to the crisis, are covered in the textbooks that are used to teach economics to the great majority of students who only take economics 101.  Textbooks in economics follow the 80/20 rule.  None will be adopted that are more than 20% different from the standard texts which were used prior to the financial crisis and the Great Recession.  The most popular textbook was written by Greg Mankiw who is the head of the Economics Department at Harvard.  The book is very well written but it is very orthodox much like its author.  Mankiw adapts his economics very well to the prevailing winds of the political economy.  One of his books  was very critical of the idea that tax cuts would stimulate enough economic growth to actually increase tax revenue.  The senior George Bush called this voodoo economics when he ran against Ronald Reagan who made this claim during his campaign.  Mankiw removed his criticism of voodoo economics from his textbook following Reagan's election.  Mankiw was also an economics adviser to the junior Bush after he was elected president.  The economy was in a minor recession following the bursting to the dotcom bubble and Mankiw argued that it was necessary to use fiscal policy to stimulate the economy.  He supported the Bush tax cuts, and the deficits that would follow, as an essential tool to stimulate the economy.  Like many conservative economists he was not a supporter of Obama's use of fiscal policy to stimulate an economy in a very deep recession.  Conservative economists, who typically dislike government intervention in the economy,  joined a chorus which regarded deficit reduction as a more important concern than reducing unemployment.  Some economists even argued that deficit reduction would stimulate economic growth.

The great bulk of the research that gets done in the academy satisfies most of the methodological requirements that prevail at any given point in the profession.  Like most academic research in every profession, it is primarily of interest to other researchers.  There is little that is more boring than attendance at an academic conference in which graduate students and young professionals present the results of their research.  That is not unique to the economics profession.  Methodological rigor is valued even when most of the research lacks relevance outside of the academy.  On the other hand, we live a world in which a good understanding of the strengths and weaknesses of economic ideas are very important.  Smith is raising good questions about the relevance of economic ideas that predominate in introductory economics courses.  We live in a political economy that is not well represented in the textbooks.

Siemens' Sale Of Its Audiology Business Provides a Glimpse Into New World Order

Siemens, the large German technology firm, sold Audiology Solutions, based in Singapore, to a business group that was formed for that purpose.  Audiology Solutions was a small business within Siemens but the sale illustrates the internationalization of the business world.  Siemens will retain a 200  million euro interest in the new firm and a seat on its board.

Audiology Solutions, which produces hearing aids, was sold to EQT which is a European private equity firm, and Santo Holding which is an investment vehicle for the Strungmann family.  EQT was advised by Bain & Company which is a US based private equity firm.  It received legal advise from an international law firm.  Santo Holding received legal advise from an international law firm.  The financing for the deal was provided by Deutsche Bank, Goldman Sachs and UBS.

Siemens is a very large multinational corporation with worldwide subsidiaries.  Audiology Solutions was only a small piece of a very large international firm.  The interesting part of the deal is how the business services industry has internationalized.  Bain & Company is a private equity firm that was started by Mitt Romney in the US.  The law firms that were used to put the deal together specialize in cross border legal issues.  The large German, US and Swiss banks that provided the financing for the deal are experienced partners on such deals.  The only part of the deal that was not mentioned in this article was the international accounting partnership that would have participated in the deal.  The business services industry has adapted much faster to the new world order than the governments of the nation states which have not been as deeply involved in structuring the global economy. 

Wednesday, November 5, 2014

Republicans Take Over US Senate

The GOP won the election by campaigning against President Obama.  In all of the Senate races the GOP campaigns focused on linking the Democratic candidate to President Obama.  The GOP covered all of the bases in their campaign against the president.  Laughably, they referred to him a tyrant and dictator,  while the also claimed that he was a weak president.  Apparently, the public prefers a weak president on domestic policy, but a strong president on foreign policy.  The president's signature domestic policy victory was the Affordable Healthcare Act.  The GOP, with the help of the media, turned his victory into a defeat.  The administration's disastrous roll out of the act gave the GOP an opportunity to develop another line of attack against Obama and the administration.  He was transformed into an incompetent tyrant who also happened to be weak.  The public generally has a negative attitude about the competence of the government.  The Obama administration provided a lot of ammunition that was used to feed the incompetence theme.

