Friday, May 29, 2015

The Role Of The US In A Globalized Financial System

This IMF report on the global financial system suggests that the US plays the role of a venture capitalist, and also as an insurer in the global system.  In normal times the US has run trade deficits which is financed with short term dollar denominated debt at low interest rates.   It then takes a long position by investing in foreign fixed assets and equities that are primarily denominated in foreign currencies.  The value of the dollar falls in relation to its trade deficit, but the value of its foreign assets rise through capital gains, and with the rise in the value of the foreign currency denominated assets.  In this sense the US functions like a bank or a venture capital firm by borrowing short term at low interest rates and by making leveraged investments in foreign assets. 

During the financial crisis the US operated like an insurer.  It used its fixed investment positions in foreign nations to reverse the flow of funds to assist nations that were harmed by the problems in the financial system.  The US collects premiums from the rest of the world in good times and uses those premiums to pay claims in bad times.

The IMF report also suggests that the international financial system is inherently risky.   Moreover, it is hard to measure the benefits from the system.  It favors the use of macroprudential policies which can reduce the risks that are inherent in a highly leveraged system.

Tuesday, May 26, 2015

What Can We Learn About Free Competitive Markets From Corporate America

Most Americans work for corporations.  Corporations don't operate the way that free market advocates believe that all organizations should operate.  They are essentially command and control systems which look a lot like government bureaucracies.  In particular, corporate labor markets look nothing like commodity markets are supposed to operate.  Some labor markets do look like commodity markets but they are outliers.  In fact, most Americans are repelled by them.  Perhaps that is because people who are managed like commodities are less productive.  Moreover, investor behavior provides a similar message about competitive markets.  Investors vote with their dollars.  They invest in businesses which have been successful in limiting price competition in their markets.  Warren Buffet, for example, invests in firms which have succeeded in "building a moat" around their enterprise.  They are less subject to competitors who attempt to capture their customers through price competition.  Building moats around one's business is the primary topic of the business strategy courses that are taught to MBA students.  Of course, it is always a good idea to be cost competitive, but corporations often use government to limit price competition.  The most important asset in many corporations is their intellectual property.  Without government enforcement of intellectual property rights most corporations would be subject to intense price competition.  In fact, our current form of capitalism, which is based upon the ways in which corporations function, is totally dependent upon the services provided by government bureaucracies.  Even the social welfare programs provided by governments are beneficial to corporations.  For example,  government subsidies to low wage earners enables corporations to more easily retain low wage earners.  Taxpayers are supplementing the wages provided by low wage paying industries.  Free competitive markets are a utopian ideal that provide a very distorted picture of the ways in which markets and governments operate in the real world. 

Spanish Elections Send Message To EZ Leadership

Eurozone leaders have been using Spain as an example to the rest of Europe.  They claim that structural reforms in Spain have restored its economy.  Apparently, the public thinks otherwise.  The ruling party that pushed structural reforms and austerity was punished at the polls.  The electorate does not believe that a 25% unemployment rate, and high levels of political corruption, should be rewarded.  The two major political parties in Spain lost ground to protest parties in Spain's major cities.  Protest parties in Spain, and in the recent English elections, have altered the political maps in Europe.  The two party system in those countries is being threatened by protest parties that are not pleased with either of them.  The elections in Spain offer a glimpse of the political future in the EZ.  Its poster child for successful structural reform has lost electoral support in Spain.

Saturday, May 16, 2015

Why We Need A New Approach To Carbon Emissions Reduction

The path that we have taken to reduce the risk of catastrophic changes to our way of life is not working.  Between 1960 and 2000 the global economy grew at a 3.7% rate and CO2 emissions grew at 2.4%.  Unfortunately, the gap between global GDP growth and carbon emissions growth has fallen from 1.3% in the previous period to 0.7% since 2000.  The effect of international treaties since 2000 has been negligible.  Unless we take a new approach to reducing carbon emissions we will be leaving ourselves open to a catastrophe that all of us would like to avoid.

