Thursday, April 30, 2015

Why Immigration Is Good For The US

Anti-immigration politics have been spreading around much of the developed world.  In the US anti-immigration sentiment is usually disguised as opposition to illegal immigration.  That disguise has been uncloaked in this article.  The Wisconsin Governor, Scott Walker, who is running for the GOP presidential nomination, gave the game away in his discussion with Glenn Beck.  Walker told Beck that he was against legal immigration because he wanted to protect US jobs.  Apparently, the anti-union governor is really a friend of labor.  Or perhaps, he really wants to capture the anti-immigration sentiment in the GOP base.

Noah Smith makes a strong case against Walker's claim that restricting immigration will protect US jobs.  US firms can hire immigrants in the US, or they can hire non-domestic workers in countries where they relocate.  Immigrants, hired in the US, will spend money in the US, and that will expand the US market.  When they hire non-domestic workers the spending will occur in a foreign location and expand the foreign market.  Businesses prefer to locate in large markets.  Shrinking the US market by restricting immigration is bad for US workers. Smith offers Japan as example of a country that has restricted immigration and has shrunken its domestic market.  Japan has been unable to maintain the level of growth that is needed to attract investment into the Japanese market.

The Role Of The American Psychological Association In CIA Torture Program

The Bush Administration authorized an "enhanced interrogation program", which included the use of such techniques as water boarding on prisoners captured after the 9/11 attack.  The Justice Department provided a legal report which supported the legality of the enhanced interrogation program.  The legal defense has been made public and it has been widely criticized by legal scholars. The participation of the American Psychological Association in the enhanced interrogation program is described in this article.  The APA Board cooperated with the CIA and other government agencies to alter its code of professional ethics so that its members could directly participate in the enhanced interrogation program.  The APA has consistently denied its cooperation with government and private organizations that were involved in the enhanced interrogation program.  A group of medical and psychology professionals investigated the involvement of the APA in supporting the enhanced interrogation program.  It documented the role of the APA Board  in altering its code of ethics so that its members could participate in the interrogation program.

Wednesday, April 29, 2015

Tom Friedman Makes His Case For TPP

Tom Friedman devotes the bulk of this article to chaos in the Mideast.  He then positions the TPP as a step in the direction reducing chaos.  If the US is not successful in establishing trade agreements that  reduce global chaos,  Russian and China will respond to our leadership gap.  Apparently, that would only create more chaos. He offers no defense of TPP itself; its all about chaos reduction.  Friedman contributed to chaos in the Mideast by supporting the US invasion of Iraq.  His credentials on chaos reduction are not very strong.

US Economic Growth Below Forecast

The US economy grew by only 0.2% in the last quarter.  That is well below the 1% consensus forecast for the quarter.  Exports declined, perhaps in response to the stronger dollar, and imports increased.  The trade deficit reduced net GDP by 1.25%.  Consumer spending, which accounts for around 70% of GDP was strong but business investment was below expectations.  Decreasing investments in the energy industry, caused by falling prices, accounting for a large portion of the drop in business investment.  Speculation has now turned to how the Fed may alter its plans in response to lower than expected growth.

The Battle Over The History Of Ukraine

What people believe about the past has become an important issue in Ukraine.  In particular, the Ukraine famine in the 1930's, and collaboration with Nazi's during WW ll,  is undergoing revision in separatist controlled regions of Ukraine.  It has reduced the focus on Ukraine nationalism, and it has aligned the region with Russia, while it remains critical of the Soviet Era under Stalin.  I am not an historian, and I am not very familiar with the historical relationship between Ukraine and its Eastern neighbor.  History is often written to serve political purposes.  It has to be revised when politics change.

How Should We Think About Greg Mankiw?

Noah Smith begins this article by praising Greg Mankiw's intelligence and the success of his introductory economics text.  He ends the article by reminding us again that Mankiw is very smart, but he chastises him for assuming that the opponents of the Pacific trade agreement are stupid.  Sandwiched in between his ode to Mankiw's intelligence, he criticizes Mankiw for over simplifying his defense of the trade agreement.  Mankiw made the traditional case for free trade, which is not the same thing as a trade agreement.  Trade agreements are more about protecting corporate intellectual property rights, and the mechanism for settling disputes between corporations and nation states, than they are about free trade.  The comments that follow this article are quite good on this point.  My concern about Smith's critique of Mankiw is that it was too narrow.

Greg Mankiw is prominent economist, and like most highly educated academics, he is not stupid.  Smith only reminded us of this because publically attacking a prominent economist can be harmful to the career of a newly minted economist.  Accusing Mankiw of over simplifying his defense of the trade agreement, perhaps because he is so smart, will not get him in trouble.  Mankiw's use of his intelligence is another matter.  He has consistently used his brains, and his prominence in his profession, to serve the most powerful interests in our society.  Economics has very little to say about morality or society in general.  Mankiw likes it that way.  Trade agreements have little to do with economic theory.  They have a lot to do with morality and social welfare.