President Obama won two presidential elections by successfully energizing the democratic base and getting out the vote.  The GOP's attack on the president succeeded in getting its supporters to the polls.  Democratic candidates, who ran away from the president in their campaigns, were left with little to stir up their base.  Many tried to link the GOP candidate to the Tea Party but that was not available to candidates in red states where the Tea Party and anti-immigrant sentiment are powerful.

The Republican Party won the election but we have many important issues that will require positive leadership.  The GOP offered no new ideas during the midterm elections.   The issues that they did raise are the same old issues that lost them two presidential elections.  Most of them are 200 years old and have little to do with the problems that we face.  They are a part of the problem rather than a solution.

Sao Paulo Will Run Out Of Water This Month Unless It Rains

Sao Paulo, Brazil is one of the largest cities in the world with 20,000,000 inhabitants.  Brazil just elected a president but the deforestation of the Amazon rain forest which is responsible, along with a drought, for drying up the city's reservoirs,  was not a campaign issue.  Tom Friedman wonders if we will ever get our politicians to deal with serious issues.  I'm sure that the the performance of Brazil's soccer team in the World Cup was a national disaster that received a lot of attention, but running out of water in Sao Paulo is second order event in the eyes of the public and the politicians.

By the way, although the bulk of this article was about Sao Paulo, the title of the article signaled Friedman's new theme.  He is now concerned about our "fast world" which is defined by three major laws which will bring huge changes in how we live.  They are not on the radar of our political system.

Tuesday, November 4, 2014

The World Is Not Flat And It Is Not Getting Flatter

Tom Friedman made a fortune by telling us a story about globalization and the process of economic integration between nations.  He made up the story by traveling around the globe and giving us his version of "Travels with Tom".   DHL, which is the global leader in logistics, commissioned a study of globalization by an expert in the field.  He did not take Tom Friedman's approach to the topic, he looked at the data and came to a different conclusion.  Globalization has recovered from the drop in trade after the crisis in the financial system.  That is, the level of trade has recovered while the depth and breadth of trade has declined and become more regional.  Trade between developed nations and emerging markets has continued as global supply chains have grown.  On the other hand,  trade between emerging market nations is becoming more regionalized.  Trade between Northern nations has been flat, and so has trade between the North and the South.  The growth in trade has been between Southern nations.

I was surprised by the data on communication flows.  Most of the Internet traffic never crosses national borders and telephone traffic is driven by immigration flows.  For example, telephone traffic between Mexico and India with the US is driven by immigration between those nations and the US.

How Has The Transition to Capitalism And Democracy Worked Since The Fall Of The Berlin Wall?

There was a strong expectation that Eastern Europe would prosper and that democracy would flourish after the fall of the Berlin wall and the transition to democratic capitalism took root.  This article by and Eastern European economist, who worked for the World Bank, is his report card on the transition.  The article contains detail on each of the countries that underwent the transition.  I have copied his summation below:

"So, what is the balance-sheet of transition? Only three or at most five or six countries could be said to be on the road to becoming a part of the rich and (relatively) stable capitalist world. Many are falling behind, and some are so far  behind that they cannot aspire to go back to the point where they were when the Wall fell for several decades. Despite philosophers of “universal harmonies” such as Francis Fukuyama, Timothy  Garton  Ash, Vaclav Havel, Bernard Henry Lévy, and scores of international  “economic advisors” to Boris Yeltsin,  who all phantasized about democracy and prosperity, neither really arrived for most people in eastern Europe and the former Soviet Union. The Wall fell only for some." 

The report card contains information about economic convergence between Eastern Europe and the richer nations in OECD.  It provides a grade for each country:  There are a handful of nations that have converged, but most of the countries have yet to reach the income level that they had prior to the fall of the Berlin Wall.  There has been little growth in income equality in most nations.  The transition to democracy has not been smooth in most countries.  With exception of Putin in Russia, most of the national leaders are not recognized inside or outside of Eastern Europe.  Sadly, with only a handful of exceptions,  the intellectual contributions of Eastern Europe to science, mathematics, art, music and literature have been insignificant.  One can only look back to the rich intellectual contributions from this part of the world as a memory.