The reason why we have not done what is necessary to reduce carbon emissions is easy to understand.  The current cost of producing a ton of carbon emissions is around $1.  The cost of a ton of carbon needs to rise to $40 in order to insure ourselves against catastrophic risk.  We have been unable to bring to cost of carbon to $40 because of the free rider problem.  Reducing carbon emissions is a global public good but nations make the decisions about carbon pricing from local perspective.  They are willing to let other nations bear the cost of a higher carbon price. 

One novel approach to solving the free rider problem is to create a climate club.  The members of the club would agree to a $40 per ton price for carbon.  They would share in the cost and the benefits from membership in the club.  Nations that decided to free ride by not joining the club would be penalized.  The penalties would have to be severe enough to encourage free riders to join the club.

Friday, May 15, 2015

Republican Ideologies Cannot Be Modified By Experience

Paul Krugman is critical of Jeb Bush who hopes to be the third president from the Bush family.  In particular, he criticized him for refusing to admit that his brother made a serious mistake about the invasion of Iraq.  Moreover, he reported that Jeb's foreign policy advisers include several of his brother's advisers who do not admit that they were wrong about Iraq.  Jeb Bush's economic advisers are similar to his foreign policy advisers.  They adhere to same set of economic ideologies that never change in face of contradictory evidence.  In fact, all of the GOP candidates for the presidential nomination share the same set of economic ideologies.  Krugman refers to the foreign policy and economic advisers as a "fraternity of failure".  They share a similar ideology that is impervious to failure.  If they admit to mistakes they are raising questions about the ideology and they will be expelled from the fraternity.

It is in the nature of political parties to have a common set of values.  If one looks at the Democratic Party its values differ from those of the Republican Party.  There would be no point in having political parties if this were not the case.  On the other hand, the Democratic Party has moved much closer to the center over the last 40 years.  The Republican Party has moved further to the right over the same period.  In general, the political and economic ideas of liberals are more subject to disconfirming evidence.  In fact, it is very hard to build a consensus on most issues within the Democratic Party.

Wednesday, May 13, 2015

Why Has The Revenue From Art Sales Grown 500% Over Five Years?

A lot of attention has been given to the sale of a Picasso painting for close to $180 million at a recent auction.  This article offers a simple explanation for the 500% growth rate in fine art sales in the last five years.  There are many more very wealthy individuals competing for a limited number of prestigious works of art.  As the number of super rich investors compete for a limited supply of art the prices will continue to rise.  Fine art is a better investment than many assets without a finite supply.  There is no bubble in this market. 

How Should We Understand The Slow Recovery From Recession In The UK Economy?

The Conservative Party was successful in convincing the electorate that fiscal austerity has been good for the economy.  Many economists have argued that fiscal stimulus would have been better for the economy.  Noah Smith looks at some of the data and he concludes that neither fiscal austerity or a Keynesian stimulus are the appropriate responses to slow economic growth in the UK.  He points his finger at the low level of productivity which is holding back economic growth in the UK.  A larger share of the workforce is employed but the level of output has not grown in proportion to the rise in employment.  In other words, potential GDP is lower than it was prior to the financial crisis.  He suggests that the financial sector in the UK may have grown rapidly without benefiting other sectors in the economy. 

Brad DeLong, who generally agrees with Noah Smith, looks at the data and scratches his head.  He finds no reason to argue that a shortfall in aggregate demand is not responsible for the slow recovery from recession in the UK.  He does not offer an explanation for the low level of productivity in the UK but we do know it is much easier to increase productivity in the manufacturing sector than it is in the services sector.  As services replace manufacturing as a source of employment in advanced economies it may be more difficult to stimulate economic growth through increased productivity.

Senate Democrats Deny Obama Fast Track Authority For TPP

The Republican Party has blocked almost everything that President Obama has proposed.  This time it was his own party.  He failed to convince Senate Democrats that the TPP was not a giveaway to large corporations who drafted much of the language in TPP, and who have lobbied aggressively for it.  Republican senators strongly supported fast track authority, but the president did not attempt to link his support for TPP to bills that he has advocated such as a higher minimum wage.  Instead, he strongly criticized Senate Democrats who oppose TPP.  He claims that they have not entered the 21st century.

