Tuesday, June 30, 2015

Everything You Need To Know About The Greek Problem In Europe

This article, by an economist from the Booth school at the University of Chicago, does a nice job of describing the debt problems in Greece and the implications for the eurozone.  The situation was not well handled by the IMF or by European leaders.  Greece had not managed its economy very well and it did not have the resources to service its debt.  Much of its debt was held by large banks in Germany and France.  A decision was made to bail out these banks in 2010.  Things might have been different if those funds would have been used differently.  The IMF made a loan to Greece 2010 that has now become due.  Greece does not have the funds to service that debt but the IMF is not in a position to  accept a loss on its loan.  What happens next is anyone's guess.

The US Chamber Of Commerce As A Global Pro-Cancer Organization

The US Chamber of Commerce has subsidiaries across the globe.  It is the largest lobby organization in the world.  This article describes the role that chamber is playing to protect the interests of the tobacco industry.  It is working directly against the efforts of the World Health Organization to protect the health of children.  Tobacco smoking a major cause of cancer and other health problems.  The US Chamber of Commerce is using legal tactics to block national government efforts to reduce smoking in their countries.  For example, under pressure from the US chamber's subsidiary in Ukraine, the government sued Australia's government which mandated changes in cigarette packaging that made them less attractive to consumers.  This was possible under an international trade treaty which prevents national governments from taking actions which are harmful to business interests.  Ukraine does not export tobacco products to Australia; it has no economic interest in the action that it took against Australia.  It was acting as an agent of the US Chamber of Commerce.  Subsidiaries of the US Chamber are active across the globe in blocking government efforts to protect the health of their citizens.  Some of these efforts are described in this article.

The US Chamber of Commerce has also been a major lobbyist for the fossil industries which have fought against the efforts of the Environmental Protection Agency reduce carbon emissions in the US.  Not surprisingly, it has been a major supporter of the Republican Party in the US. Several major corporations have withdrawn from the chamber because of its support for regressive policies.  The US Chamber of Commerce is a national disgrace.  Unfortunately, it is a multinational lobby organization that has no moral principles in its global operations.

Thursday, June 25, 2015

How The GOP Supports Predation In Education

Predatory animals prey on the weak and the unprotected.  The target market for predatory educational institutions are poor students who are not well informed.  They are encouraged to take out loans to purchase training programs and/or degree granting programs that promise them high paying jobs upon completion.  The loans are typically supported by the federal government.  Most of these educational institutions lie about the employment opportunities for their graduates.  Students either fail to complete the programs or they fail to find the promised jobs upon completion.  What they get for their efforts are loans that have to be repaid.

The government has established new rules that the educational institutions must satisfy in order to be eligible for federally supported loans.  The intent is to limit predation and to husband the funds available to support needy students.  The predators don't like the new rules so they have lobbied Republicans in Congress to prevent the government from enforcing the rules.  The Republicans can't be obviously against predation, so they have invented a rationale for blocking government enforcement.  In this case they claim that they want to reduce the role of government in higher education.  This argument complements another claim that often accompanies efforts to "get government off of our backs".  That is, consumers make better choices than government can make for them.  Predators should be free to attack their prey. This is how they misuse the concept of liberty when its suits their purpose.  They oppose liberty when government interferes in the market to support their friends.

Tuesday, June 23, 2015

Why Small Booms Can Produce Outsized Economic Downturns

Brad DeLong argues that over investment in housing during the real estate boom was small relative to the size of the global economy.  He attempts to explain the slow recovery from the consequent slump by arguing that credit cycles fail to operate subsequent to the collapse of the housing bubble.  Every dollar of over investment in housing produced a $120 drop in output when the bubble collapsed because credit stopped flowing to fund new investments.  Moreover, political resistance to government investment, financed by deficits, blocked one of the four remedies for restoring growth.  That, along with a 2% inflation rate target, limited the impact of monetary policy.  Real interest rates could not fall far enough to stimulate private investment when the expected return on investment was depressed.