Monday, November 3, 2014

Life After Wall Street For Donald Dell And Dell Computer

This article provides Donald Dell's story about why he went public and why he turned Dell into a private company in which he has a majority interest.  He went public for a good reason.  It was a convenient way to raise the money that he needed to grow the business.  That's what the stock market was designed to accomplish.  Businesses have other ways to raise money after they have matured but most remain publically held companies.  Dell did not like being forced to deal with Wall Street's expectations every quarter and especially disliked corporate raiders who tried to force him to do what they wanted.  Dell believes that he now has the freedom to take Dell to the next level because he will not have to focus his attention on earnings per share every quarter.  Its not clear that his strategy will be successful but it raises a question about the value of being a public company when a firm no longer needs to sell stock in order fund investments. 

Donald Dell is not the typical CEO since he founded the company and is its largest shareholder.  Most CEO's probably prefer remaining public since they increase their wealth by being compensated in stock options and they can implement strategies that are intended to increase the value of their stock options during their tenure which averages around 7 years.

The US Trade Imbalance And The US Labor Market

Dean Baker is pleased to see that economists like Larry Summers have made a good case for the proposition that the US economy is suffering from a lack of demand.  He takes it a step further and reminds us of the accounting identity which tells us that US trade deficits are responsible for a significant decline in US output.  His solution to this problem is to let the currency exchange market work as it is supposed to work.  That is, demand for the dollar would fall and the dollar would decline in value.  That would make US exports less expensive and it would make imports more expensive.  The trade deficit would decline and we would have a full employment level of output.

Dean shows that the US trade deficit declined as a result of the Plaza Accord which reduced the value of the dollar versus that of its trading partners.  He assumes that it would work again if we found ways to enable the currency exchange market to function.  Unfortunately, some of our trading partners are using some of the dollars they accumulate to purchase US treasuries in order to prevent a devaluation of the dollar relative to their currency.

A decline in the value of the dollar would make US exports less expensive, and it would make imports more expensive, but one wonders how much of an impact that would have on the trade deficit.  About half of our imports are made by US corporations which import intermediate and finished products from overseas producers.  They do so because labor costs are much lower abroad.  They can "purchase" those products for resale in the US, under their brand, using more valuable dollars.  They also benefit by gaining access to rapidly growing consumer markets in countries whose economic growth is fueled by exports.  Its not in the interest of many multinational corporations to produce their products domestically, or to have the dollar decline in value.  Moreover, the great bulk of world trade is in manufactured products.  We have fewer of these products to sell as we deindustrialize and transition to a services economy. 

The Fallacy Of Thinking A State Is Like A Business

Paul Krugman has been trying to understand why many business leaders support the wrong policies for a nation with high unemployment.  He argues that they believe that the state should do what they would do during a turn down in their business.  They would try to cut costs by reducing wages and they would cut back on investments.  That makes a lot of sense since they don't sell much of their output to their own employees.  But what would happen if they did sell most of their output to their own employees?  Reducing wages or laying off workers would make things worse.  Demand for their output would fall and they would be forced to make further cost cuts.  They would have triggered a deflationary spiral in response to falling demand.

Nation states are unlike businesses in an important way.  Most of their income comes from employed workers who pay taxes.  During a recession they lose tax income and budget deficits will increase as tax income falls.  Raising taxes and reducing income support programs would make things worse because households would reduce spending.  Falling demand would put pressure on businesses to make further cuts in spending.  Unemployment would increase along with falling demand and government deficits would increase in response to declining tax revenue.

In a moderate recession, under conditions of moderate inflation, monetary policy can reverse the recession.  The Great Moderation in the US provides a good example.  Residential real estate spending is very sensitive to interest rates.  The Fed cut interest rates during slumps and new home purchases stimulated spending.  When the threat of inflation increased, the Fed raised interest rates and spending on interest rate sensitive product declined along with the threat of inflation.  This was called the Great Moderation because the business cycle was carefully managed by the Fed.