Tuesday, May 12, 2015

President Obama Won't Let US Keep Carbon In The Ground

President Obama is the most climate friendly president that we are likely to get.  Unlike most Republicans he is not a climate change denialist, and he has done some good things to reduce carbon emissions in the US, however, he has made two bad decisions that are harmful.  He has opened up coal mining in a crucial area, and he has allowed BP to drill for oil in the Arctic.  If we can't keep carbon in the ground we can't keep it out of the atmosphere. 

Monday, May 11, 2015

Why Politicians No Longer Speak About The Middle Class

Politicians have been using euphemisms in their campaign speeches to describe Americans who are in the middle of the income distribution.  They prefer terms like "Ordinary Americans",  "Hard working Americans" "Everyday Americans" etc. instead of "Middle class Americans".  That is because many Americans in the middle of the income distribution can no longer afford the middle class life style that was associated with membership in the middle of the income distribution.  They can't afford day care, vacations, or a college education for their children.  Consequently, the term connotes anxieties which politicians wish to avoid.  The economy looks more like an hourglass than it used to look like with a bulge in the middle.  Most of the growth in new jobs is in the lower segment of the distribution, and most of the growth in income and wealth is concentrated at the top of the distribution.  The middle class is shrinking, and many Americans expect that it will continue to shrink.  We will always have "ordinary, hard working, everyday Americans".

An Australian Perspective On The Trans-Pacific Partnership

President Obama and supporters in Congress claim that the partnership will increase jobs in the US.  Most of the research on this topic shows that there will be no net gain or loss of jobs in the US.  The real issues involve competition between the US and China over setting the rules for trade in the Pacific Rim;  the partnership also increases the strength of MNC's relative to sovereign nations.   Australia has been hit by both of these issues.  It has to balance itself in the Pacific Rim between the US and China.  That is why it has entered into both of their partnerships.  Australia has also had one of its laws on tobacco packaging reversed by a tobacco company complaint to the the third party mediator who heard the complaint.  The Australian government passed a bill that made cigarette packaging less appealing to consumers because it wanted to protect public health.  The third party mediator found that the rights of the tobacco company overrode the right of the government to protect public health.

Why Paul Krugman Calls Wall Street Bankers Vampires

Many progressive Democrats believe that the banking reforms in Dodd-Frank do not go far enough to prevent systemic failures like we had in 2008.  Krugman agrees that more could have been done but that Dodd-Frank is much better than nothing.  We know that because the bankers have been purchasing Republicans to dilute Dodd-Frank.  It has made them do things that have decreased risk in the banking system while making it more difficult to make risky but profitable bets.  Krugman reminds us that vampires are creatures of the night.  The can't tolerate sunlight.  Dodd-Frank sheds too much sunlight on their risky operations.  Since they are vampires, even their defenders have to be careful when they defend them against the sunlight that is in Dodd-Frank.  They are forced to argue that the vampires are better than the alternative financial organizations that have been moving into the risky areas that are off limits to banks that are classified as systemic risks. 

Sunday, May 10, 2015

President Obama Defends The Transpacific Trade Plan

President Obama answers questions about the TPP in this video interview.  He argues that we have a global economy and that is not going to change.  He also acknowledges the impact that globalization has had on American jobs in manufacturing.  Labor intensive jobs have indeed been outsourced to low wage countries.  Technology has enabled MNC's to export low skill jobs to low wage countries but he believes that technology, and other factors,will eventually make it less expensive to manufacture labor intensive products in the US.  He believes that some of the opposition to TPP is based upon the negative impact that previous trade agreements, e.g. NAFTA, have had on US employment.  He argues that TPP is designed to raise labor and environmental standards in Asia. That was left out of NAFTA.  This will help to level the playing field in Asia.  The trade plan will also lower trade barriers that make it more difficult for US MNC's to export to this market.  It will also protect the intellectual property rights of US firms.  He understands that this will be good for the profits of US firms but it also strengthens something that we are good at.  That is, creating intellectual property.