Monday, April 27, 2015

What's Causing The Rise And Fall Of The Euro?

International investors have been purchasing euros in order to purchase EZ stocks.  That has placed a floor on the fall in the relative value of the euro.  On the other hand, the declining yield on EZ treasury bonds has lessened the demand from international investors for euros.  The relative value of the euro is caught between the demand for EZ equities and EZ treasury bonds.

Apple Continues To Amaze The Market

Apple announced profits of $13.6 billion on $58 billion in revenue for the last quarter.  It sold 61.2 million smart phones in the quarter raising prices while competitors introduced lower priced products.  Apples sales in China were up 71% in the quarter.  China has replaced Europe as Apples second largest market.  Its not very often that a firm captures control of a market by consistently introducing products that customers are willing to pay a premium to purchase.

Conservative Columnist Opposes GOP Tax Policies

Robert Samuelson's op-eds in the Washington Post have generally supported conservative economic policies.  The Republican Party is really in trouble when Samuelson strongly criticizes GOP tax proposals.  Even the conservative Heritage Foundation is troubled by GOP proposals to end the estate tax.  Samuelson argues that these policies are self-destructive.

The Shifting Role of Super PAC's In US Election Campaigns

The Supreme Court decision that equated the ability of large donors to fund political campaigns with "free speech" as protected under the Constitution,  has transformed Democracy in the US.  Super PAC's, which are able to collect unlimited funds to finance campaign spending, are becoming  Campaign Center for presidential campaigns.  For example, officials from the Bush Campaign have moved to a PAC that funds the Bush Campaign.  This in violation of the law which was intended to prevent PAC's from exercising their right to "free speech" on behalf of specific candidates.  The law is not being enforced by the Federal Election Commission. 

Democracies have always been at risk from powerful interest groups.  The rules that have limited the power of interest groups have been weakened by the Supreme Court decision.  Political candidates have become more beholding to those who fund their campaigns.  It is becoming harder to distinguish democratic elections from a market system based on the price system.

What Does Economic Theory Say About Rising Wealth Inequality?

Economic models of wealth inequality tell us not to worry about it.  We should not worry about it because it cannot happen.  The theory assumes that the distribution of wealth is stationary.  According to the theory, individuals move up and down the distribution, but the distribution itself is stationary.  This, in turn, assumes that individual mobility is a constant.  That is the end of the subject because theory trumps empirical reality. 

Thomas Piketty has made an effort to explain why the distribution of wealth is not stationary.  That has inspired a number of conservative economists to provide a rationale for the assumption of individual mobility within a constant distribution.  It is almost unpatriotic to question that assumption because the idea of "American Exceptionalism" depends upon it.  Everyone knows someone who rose from rags to riches, and we even know someone who moved from riches to rags.  Therefore, the mobility assumption rests on solid grounds.

It turns out that rising wealth inequality is better explained by the high correlation between parental wealth and the wealth of their children.  The concentration of wealth tends to increase over time, and so does individual mobility within the distribution.  None of the efforts to defend the assumption of individual mobility, described in this article, are supported by facts.  If one is rich or poor it is best explained by the wealth of one's parents.  The distribution of wealth is not stationary and we should not accept economic theories which assume otherwise.  If we care about rising wealth inequality we should ignore those who defend the assumption that the distribution is stationary.  Government policies can alter the distribution if it chooses to do so.

Sunday, April 26, 2015

Is Kansas The Model For A Tea Party America?

This article describes the politics in Kansas under Sam Brownback who has enacted legislation that reflects the social conservatism of his Tea Party inspired base in Kansas.  In the movie "Alice In Wonderland" a young child, living in Kansas, falls into an imaginary hole and discovers a wonderland.  She told her dog Toto that "this isn't Kansas".  Under Sam Brownback Kansas has become a wonderland.  His policies describe the political wonderland of a state that has been able to enact laws which are common in the modern Republican Party.  Perhaps we will wake up one day and say that this Tea Party wonderland isn't America. 

Under Brownback, Kansas has offered a concentrated form of what most national Republicans claim to want. Tax cuts for the wealthy, tax increases and reduced benefits for the poor, arbitrary interference with the reproductive freedom of women, and increased discrimination against gays and lesbians. Voters next November should ask themselves whether they want this ghastly agenda to be repeated on a national scale.