The Great Recession was triggered by a collapse in the financial system and the real estate market which had been supported by "innovative" financial securities that created the banking crisis.  The Fed cut interest rates to zero but that did little to stimulate spending for new homes as the prices for foreclosed homes declined dramatically.  Moreover, inflation fell below 1% as business investment and household spending collapsed.  Therefore,  it was impossible to reduce the real interest rate below zero like it was in a period with moderate inflation.  For example, with 5% inflation, a 1% cut in the nominal interest rate would reduce the real interest rate (nominal rate minus the inflation rate) to -4%.  The Fed did what it could to sustain the economy, and low interest rates did prevent a further erosion of the housing market, and asset prices rose in response to low interest rates. However, the recovery from the Great Recession was much slower than it was in previous recessions.  The labor market has improved but the recovery has a long way to go.

Sunday, November 2, 2014

Why Fiscal Policy Has Replaced Monetary Policy As Weapon Of Choice

Monetary policy was the preferred method of dealing with recessions in the high inflation era in early 1970s.  That is because a 1% cut in interest rates, with inflation at 5%, led to a real interest rate of -4%.  That encouraged households and businesses to reduce savings and increase spending.  Now that inflation is close to zero, and is likely to remain close to zero for the rest of the decade,  monetary policy is less effective.  With households and businesses saving more than they spend there are only two ways to increase employment.  Governments can run deficits to absorb private savings or countries can export more than they import.  Germany has used exports surpluses to maintain employment, but that advantage is disappearing as exports of machinery is slowing down.  The weapon of choice, despite all of the attention that has been given to the extraordinary use of quantitative easing by central banks,  is fiscal policy.  Nations that have employed relatively moderate levels of fiscal policy stimulus have done better than nations that relied solely on monetary policy.  Moreover, nations that attempted to run budget surpluses have done poorly.  We have returned to the 1950's when fiscal policy was the weapon of choice in recessions.

UN Panel Issues Dire Warning About Global Warming

The UN panel meeting in Copenhagen did not mince words about the dangers from climate change if we choose not limit carbon emissions.  It declared that we are on a pace to exceed the one trillion ton limit on global emissions in thirty years unless we take strong steps limit emissions or find a war to dispose of them in the ground.  They left no doubt about the source of climate change.  The changes that we are observing today,, and those that we will see in the future, are the result of human behavior since the industrial revolution.  The growth of industrial output in emerging economies has accelerated global warming and we are seeing those changes today in all parts of the world.

The problems that we face from climate change will alter the planet and change the way we live.  Human life will be seriously changed and many species will disappear.  The obstacles to change are also powerful.  A large share of fossil fuel reserves, which are on the balance sheets of the energy companies will have to be kept in the ground.  Moreover, energy companies are spending $600 billion per year to find new reserves and they are being provided with $1.2 trillion in subsidies by governments.  It is not surprising that governments are timid about limiting emissions.  Politicians boast about the discovery of new reserves and the number of jobs that they create by unleashing the greed that motivates producers discover and exploit new reserves.  Republicans in particular,  claim that they are not scientists and that they are not able to judge the warnings provided by the overwhelming consensus of the scientific community.  The public is also confused about the causes of climate change and the present dangers.  Many choose to believe the talk radio and TV hosts who are paid well to keep them ignorant of the dangers, and even hostile toward politicians who want take even small steps to reduce carbon emissions.

Nation states have not been able to agree upon targets to limit global emissions.  With the exception of Europe, which has recently agreed to an emission target, nation states have been left to take independent actions to reduce emissions.   Some states will find ways to free ride on the efforts by others to limit emissions without a binding international treaty.  We seem to be on sled that has been picking up speed on its way down a slope towards a steep cliff.  It may not be possible to apply the brakes until the cliff is in sight because everyone has been enjoying the ride.  By then it will be too late.