The comments that follow DeLong's post raise some issues that DeLong did not consider.  I have listed some examples below:

*  As the value of real estate inflated during the boom households took out home equity loans to fund consumption.  That source of spending dried up after the collapse;  households were forced to rebuild their balance sheets.  Consumer spending was hit with a double whammy.  Households were forced to pay down debt during a period of high unemployment, slow growth in wages, and elevated job insecurity.

*  Wall Street banks were in the business of producing mortgage based derivatives.  They borrowed against the assumed value of the derivatives that they held to purchase a stream of new mortgages  to produce the new derivatives that they manufactured.  Many banks became illiquid when they were unable to borrow against derivatives that had lost their value.  Many banks also became insolvent when the derivatives that they held lost value.  The financial system would have collapsed if the Fed had not resorted to extraordinary measures, including placing the toxic derivatives on their balance sheet.  This was not a typical slow down in the credit and investment cycle.  Highly leveraged borrowing, to produce derivatives that declined in value, exceeded the value of the real estate purchased during the boom.

*  The customers of the banks who purchased the toxic derivatives were also damaged.  That included pension funds,  endowments, insurance companies as well as international banks.  Banks in Europe were prime customers for the toxic derivatives.  Since they had a AAA rating they could invest in them without a requirement to place capital in reserve as a cushion against loss.  Their balance sheets were in serious trouble when they had to write down the value of the derivatives that they held.  That, along with investments in AAA rated sovereign debt that turned out poorly, had a major impact on the credit cycle in Europe. 

*  Central banks have kept interest rates extremely low for an extended period of time.  Low mortgage interest rates have certainly been good for the damaged real estate market.  They have also been good for the stock market in a number of ways.  They have encouraged a rise in asset prices but they have not stimulated investment in productive assets.  Large corporations are taking advantage of low interest rates to buy back their own stock and to pay out dividends.  That is a quick way to increase stock values without making risky investments in new productive capital.

Sunday, June 21, 2015

How Climate Change Denialists Attempted To Block Pope's Encyclical On Climate Change

Conservatives within, and outside of the church, were defeated in their efforts to influence the Pope's encyclical on climate change.  This article describes some of the efforts made by conservatives.  None were more active than the Heartland Institute which is a free market "think tank" based in Chicago.  Heartland has a long history of supporting ultra conservative causes.  It supports efforts to privatize almost everything, including public education,  and it defended the tobacco industry's efforts to deny that smoking was a cause of cancer despite evidence which showed the lung cancer was almost non-existent prior to the dramatic rise in cigarette consumption following  the first world war.  Cigarettes were distributed without charge to soldiers because they had a "calming effect" in the battlefield. 

Saturday, June 20, 2015

Why Do Conservative Politicians Pretend To Be Business Leaders?

Paul Krugman picks on Jeb Bush (who wants to called Jeb) to make a good point.  Jeb is trying to sell himself to the electorate by claiming that he was responsible for Florida's economic growth.  If he is elected president he claims that he will grow the economy at a 4% rate.  Krugman looks at the record and it shows that Bush had little to do with Florida's growth rate; it was entirely the result of the Florida housing bubble.  Secondly, his claim that he will grow the economy at a 4% rate is a pipe dream; one can't find a single economist who believes that this can be done.  On the other hand, part of the electorate, which believes in miracles, will rally around his boast.  That brings us to the real reasons for Bush's false claims about his economic prowess.  Voodoo economics is a well honored tradition in conservative politics for good reasons.