Saturday, April 25, 2015

Greg Mankiw Tells Us Why We Should Support TPP

Greg Mankiw is the chairman of the economics department at Harvard.  He has also written the best selling economics textbook in the US.  His defense of the proposed trade pact between the US and its trading partners in the Pacific region is right out of his textbook.  His defense of TPP tells us a lot about Mankiw, and about many economists.  His argument is pretty simple.  The economics profession unambiguously supports free trade.  Unfortunately, most people have misconceptions about free trade, presumable because they are not economists.  It would be foolish to pay much attention to the naive critics of TPP.  They should read Mankiw's textbook

Mankiw reaches back in time to Adam Smith and David Ricardo to explain the virtues of free trade.  Apparently, the economics profession has not progressed very far from the ideas about trade that were developed hundreds of years ago in England.  They certainly helped England establish global markets for its products which provided its manufacturers with economies of scale which Smith clearly understood.  Most of the critics of TPP are generally supportive of international trade.  They don't need a lecture about trade from Mankiw.  They oppose many of the details that are part of the trade agreement.  Many of the questionable details in the trade agreement appear in the comments that follow Mankiw's arrogant defense of the general idea of free trade.

Friday, April 24, 2015

Obama's Trans-Pacific Trade Plan Splits Democratic Base

President Obama has championed the TPP but it is not popular with trade unions that have historically been a powerful base of the Democratic Party.  Dana Milbank is a fairly moderate liberal reporter for the Washington Post He describes the problems that the trade deal poses for the 2016 election.  Republicans are united behind the TPP for variety of reasons.  Free trade is part of their catechism, and it certainly helps multinational corporations.  It should have been combined with programs that will help affected segments of the labor force adapt to a changing labor market, but that has not been done.

The 2016 Election And The Return Of The Zombies

An Australian economist wrote a book about zombie economic ideas.  He called them zombie ideas because, like zombies, they never die.  They are the living dead.  Paul Krugman picked up on the notion of zombie ideas, and he describes a few of them that are being promoted by GOP presidential candidates in the GOP primaries.  They advocate zombie ideas because they have a religious status among hard core conservatives who vote in GOP primaries.  They don't die because they are an article of faith.  They cannot be killed by contradictory evidence that Krugman presents in this article.  The hard core conservatives that show up in the GOP primaries did not acquire their zombie ideas by accident.  They have been well taught by those who benefit from them and they are treated with more respect than they deserve by media which tries hard not to offend true believers.  We will be exposed to zombie economic ideas, along with a strong sprinkling of "American Exceptionalism", until the madness ends in 2016.

Tuesday, April 21, 2015

What Can We Learn From The British Elections?

The Labour Party and the Tory Party are heading into the final stages of the British elections in a dead heat.  The public loves the idea of fiscal responsibility so both parties are telling the electorate that they will keep the government from going broke.  The public likes that idea because most of them live pretty close to the fiscal edge and they understand how easy it is to go broke.  They don't distinguish between governments and households, and they don't understand the logic behind Keynesian economic theory.  The Labour Party has come up with some ideas that have helped it to gain some leverage in their campaign.  It has proposed tax hikes on some groups with high incomes.  For example, the Party proposed a "mansion tax" that would raise money from wealthy foreigners who have purchased expensive residences in which they do not live.  That has been a popular idea.  The Labour Party has also added a new twist to the income redistribution argument.  It is telling the public how it will spend the money that it will collect with the new taxes.  Each new tax will be used to fund specific programs that are popular with most of the electorate.  Instead of "soaking the rich" they are providing new programs with tax revenues.  They are not borrowing money and running budget deficits to fund the programs.

Most people don't like to pay taxes.  Ronald Reagan and George Bush took advantage of this.  They both cut taxes, primarily for the rich, and they borrowed freely to fund government programs that they liked.  Deficits increased substantially during their terms in office.  Neither party in the US scolded them about budget deficits and fiscal responsibility.  The Republican Party only preaches fiscal responsibility when Democrats are in office.  The Tories do the same thing in Britain.  The Cameron government ended its austerity program when it observed its impact on the economy.  That is not common knowledge in Britain.  The government is claiming that its austerity policies were responsible for the slight recovery that occurred.

David Brooks Extols The Virtues Of Marco Rubio

David Brooks calls Marco Rubio the "New American".  He doesn't tell us why he would be a good president, but he explains why he might be likable.  Brooks has narrowed down the GOP nomination race to our third Bush, who he places slightly ahead of Rubio and Walker.  Brooks is good at reading the political tea leaves of his party. He is not very good when he branches out into other areas.

Monday, April 20, 2015

The IMF Explains The Global Decline In Business Investment

This IMF study looks at the many of the factors that have contributed to the decline in global business investment.  The study is important because business investment is the most volatile component of GDP.  It also interacts with other factors such as the level of employment and wages which affects consumption which is the largest component of GDP.  Moreover, there are a number of competing explanations for the decline in business investment.  For example, the finance minister of Germany believes that businesses cut back on investment when the lack confidence in government policies.  The conclusions reached by the IMF were not equivocal.  It concluded that the decline in global investment is almost entirely explained by the decline in global activity.  Businesses have cut back on investment in response to a fall in demand.  In some countries the lack of credit has also been a contributing factor but that to is related to the decline in output.  Banks are less willing to make loans and firms are less willing to borrow at low levels of output.