One of the problems that he has in selling TPP to progressives in his base is that TPP is also supported by the pro-business wing of the GOP.  That will help him to get Congress to pass the agreement, but the GOP will not help him to pass bills that will be good for labor.  He argues that he has consistently pushed for such policies without success. 

Wednesday, May 6, 2015

New President Of American Economics Association Challenges Orthodoxy

A new book by the new head of the AEA attacks the dominant assumption of academic orthodoxy.  That is, the idea that human beings are rational optimizers.  That assumption, which is the underpinning of the rational expectations school of economics, that is centered at the University of Chicago, is being challenged by an academic from Chicago's Booth School of Business.  His research has shown that human decision making is far from rational.  Rational expectation theorists attempt to escape from this problem by using the concept of "bounded rationality".  Their models assume a typical agent who attempts to be as rational as possible.  Economists cling to this assumption because it enables the use of mathematical models which distinguish economics from other social sciences.  That is, it is more like physics than other social sciences.  In other words, he accuses the economics profession of "scientism".  That is, a pretense of being scientific by mimicking the surface characteristics of the physical sciences.  It also excludes ethical considerations and morality from its analyses by assuming that economics is a positive science which has no interest in making normative judgements.

The book is also critical of the use of cost-benefit analysis by business professionals and many economists.  For example, if we can measure the cost of reducing carbon emissions in dollars, and we can measure the benefits that are derived from the reduction of carbon emissions, we can make a rational decision about whether or not we should undertake a reduction in carbon emissions.  The root of cost-benefit analysis is in utilitarian philosophies which are not commonly used by modern philosophers.  Its not possible to calculate the utility of avoiding species extinction and other benefits that might be derived from reducing carbon emissions.

Tuesday, May 5, 2015

Why the Equity Versus Efficiency Focus Should Shift in Economics

Larry Summers gave a speech at Brookings in honor of the 40th anniversary of a book by Arthur Okun on the tradeoffs between efficiency and equity.  In that period it was assumed that the distribution of income was relatively constant.  Therefore, the profession focused primarily on increasing efficiency because everyone would benefit from productivity growth.  The benefits from productivity are not being shared today so our focus should be on a more equitable distribution of income.

Summers points to a signal statistic which shows how things have changes since 1979.  If the distribution of income today were the same as it was in 1979, the bottom 80% of the income distribution would have 25% more income than it has today.  The top 1% would have half as much of total income than it has today.  The gains from efficiency and productivity have not been equally shared.  Summers then shifts his attention to policy issues which are tilted in the direction of greater equity versus efficiency.

 Tax policy over the last 40 years has been directed towards an increase in efficiency.  Summers argues that it ought to be directed towards redistribution.  We should also be less concerned with reducing to cost of capital and more concerned about increasing taxes on capital.

The financial sector, and the corporate system to which it is connected, has also increased it share of income substantially.  The financial system has also been a source of economic instability.  We need more regulation, which may decrease efficiency, in pursuit of equity and greater stability.

Dani Rodrik On The Transatlantic Trade and Investment Plan

There has been a lot of debate about the proposed Transpacific trade plan.  Dani Rodrik shifts his attention to the proposed Transatlantic trade plan.  In particular, he reviews two analyses of the purported economic impacts from the trade plan.  He believes that the real issue is the investor-state dispute resolution which turns the resolution of disputes over to a third party.  However, he chose to analyze two studies which reach different conclusions about the economic impact from the trade plan.  The studies reach different conclusions about the impact but that is less important than his explanation of the assumptions used in each model, and the limited importance of the types of gains which were used as the dependent variables over the long term.  One would not want to base one's decision about the trade plan based upon the conclusions from the models which were used to describe the long range results by 2027.  They might just as well tried to predict the weather in 2027.