The more general reason is that conservative parties distinguish themselves from liberal parties by claiming that they will be better economic stewards of the economy.  They associate themselves with the business class, and they successfully portray liberal parties as poor stewards of the economy. They overtax those who are successful, and they over regulate the economy so that they can spend excessively on social welfare programs.  The Tory Party in Britain and the Republican Party in the US follow the same marketing strategy.  Its hard to imagine a conservative party that does not follow this strategy.  It works some of the time, and they get a chance to reduce tax rates for the rich when they get in office.  Its very difficult to undo the damage when liberal parties win elections.  Cutting taxes is much easier than raising taxes.  The deregulation story is often easy to sell because the public admires entrepreneurs who are free spirits who overcome obstacles to build a business.  Conservative parties are good at generalizing that story to those who run large businesses that were built up by their predecessors.  They often provide the major obstacles for entrepreneurs who attempt to destabilize their markets.  Moreover, they often use government regulations to raise the hurdles for new business entry.  Government regulation of the economy is a double edged sword.  The important issue is not regulation per se, but who benefits from a particular regulation.  Its easier to sell the deregulation story to the public than it is to educate the public about the complexity of the regulation story.

Friday, June 19, 2015

The Pope's Encyclical On Climate Change

The quote below is the final comment in the New York Times summary of the Pope's encyclical on climate change.

“All is not lost,” he writes. “Human beings, while capable of the worst, are also capable of rising above themselves, choosing again what is good, and making a new start.”
The Pope believes that the scientific community has made the right conclusion about the human contribution to climate change.  He has also seen much of the damage from climate change in his travels around the globe.  At a fundamental level, the Pope shows his respect for the ability of the scientific community to deepen its understanding of natural phenomena.  This may be one of the positive virtues that we possess as human beings.  He is concerned, however, about our moral and ethical development.  We are better at science than we are at moral and ethical development.  Our pursuit of material gain, without regard for the health our planet, and the well being of future generations, is the root cause of the damage that we are doing to our planet.  We are capable of realizing our human potential but it has been often been difficult for us.  He is hopeful that we can rise above our human frailties and do the right thing.  His encyclical is intended  to push us in that direction.

This editorial in the New York Times praises the Pope's encyclical but it is not as hopeful as the Pope's message.  We all struggle to live up to the moral and ethical values that we hold.  Our politicians don't seem to care much about that kind of struggle.  The senate majority leader opposes any efforts made by the government which might affect the interests of the coal mining industry in his state.  More generally, the Republican Party has used climate change denial as an attribute that distinguishes itself from its "liberal opponents" in the Democratic Party.  It is not likely to give up its war against liberalism which has been well received by its electoral base.  However, we should be hopeful that the Pope's message will have a positive impact on public opinion.  Politicians place a high value on swings in public opinion.  It can determine whether they remain in office. This is something in which they all believe.  They have to balance the loss of campaign contributions from the affected industries versus the impact of changes in public opinion.

Wednesday, June 17, 2015

Politicians In Texas Have Been Infected By The Gold Bug

This article describes some of the crazy things that elected officials in Texas, including its past and present governors, have been doing to protect Texans from the federal government.  They believe that the federal government is destroying the value of the dollar (which has been increasing in value) and they want the federal government to return its share of gold to Texas.  It would then issue a currency that is convertible to gold.  This might have been a funny episode on the Colbert Report but unfortunately it is serious. Glenn Beck scared the hell out of his talk radio audience by predicting Armageddon and telling them to buy gold as a protection.  That helped to drive up the price of gold and Beck probably unloaded his share prior to the steep drop from the peak that he helped to create.  That was great for Glenn Beck but it has not been good for the gold bugs that he incited.  Many of them live in the Lone Star state and they get elected to high office in Texas.  "Hook 'em Horns!"

Are We Running Out Of Groundwater?

35% of the freshwater used by humans comes from underground aquifers.  NASA has been studying the aquifers for a decade and it released a study which shows that 21 of the 31 aquifers have  reached a tipping point.  They lose more water every year than they replace.  We are familiar with the situation in California where the drought has made the state more dependent upon underground water sources.  The NASA report includes a graph which maps the aquifers and indicates the distress level in each of them.  It also describes the implications of the depletion pattern that it has observed.