The IMF study also contradicts the idea that government borrowing "crowds out" business borrowing and investment.  The assumption is that government borrowing shrinks the pool of savings available for lending.  That raises the interest rate which decreases the demand for business investment.  Business investment has not been crowded out by high interest rates.

Sunday, April 19, 2015

GM Investing In China

GM and its Chinese partner, SAIC, plan to invest $16 billion over the next 5 years to develop a complete line of 40 cars.  It will include electric vehicles.  They will focus on the Buick and Chevy brands. 

What Policies Would Economists In Britain Advocate If They Ran The Country?

The Financial Times asked a broad sample of economists to make economic policy recommendations.  Their recommendations were very different from what politicians are likely to recommend.  They are also less conservative than what many people would anticipate from economists.  Its pretty clear that economists have very little influence over politicians in Britain.  Politicians select economic advisers who will promote policies that help them to get elected. They may not be the best policies for the nation. 

Saturday, April 18, 2015

The GOP Primary In New Hampshire And Tribal Politics

16 GOP presidential candidate hopefuls made presentations to members of the their tribe.  Each was trying to convince New Hampshire republicans that they would be the best president if elected.  The great majority of their comments had little to do with their qualifications for the presidency.  They spent most of their time attacking Hillary Clinton and President Obama who are not members of their tribe.  That strategy is pretty consistent with Dana Milbank's description (posted below) of the tribalization of politics in America.  The easiest way to establish rapport with one's tribe is to attack members of the rival tribe.  I can't imagine that a candidate for an executive position in a corporation would attack the firms competitors in order to get hired.  Its a shame that this is the way that we select our presidents.

Why Political Division In US May Be Self Reinforcing

Dana Milbank has come to believe that politicians in the US have become more partisan as the electorate has become more partisan.  The electorate is less informed about issues than it is about what is bad about the "other team".  Elections have become more tribal over time.  Politicians in safe districts, or safe states, increase their rhetoric about the tribe that they dislike.  That turns out the vote for their side. The key to victory is getting your tribe out to vote, or in making it more difficult for the other tribe to vote.  It is not surprising in this scenario that politicians are less able to compromise. 

The tribal behavior of the electorate is also reinforced by a more partisan media.  The "mainstream media" which makes an effort to be bipartisan, becomes the enemy of the tribal media (and the social media) which reinforces the belief system of its tribe.  The divisions between the rival tribes also grows along with the rising amounts of advertising expenditures on political campaigns.   The electorate becomes more tribal with each election cycle and political campaigning becomes perpetual in Congress.  The political parties also become more dependent upon those who fund their campaigns.  Over time the political parties will become less relevant.  Tribal identification is stronger than political party identification.  Its hard to imagine how this process of tribalization can be overcome.

Friday, April 17, 2015

Germany's Finance Minister Offers His Views On Eurozone Economic Policy

The economic policies that were pursued by the EZ member states were the correct policies according to Germany's finance minister.  He explains why they were the correct policies and defends them against those who claim that they have been a burden on the EZ recovery.  He holds Ireland and Spain up as examples of countries took the proper steps which led to their strong recoveries.  He also defends Germany's economic policies against critics who believe that Germany could have done more to stimulate economic growth.  He also announced that several top economists would participate in the next Finance Minister meeting.  Paul Krugman has been one the major critics of the economic policies that inspire Germany's Finance Minister.  He claims that Keynesian policies have helped the US economy to recover more quickly from the recession.  Its unlikely that there will be many Keynesian economists invited to the meeting of eurozone finance ministers.  Krugman believes that politicians select economists who tell them what they want to hear.  That may be true, but Keynesian economic theories never took root in Europe as they did in the US.  That is especially true in Germany.

Wednesday, April 15, 2015

Populism And Politics In US

We have right wing populists and left wing populists in the US.  It would appear that there are a lot of populists in America.  Since the populists on both sides of the political spectrum don't agree on much of anything, the concept of populism would appear to be an empty concept.  Apparently, it means that ordinary people at each end of the political spectrum don't trust our political leaders.  They both sense that our political leaders don't really care about them.  In this case, many Democrats are not happy with a free trade agreement that is being promoted by the Obama Administration.  The proposed trade agreement has not been made public, but they tend to promote the interests of multinational corporations.  Many Democrats believe that the NAFTA trade agreement sponsored by the Clinton Administration was not good for ordinary Americans.  The Republican Party supports the Obama trade agreement so that makes many democrats even more concerned about the proposed agreement.  This puts right wing populists in a difficult position.  They object to everything that is proposed by the Obama Administration.  It will be fun to see how they sell it to their Tea Party base.