Saturday, May 2, 2015

Summary Of IMF Conference On Rethinking Macro Policy

The IMF invited central bankers and some of the best economists in the world to its conference.  Oliver Blanchard did an excellent job of summarizing the issues that were raised and he offered his opinions on some of the responses he received.  There is as much confusion as there are solutions to the issues that discussed.  Monetary policy is clearly at a cross roads.  Fiscal policy is even in worse shape.  There is more concern about reducing public debt than there is about increasing budget deficits to stimulate growth.

Technological Advances And The Social Contract

This panel discussion raised some very interesting questions about our technological future and its implications.  One of the advancements is in machine learning.  Machine learning is growing at an exponential rate.  This raises a question about the time frame in which machine intelligence will be superior to human intelligence in more applications than we can currently imagine.  Things that we used to believe were uniquely human, such as the ability to recognize and identify complex images, can now be done better by computers.  As computational resources increase in power, the range of activities for which we require human resources will diminish.  An expert in the field of machine learning explains why this is not science fiction.  Another expert looks at our job classification system which shows that 80% of the labor force is employed in relatively low skill jobs.  A lot of these jobs will be replaced by smart machines.  Unfortunately, some of fastest growing industries are not labor intensive.  A very small segment of our workforce today, and tomorrow, will be employed in occupations which require a STEM education (Science, Technology, Engineering and Math).  Many of our politicians advocate programs to train more students in STEM.  A liberal arts education may be a better solution because it enables people to be more flexible and adaptive. 

The social question that arises from these discussions is that the age of labor scarcity is ending.  Our incomes have been based upon labor scarcity.  The first impact has been on low skill jobs, but many high skill jobs will also be replaced by smarter machines.  How will we manage a society in which we do not need a fully employed labor force working 40 hour per weeks?

The economist on the panel took a historical look at this problem and may have been a bit shaken by the rebuttals that he faced.  New technologies have always substituted for, or complemented, human labor. The majority of the workforce in much of our history was employed in agriculture.  Only 2% of the labor force in the US is employed in agriculture.  The farmers moved to the cities and took jobs in manufacturing.  Now they are moving into the services economy which employs the bulk of our labor force.  Unfortunately, many of the higher paying jobs in the services industry will also face a threat from increasingly smarter machines.  How would you prepare your five year old child for the future is the unanswered question.

My take away from this panel discussion is that the changes in technology are happening much faster than I had imagined, and that the time frame for order of magnitude transitions will be much shorter than many anticipate.  Most of us have been preoccupied with the very real problems that are apparent today.  That includes most of our  politicians.  We will need a superior government to deal with the issues that were raised in this discussion.  Its not encouraging to witness the backwards looking politicians that we observe running for high office in the US.  Many are following rather than leading the electorate.

Friday, May 1, 2015

What If The Governor Of Kansas Became The President Of The US?

The governor of Kansas has implemented policies that are being advocated by Republican candidates competing for the GOP presidential nomination.  Those policies have been terrible for Kansas.  For example, some schools are closing week earlier because they have run out of money.  Moreover, the state budget is in deficit because of tax cuts which were supposed to increase tax revenues by expanding the Kansas economy.  If we want the rest of the US to look like Kansas we only need to elect a Republican as our next president.

Made In The World Products And Multiregional Trade Agreements

Production by multinational corporations makes extensive use of cross national supply chains.  For example, Apple's smart phones are assembled in China using parts that are produced in a number of countries outside of China. The Apple smartphone is a classic example of a "made in the world" product. If the US imposed tariffs on smartphones imported from China, that would decrease the profit on Apple smartphones in the US.  Consequently, multinational corporations have an incentive to lobby for preferential tariffs on their products which are made elsewhere and imported into the US.  According to this article,  made in the world production is one of the reasons for multi-regional trade agreements like the Trans Pacific Partnership.  It argues that made in the world production limited the use of tariffs and other restrictions on imports during the recent recession.