Donald Trump Announces His Candidacy For GOP Presidential Nomination

"The Donald" told us why he should be our next president.  Perhaps he would fire everyone else and  move the White House to the Trump Tower where he could deal directly with Chinese officials who decided to locate in the building named after the world's best deal maker.  His announcement failed to impress Jennifer Rubin who writes from a conservative perspective for the Washington Post.  She called the announcement a "clown show".  Trump's candidacy may not go very far but it would be great for TV ratings.  The whole world loves a clown, and Trump does symbolize the American Dream.  Even a clown can become a billionaire.

Tuesday, June 16, 2015

What Do We Learn From Home Depot's Investment Spending?

Home Depot is an economic bellwether.  Its income and profits track remarkably well to the business cycle.  The graph below shows the rise in profits prior to the housing market crash, and the rapid decline subsequent to the collapse in the housing market;  profits climbed steadily during the recovery and they are now back to where they were prior to the recession. The capital spending graph shows a very different pattern.  Capital spending fell off dramatically with the onset of the recession. It has been flat during the recovery and it is well below the peak it reached prior to the recession.  It has been able to restore its profits, but it is no longer investing its profits to expand.  Apparently, Home Depot does not envision growth in its future. 

IMF Research On Income Inequality and Economic Growth

An IMF study on income inequality and economic growth found that increasing the income share of the top 20% had a negative effect on economic growth in 129 countries.  Moreover it found that increasing the share of the bottom 20% had a positive effect on economic growth.  It suggested several mechanisms that might explain the relationship between inequality and growth, but no clear link was evident in the data.  Nevertheless, the IMF study should put an end to the "trickle down theory" which was made popular by Ronald Reagan.  That "theory" proclaimed that increasing the income of the rich would stimulate economic growth and make everyone better off.  Reagan used his "trickle down theory" to justify steep tax cuts for families with high incomes along with the end of government regulations which were believed to constrain commerce.  The combination of tax cuts, and a large increase in defense spending, produced the largest budget deficits since the end of the second world war.  Reagan's "Morning in America" was produced by the classical Keynesian formula for stimulating economic growth through large budget deficits.

Monday, June 15, 2015

Larry Summers On TPP

The press is having a field day describing the politics of the proposed TPP as it is being expressed in Congress.  Larry Summers goes beyond the politics, and places the TPP in a much broader context.  President Obama and Congress have failed to do this. 

Sunday, June 14, 2015

Pentagon Plan To Locate Weapons In NATO Nations Close To Russia

The US and Russia had established an understanding that they were not aggressors toward each other and that military weapons would not be positioned close the Russian border.  That understanding has changed after events in Crimea and Ukraine.  A Pentagon plan to position weapons in the Baltic states as well as in other Eastern European states is described in this article.   The plan was discussed during a recent meeting in Riga.  It was intended to reassure NATO nations in Eastern Europe that they would be protected from Russia.  Putin has denied any intentions of aggression towards them but this is an escalation that serves more as a warning than anything else.  It is another unfortunate deterioration in the efforts that had been made to bring Russia and Europe closer together.

The Pope Will Place The Catholic Church Against Climate Change

The debate about climate change has generally been about the science behind climate change.  The vast majority of the scientific community has little doubt about human contribution to climate changes but the general public has been confused by skeptics who have generally been associated with the fossil fuel industry.  The pope will issue an encyclical which turns the debate into a moral issue.  It will declare that the morality of economic development must be changed.  An encyclical is a teaching document which clarifies the position of the Church on theological issues.  This encyclical will turn a largely secular debate into a moral and ethical issue. 

Friday, June 12, 2015

What Can Government Do To Limit Financial Risk?

The financial crisis caused the most serious recession since the Great Depression.  Curiously, the financial system was absent from the prevailing models of the macro economy prior to the Great Recession.  The IMF conference in April made an effort to determine what was learned from the financial crisis and how we might prevent the next crisis.  Noah Smith reviews some of the issues discussed during the IMF conference and he concludes that we are long way from understanding what can be done to prevent the next crisis.  On the other hand, we no longer believe that we can model the economy without including the financial system in our models.