Economists Agree That It Is Superior To Other Social Sciences

Economists don't refer to other social sciences when the publish and with good reason.  They believe that they are a more scientific.  They may make that assumption because they can measure many of their concepts in dollars or other currencies.  Many regard this as a form of scientism.  That is, they use more numbers in their research, along with a lot of equations.  In other words, they have succeeded in copying the surface characteristics of the physical sciences.  They make assumptions about how people  make financial decisions without paying much attention to what psychologists have to say about human behavior;  they also make policy recommendations to politicians while ignoring what political scientists have to say about government.  A much larger number of economists today work in business or finance departments and they align themselves more closely to the orthodoxies in those professions than do economists in academic departments. 

The Strange Marriage Between The GOP And The Tea Party

I have relatives who are members of the Tea Party.  They are also Republicans. The Affordable Healthcare Act cemented their relationship with the GOP.  They opposed giving taxpayer money to people who they did not respect.  Some of those who opposed ACA were also dependent upon Medicaid, Medicare and Social Security.  Somehow, the Republican Party convinced them that it was the Party that represented their value system.  They were opposed to anything that could be called liberal or progressive.  The GOP bill which abolishes the estate tax benefits a small fraction of families.  It does not benefit of any my relatives who belong to the Tea Party.  The GOP will pay for the tax cuts to our wealthiest families by cutting benefits that go to our poorest families which includes many of my relatives who belong to the Tea Party.  It will try to sell this to Tea Partiers by positioning the lost benefits as anti-liberal and anti-progressive.  It will probably work.

Nokia Acquires Alcatel-Lucent

The combined telecom equipment provider will become one of largest firms in the industry.  The Finnish firm will combine the technological assets of the French firm Alcatel, along with the assets of the US telecom firm Lucent which had been acquired by Alcatel.  This is big step for Nokia which sold its cellphone business to Microsoft.  It hopes to become more competitive in the telecom market but there are questions about its ability to cut costs.

Saturday, April 11, 2015

Intellectual Failure And Our Slow Recovery From The Great Recession

Milton Friedman wrote a book in the 1960's that explained the cause of the Great Depression.  He argued that the Great Depression was caused by bad monetary policy.  In other words. it was the result of government failure.  There was no reason to believe that the Great Depression was caused by market failure.  Friedman's argument was consistent with the neoliberal ideology that was gaining force withing the economics profession.  Markets left to their own devices are self regulating.  Government intervention into the market economy is the enemy that must be destroyed so that markets can work their magic.

Brad DeLong cites research which suggests that the Great Depression was not caused by government failure.  It was the result of market failures.  Credit channels had been disrupted and there was a steep decline in business investment and consumer spending.  Fiscal policy, along with efforts to revive the credit channel,  would have been the proper response to the Great Depression.  That is, government interventions were required to address the failures of the market.  DeLong argues, along with one of his colleagues, who refuted Friedman's explanation for the Great Depression,  that we failed to provide the correct remedies to the Great Recession because of the dominance of Friedman's explanation for the Great Depression, along with neoliberal orthodoxy which holds that government failure is a bigger problem than market failure.  Central banks have responded by increasing the monetary base, but that has not been an adequate response for an economy that suffers from weakened credit channels and weak aggregate demand.

Harvard Graduates And "Its A Wonderful Life"

A Harvard economic professor ponders the career choices that are being made by 20% of Harvard graduates.  They are attracted by the prestige and financial rewards of a career in finance.  He hopes that they will use their talent to make the world a more wonderful place.  However, he is concerned about the fact that much of the work done in the finance industry is rent seeking.  It transfers value from society to those who work in finance.  A nation that rewards its most talented young people for rent seeking is on the wrong track.  Society prospers when it produces scientists who create knowledge, and when that knowledge is used to invent things like semiconductors which add value to many of the products that we enjoy today.  It also prospers when its most talented individuals who enter into other professions choose to transfer value to society instead of extracting through rent seeking.

The outsized financial rewards available from a career in finance are only one of the determinants of career choices made by talented graduates.  Career choices also reflect cultural forces.  Youthful idealism has lost ground in a culture that places financial success above other values.  The Harvard graduates who choose a career in finance reflect deeper changes in our culture. 

Art Laffer As A Symtom Of GOP Madness

Art Laffer was adopted by the GOP in the 1980's.  The Laffer curve showed that high tax rates actually reduced tax revenues because they also reduced economic activity.  Ronald Reagan used that argument to justify a dramatic cut in the top tax rate after he defeated George H. Bush in the GOP primary.  Bush famously referred to Reagan's tax policy as "voodoo economics" but he lost the election.  The GOP has been running with that idea ever since.  If it takes voodoo economics to win elections, and reward your major constituents, they are all for it.

Art Laffer was wrong about the relationship between the top tax rate and economic growth, and all of his economic predictions about economic policy decisions during our recovery from the Great Recession have been wrong.  However, he has never been more popular within the GOP than he is today.  Paul Krugman argues that the GOP attachment to false economic ideas is a symptom of madness in a political party that lost its connection to reality.  It used to be a real political party with a better connection to the real world.

Wednesday, April 8, 2015

Energy Economics And Fossil Fuel Reserves And Resources

Unless we change the economics of the energy market we will not recognize the world that we will have created.  The basic problem is that climate scientists believe that we must keep the increase in the average global temperature since the industrial revolution below 3.6 degrees F.  We have already added 1.7 degrees to the average temperature since the industrial revolution.  If we use the available fossil fuel reserves in the ground we will add another 2.8 degrees.  That brings the total temperature increase to 4.5 degrees.

We also have a large quantity of fossil fuel resources in the ground that are not recoverable with current technologies and prevailing prices.  We would add an additional 3.1 degrees if we used the oil and gas resources, and an additional 8.6 degrees if we used all of the coal resources.  That brings the total temperature increase to 16.2 degrees.  It is hard to even imagine the consequences of a 16.2 degree increase in the average temperature. 

One of our problems is that economics of the energy market encourages the exploitation of new resources in the Canadian tar sands, and oil and gas resources in the Arctic.  We would have to discourage the use of these resources as well as 90% of the coal resources that are underground in the US. 

British Election And Food Fights

David Cameron faces a tough reelection bid in Britain.  He has been making an effort to convince ordinary people to vote for him by sharing meals with ordinary people on his tours.  Apparently, he doesn't know how to eat hot dogs like ordinary people.  He was caught using a knife and fork in a gallant effort to show how ordinary he is really is.  Queen Elizabeth did the same thing when she visited the US and was forced to eat a hot dog.  However, she did not have to run for election.  Its a pity that our democratic system forces "extraordinary" politicians to pretend that they are not different from most of the people that vote in elections. 

FDA Fails To Supervise Dietary Supplement Industry

The dietary supplement industry is a $33 billion industry in the US that has a license to steal from naive consumers.  They do not have to support the claims that they make for the benefits from the supplements that they sell;  many of the supplements do not even have the ingredients that they place on the product labels, and some of their products present health hazards.  One of the health hazards comes from BMPE which is a substitute for amphetamine.  Canada has banned products containing BMPE, but the Federal Drug Agency in the US has not warned consumers about these products and it has made no effort to remove them from the market.

We should not be too surprised about the state of this $33 billion market in the US.  The 1994 law that applies to the industry was developed by Orrin Hatch, who is the senior US Senator from Utah  in which many of the producers are headquartered.  Hatch's son Scott is a partner in a lobbying firm that represents the industry in Washington.  The FDA, which is supposed to protect consumers, is a toothless tiger.  The top FDA officials, in charge of the supplement industry, move back and forth between the FDA and the industry's official trade organization.  Just another example of the revolving door between US regulatory agencies and the industries that they are supposed to regulate.

Its hard to imagine a more profitable business to enter.  The list of purported benefits from the supplements is marketers dream.  They will improve your sex life;  help you to develop a powerful body; allow you to lose weight without having to diet; help you to get a good nights sleep, and they will cure some of our most common ailments.  The advertised claims that they make for their products do not have to supported with evidence.  Apparently, its sufficient to tell consumers that they are "natural" products and to show pictures of unidentified people who have benefited from the product.  The products are also very cheap to produce.  Studies have shown that they seldom have the "natural" ingredients that they advertise.  Cheap fillers are the primary ingredient in the products.  To make things even better, the prices that they charge for the products has little relation to the cost of producing the products.  Their major expense is marketing and the cost of distribution. Organized crime organizations in the US should be jealous.  They have to deal with violence and the risk of imprisonment.  The dietary supplement industry only makes a relatively minor contribution to public officials in relation to their revenues and profits. 

Monday, April 6, 2015

Larry Summer's Comments On Asian Infrastructure Investment Bank

China has been successful in establishing the AIIB and many US allies, including Britain, have joined the bank.  The AIIB will provide many of the services that have been performed by the World Bank.   According to Summers this is a seminal event which undermines US leadership in setting the global economic architecture.  He describes the impact of this development, and he provides his analysis of the political dysfunctions in the US that contributed to the loss of US leadership.

Robert Samuelson Explains Why A Full Employment Economy Is A Bad Idea

I have posted the following quote from the Washington Post which gives Robert Samuelson a platform to pontificate about economic issues every Monday.

But we shouldn’t delude ourselves: What’s justified in the short run won’t work in the long run. Ensuring permanent “full employment” in a “high-pressure economy” is a seductive goal. It’s also utopian. It exceeds our powers of economic management.
The promise of constant full employment poses internal contradictions. If people believe that prosperity is guaranteed, they will behave in reckless ways that destroy prosperity. This happened in the 1960s with inflationary psychology, in the late 1990s with the tech bubble and in the 2000s with the housing crash. Societies that sow unrealistic expectations will reap destructive disappointments.