Why Conservatives And Liberals Oppose Dood-Frank

Conservatives don't like the financial reform bill that was passed during the financial crisis.  They claim that banks that are too big to fail receive a subsidy because they are not a default risk.  Therefore, they can borrow money at a lower rate than smaller banks.  Liberals don't like Dood-Frank because they don't believe that it does enough to reduce systemic risk in the banking system,  and TBTF banks should have to pay for the subsidy that they receive.  It turns out they are both wrong.  Two different statistical methods are used to demonstrate that TBTF banks do not receive an implicit subsidy from the government.

That result is interesting but I was more interested in one of the implications of this analysis.  It raises a question about who really owns a corporation.  The common view is that shareholders are the owners of our major corporations.  It turns out that creditors have an equal claim on corporate ownership.  They just use credit default swaps to transfer the risk of default on their claims to third parties.

Britian's Leadership Makes Bold Effort To Solve The Wrong Economic Problem

Britain's economy is not in good shape.  The unemployment rate is not bad, but nobody has offered an explanation, or a solution, for the decline in productivity.  An economy with declining productivity is not a good thing.  The conservative government, with the help of a compliant media, has decided that government debt is the problem that must be solved.  Paul Krugman argues that there is little reason to believe that government debt is, or has been, a serious problem in Britain.  His argument will fall on deaf ears in Britain.  There is no argument that makes more sense to serious people than the problem of debt.  It also provides an excuse for the government to make large cuts in social welfare programs and to avoid doing what is needed to restore productivity growth.

Sunday, June 7, 2015

The Economic Consequences Of Austerity

Amartya Sen is a Nobel Prize winning economist and philosopher who teaches at Harvard.  His title for this essay is a play on a book written by Keynes which predicted the economic consequences of the austerity imposed on Germany following its defeat in the first world war.  The victorious states imposed an unworkable punishment on Germany that ruined its economy and much of the European economy in the process.  Sen sees a parallel between the austerity that was forced upon Germany and the decision by European leaders choose it as the weapon of choice following the financial crisis.  Keynes hoped that his book would have enlightened the public about political economy and that future generations would have learned from the economic disaster that was imposed upon Germany, and indirectly on Europe, following the first world war.  Sen has distilled the lessons that we should have learned in this short essay.

The rationale for austerity in in Europe was based upon two objectives: the need to reduce the ratio of public debt to GDP, and the need for structural reforms in many of the European economies.  Sen believes that structural reforms are needed, and desirable, but that it was a mistake to use austerity as the means to force the structural reforms on the struggling economies in Europe.  In the first place, the imposition of austerity has not reduced the ratio of public debt to GDP.  Instead the ratio has increased for obvious reasons.  Public revenues grow when the economy expands and they decline when the economy shrinks.  The decision to cut public spending, at the same time that private spending is declining, causes the economy to contract.  It is impossible to lower the debt to GDP ratio when the economy and tax revenues are declining.  The easiest way to reduce the ratio is to expand the economy and the tax revenues which follow the expansion.  Sen argues that this is what happened during the Clinton Administration in the US.  Clinton inherited a large budget deficit but the economic growth that accompanied the dotcom boom increased tax revenues enough to produce a budget surplus at the end of the Clinton Administration.

Sen also reminds us of the debt to GDP ratios in Britain and the US following the second world war.  They were double the debt the ratios that politicians are alarmed about today.  They were quickly reduced during a period of rapid economic growth.  Moreover, some of the public goods, such as the National Health System in Britain, would not have been established if fear mongering about the public debt would have imposed constraints on the political process.

Sen has observed the political consequences of the austerity that has been imposed upon struggling nations which have been forced to cut public services and to deal with the consequences of high unemployment.  Public support for the major political parties has imploded and antidemocratic forces have taken advantage of the economic malaise.  The premise of democracy is that leaders should debate the issues that might be used to restore economic growth prior to making their decisions.  Bad decisions were forced upon the public, and Europe is in the process of attempting to restore economic growth and political order in an economy that has been damaged by those decisions. History has a way of repeating itself.  That is bound to happen when we don't learn from our mistakes.  We made similar mistakes following the first world war and during the Great Depression.  Our financial leaders continue to compare national economies to household economies and to lecture the public about their mistaken economic assumptions and morality that underlies their belief system.

Saturday, June 6, 2015

Inequality: What Can Be Done?

This review of Tony Atkinson's new book on inequality by Thomas Piketty summarizes the issues very nicely.  It has been widely recognized that income inequality has been growing in most developed countries.  This is partly due to changes in government policies which have redistributed income to the rich.  That has been accomplished in Britain and the US by replacing progressive taxes with regressive taxes.  Atkinson has proposed a restoration of the progressive income tax and the inheritance tax.  He would also eliminate regressive tax policies that were introduced during the Thatcher regime in Britain.  This would help to reduce inequality in Britain well below the level of inequality in the US, where it is the highest,  and bring it closer to the level of inequality that prevails in Europe and other OECD nations.  Atkinson pairs the inheritance tax with a system that would provide ordinary citizens with access to capital for investment purposes.  Inheritance income would be more equally distributed in order to increase social mobility.

Piketty describes other methods of reducing income inequality in Britain, and he points out that Atkinson does not discuss some of the problems with the use of tax havens in Europe which might make it difficult to deal with tax policy at the national level.  On the other hand, Piketty understands that dealing with the politics of tax policy at a local level may make it easier to get things done.  In any case, much can be done to reduce income inequality simply by reversing many of the redistributional changes in tax policy which were successfully engineered by conservatives.

Friday, June 5, 2015

A Snapshot Of The US Housing Market

The sale of existing homes is a good indicator of demand for housing at existing prices.  This market has been improving after a lapse in 2013.  Low mortgage interest rates have contributed to the growth rate.  New housing construction, which is a leading contributor to economic growth, has been growing much slower than it was prior to the financial crisis.  Construction of apartment complexes for the rental market has been growing faster than the new home construction market.  The housing market tends to be local.  This report provides an interactive graph which shows the growth rates in a number of local markets.

Thursday, June 4, 2015

The US Tax System Becomes Less Progressive For The Ultra Wealthy

The US tax system is based on the ability to pay theory.  Tax rates generally increase as income rises.  This study shows that the tax system is progressive up to a point.  Most households in the top 1% have a higher tax rate than households below the top 1%.  As one moves up to the top .01% and beyond the tax rate actually falls.  That is because capital gains become a larger source of income as one's income increases.  Capital gains are taxed at a lower rate than earned income which is the primary source of income for households below the top .01%.  The ultra wealthy have a lower tax rate than upper middle income Americans. 

Capital gains used to be taxed at the same rate as earned income in the US.  Conservative administrations, beginning with Reagan, cut the tax rate on capital gains by arguing that it would encourage investment.  It has not produced a measurable gain in business investment.  In fact, business investment in recent years has declined.  Retained earnings are being used to jack up stock prices through stock buybacks and dividend payouts, which are also taxed at a lower rate, have increased dramatically.

The Causes And Solutions For Rising Income Inequality

Mark Thoma lists many of the causes of rising income inequality along with some of the solutions.  Its hard to argue with the items of the lists that he provides.  He makes an effort to provide new information by telling us that we don't have perfectly competitive industry markets.  Most industrial markets are imperfectly competitive, and some firms are able to produce monopoly profits which are unequally distributed.  He concludes that the monopoly profits would be more equally distributed between workers and top management if workers had more bargaining power.  Thoma's heart is in the right place if one believes that it would be desirable to decrease income inequality.  However, his analysis is not helpful.  In the first place, he offers no method for increasing the bargaining power of labor.  Moreover, most economists understand that we do not have perfectly competitive markets and there is no way to make them perfectly competitive. Thoma does tell us something that we do not already know. Its also the case that profits are unequally distributed between management and labor even in firms that have a smaller share of industry profits.  This is easily explained by our system of corporate governance in which CEO's determine the structure of corporate boards that determine executive compensation. Top managements in highly profitable firms may make more money than executives in less profitable firms, but top executives in less profitable firms typically receive a similar share of the compensation pool.