This is a typical example of Samuelson's opinion articles about economic policy.  This article, like most of his articles, begins with several paragraphs that demonstrate his familiarity with economics.  In this case, he shows that he is familiar with the idea of the "natural rate of unemployment".  That is, the unemployment rate consistent with an acceptable rate of inflation, which can vary over time.  After showing that he is familiar with freshman economics, he proceeds to the conclusion that is quoted above.  He claims that three large swings in the US business cycle were caused by the false expectation that prosperity is guaranteed.  Apparently, his unsupported explanation for the three economic events he cited,  proves that it is counterproductive for governments to have a goal of a full employment economy.  Governments, of course, cannot eliminate the business cycle but Samuelson argues that is a mistake for governments to create the expectation that they will develop policies to moderate the business cycle.

I have gotten into the habit of reading Samuelson's opinion articles by skipping to the conclusions that he reaches in the last couple of paragraphs.  That is the message that he wants to deliver to his readers.  The rest of what he writes is generally superfluous.  It serves primarily to convince readers who share his political views that they are credible.  In other words, Samuelson is good propagandist.

A Billionaire's Critique Of Economics

Charlie Munger is Warren Buffet's partner who has been a major contributor to the fantastic success of Berkshire Hathaway.  He was asked to give a talk at the University of California at Santa Barbara about economics.  He was generous in his praise for many of the ideas in economics, but he was unsparing in many of his criticisms of the profession.  His perspective, of course, is that of an investor who has to put a value on businesses.  He and Warren Buffet are pretty good at that game and they avoid using many of the tools used by economists and consultants.  His talk is sprinkled with interesting insights that he has gained from experience; it is also very humorous.

Saturday, April 4, 2015

How Germany Can Help The Global Economy

Ben Bernanke is concerned about the global imbalance between investment and savings.  When savings exceed the level of investment a shortfall in aggregate demand is the outcome.  His first effort to describe this problem focused on the global imbalance.  In this post he focuses on the Eurozone.  The EZ has a trade imbalance with the rest of the world which is primarily the result of Germany's trade surplus.  As the euro declines in value relative to the rest of the world Germany's trade surplus will increase.  Bernanke argues that Germany could take steps the improve the imbalance within the EZ, and with the rest of the world.  He believes that Germany would benefit along with the global economy if it invested more of its surplus savings in infrastructure and if it stimulated business investment and encouraged growth in wages.

Friday, April 3, 2015

Is Finland A Victim Of Secular Stagnation?

Finland has been a poster child for a successful economy in the Eurozone.  Finland now looks like a nation with a stagnant economy; it may be a victim of secular stagnation.  That is, a period of slow growth despite abnormally low real interest rates. 

There are a couple of explanations for the growth slow down in Finland.  Its demographics are unfavorable, and its wages are not competitive with many of its trading partners.  Finland may have to undergo some difficult structural changes to restore growth. Some politicians believe that it will have to reduce wages to restore growth.  Nokia's success, however, was not based upon cost competitiveness.  Its not clear that Finland can become a net exporter by cutting wage costs.

Finland ran large trade surpluses during its boom years.  That was driven by technology exports by Nokia which has been losing market share and exports over the last several years.  Finland now runs trade deficits which reduce its GDP.  A boom in residential housing cushioned Finland's transition from a surplus nation to a net trade deficit nation, but there does not seem to be anything available to replace the housing boom.  Finland and the Eurozone may be facing an extended period of low growth in which monetary policy has limited leverage.  The decline in the value of the euro may boost exports, but it won't affect trade patterns between nations within the EZ.

Thursday, April 2, 2015

The Global Savngs Glut Versus Secular Stagnation

Ben Bernanke argues that a global savings glut provides a better explanation for low global interest rates and slow economic growth than the secular stagnation hypothesis.  Both of these explanations imply that the global supply of savings is greater than the level of investment.  The secular stagnation hypothesis argues that the demand for investment capital in the US will be weak over an extended period because of weak fundamentals.  For example, slow population growth, and a less capital intensive economy will produce a long term reduction in business investment demand.  The policy response to this problem is to increase the level of government investment in productive infrastructure.  The savings glut explanation argues that the entire global economy can't be in the grip of secular stagnation.  Capital should be able to flow to profitable investment opportunities where the exist.  According to Bernanke, government policies have interfered with the efficient allocation of savings to their most productive uses.  For example emerging market economies (EME) in the late 90's used their current account surpluses to acquire foreign assets to increase their reserve accounts.  This caused their currencies to decline in value and it stimulated exports.  There is a current account surplus today in the eurozone.  The level of savings exceeds the level of business investment.  That is due to a large trade surplus in Germany, but primarily due to a lack of investment in the countries damaged by recession.  That has caused the value of the euro to fall and it may stimulate EZ exports at the expense of imports from nations whose currencies have risen in value relative to the euro. 

Since government policies are the major reason for the misallocation of capital, Bernanke believes that changes in government policies should use to rebalance the allocation of savings.  That should cause interest rates to rise to a more normal level in response to an increase in investment demand.