Given the structures of our institutions the prevailing pattern of income distribution is not likely to change.  Investors are less concerned about the share of the compensation pot going to top management than they are about shrinking the total cost of compensation.  Many believe that tough managers who are willing to cut total costs earn the large share of compensation that they receive.  Top management compensation is increasingly in the form of stock options and dividends which are taxed at a lower rate than earned income.  That encourages management to use a larger share of retained earnings for stock buybacks and dividend payouts.  Government tax policies have had a major effect on income distribution.  Thoma seems to be unaware of this relationship. 

The Shifting Center Of Global Economic Activity

Tim Taylor summarizes a McKinnsey study of global economic growth.  The center shifted from Asia to Europe in the mid ages. This resulted from warfare and disease in Europe decreased the population and increased the ratio of arable land per capita.  The industrial revolution increased the gravitational pull of Europe and the US, but the industrial revolution has shifted to China and India which will become the next center of global activity.

The Effects Of Small Business Training In Mature And Developing Countries

The Small Business Administration in the US has promoted a variety of business literacy programs to encourage entrepreneurship and job creation.  This study suggests that business literacy programs are more effective in developing countries than they have been in the US and other developed countries.  Mexico is offered as an example of a successful program and it is suggested that SBA programs in the US might be less effective because other sources of business literacy are available in the US.

Why We Don't Need to Produce More IT Workers In America

There are lots of highly educated information technology professionals in places like India.  They are able to do much of the work that is done by domestic information technology professionals.  They are also willing to work for much less money than American IT professionals.  This article describes what Disney did to reduce the cost of information technology labor.  Disney replaced much of it IT staff in Florida with professionals from India who received temporary visas which have been made available under the assumption that we have a shortage of IT professionals in America.  The replaced IT professionals at Disney were required to train the less expensive professionals to do their jobs in order to receive their severance allowance.

What happened at Disney is not unique.  American corporations are outsourcing much of their IT work to less expensive countries.  Some of the work is outsourced directly to the subsidiaries of US firms like IBM and Anderson Consulting,  and some of the work is performed by consulting firms in the US who recruit less expensive IT professionals with temporary visas to replace more expensive American professionals.

One can't fault US corporations for taking advantage of lower cost professional labor which is available in India and many other low wage countries.  Their mission is to increase shareholder value and this is more easily done by lowering costs than it is by increasing sales.  The US government could place limits on this practice but that would be inconsistent with the mission of US corporations which is to increase profits and shareholder value. Some economists, like Greg Mankiw from Harvard, argue that placing limits on this practice would interfere with free trade.  Importing labor is not different from the import of other commodities which are freely traded.

Tuesday, June 2, 2015

Barry Eichengreen On New Economic Thinking

Brad DeLong is a fan of his colleague at Berkeley but it he is less optimistic about ability of the the profession to adapt to the new economy and to benefit from some of the resources described by Eichengreen.  His pessimism derives from his experience with graduate education in economic departments, which have not changed much at all.  Most of the benefits from computer technology and access to big data will occur outside of the economics departments.

Federal Reserve Policies And Income Inequality

The Fed has been accused of increasing income inequality by keeping interest rates low. Ben Bernanke admits that low interest rates have contributed to rising asset prices, like stocks, but he argues that monetary policy has not promoted income inequality.  The Fed's policies have been directed toward maintaining employment and price stability.  Income inequality would have been worse if unemployment had risen more than it has.  Preventing price deflation has also been good for borrowers and bad for creditors who tend to be wealthier. 

Bernanke argues that monetary policy is a blunt instrument that has diverse effects on income inequality.  Moreover, it is not part of the Fed's mandate to deal with income inequality. Fiscal policy, which is the responsibility of elected officials, is more appropriately directed toward the distribution of income and social mobility.  In fact, counterproductive fiscal policies have made it more difficult for the Fed to maintain employment stability.