Paul Krugman has entered into this debate. He tends to favor the secular stagnation hypothesis and the use of fiscal policy to increase aggregate demand.  His argument is a bit technical but these discussions between three top economists, which includes two high level policy officials,  touches on some of the central issues in the global economy.

Wednesday, April 1, 2015

The Religious Freedom Bill And Its Impact On GOP Presidential Hopefulls

The strong reaction from the business community, and most of the media, about the Indiana "freedom" bill has put GOP presidential candidates in a difficult position.  Most of the candidates came out in support of the bill even while the Indiana Governor, who was surprised by the negative reaction to the bill, promised to change the bill.  They understand the the coming primary elections will determine the GOP presidential candidate.  The primary elections are different from the general election that will take place in 2016.  The turnout for the primary elections attracts the most conservative part of the GOP base which is sympathetic to the "freedom" bill.  Even those without strong religious beliefs oppose gay rights.  The majority of voters in the general election, especially those under age 30, have become supporters of gay rights.  The GOP presidential candidate must win 65% of the white vote in order to win the general election.  That has only occurred once in American history.  The GOP position on gay rights, and minority rights in general, may even offend a significant portion of white males.

Popular opinion in the US about the rights of gays and minorities has become much more accepting over the last few decades.  A substantial portion of the conservative base in the US is less representative of the general population.  Curiously, their views are much closer to popular opinion, and government policies in many Eastern European countries, and in many Islamic nations that are not popular with American conservatives.

Increasing The Number Of US College Graduates Will Not Reduce Inequality

There is a positive relationship between obtaining a college degree and earnings potential.  Many believe that increasing the number of college graduates will lower the level of income inequality in the US.  This study did a simulation to determine whether a substantial increase in the number of college graduates would decrease the level of income inequality.  The simulation examined the impact of a 10% increase in the number of college graduates between the ages of 25 and 64 and found that this decreased the wage gap between those with and without college degrees and it reduced the level of inequality between those at the top of the bottom quartile and those in the middle quartile.  It did not, however, reduce the overall level of income inequality. There are a lot of benefits to individuals and to society that result from increasing the number of college graduates.  This even promotes improvement in secondary schools that must prepare more graduates for college.  Unfortunately, it is not the solution to our income inequality problem because it is primarily due to the gap between those at the very top of the distribution and everyone else.

Ben Bernanke Versus Larry Summers On Secular Stagnation

Its great for the economics profession, and for the public, to have Ben Bernanke posting blogs.  Bernanke is not only an outstanding economist but he was also the Chairman of the Fed during a very difficult economic climate.  His blogs reflect the thinking behind the policies adopted by the Fed during that period. Bernanke turns to the future in this blog.  He explains why he disagrees with Larry Summers' secular stagnation hypothesis.

The secular stagnation hypothesis was motivated by the failure of persistently low real interest rates to stimulate aggregate demand.  Summers concluded that we may have entered into a period of low economic growth because business investment and consumer demand were unresponsive to historically low real interest rates.  Periods of rapid growth over the last two decades were assumed to be in response to financial bubbles.  Therefore, sustainable economic growth was not possible without creating risk in the financial system. 

The secular stagnation hypothesis presented a real challenge to the mission of the Fed.  Its mission is to provide employment and price stability as well as financial stability.  Consequently, it is not surprising that Bernanke would seek to escape the constraints on growth and stability that were advanced by Summers.

Bernanke presented evidence which suggested that economic growth was not dependent upon financial bubbles.  US trade deficits were equal to 6% during the financial bubbles.  The bubbles only offset the trade deficits.  Therefore, financial bubbles would not be needed if US trade deficits could be reduced.  Bernanke concluded that the major weakness in the secular stagnation hypothesis is that it fails to consider international trade.  He argued that there must be opportunities for profitable investment somewhere in the global economy.  Capital should flow to places where investments would be profitable even without negative real interest rates.  That would be good for US exports as long as US firms supplied the physical capital to international manufacturing hubs.  The US trade deficit with China, for example, would be reversed if US firms shipped capital equipment to China in return for its finished products.

The US economy has been able to grow despite several headwinds that have restrict economic growth.  The reduced flow of credit, and the slow recovery of the housing market have been headwinds.  Fiscal policy in the US has also been a headwind.  Federal and State spending have been lower than they should have been during a recession.  Perhaps the US economy will resume a sustainable level of growth without financial bubbles as these headwinds dissipate.  Summers would like to agree with Bernanke's positive outlook.  However, he has several concerns about Bernanke's analysis of his secular hypothesis hypothesis.  As long as the amount of savings in the global economy exceeds the amount of business investment aggregate demand will be below the level required for sustainable growth.  Summers believes that government investment should help to equate the relationship between savings and investment.  That is especially true in an era of exceptionally low interest rates.  There must be a large number of productive government investment opportunities at zero real interest rates.