Friday, August 28, 2015

US Economy Is Bright Spot In Global Economy

This article highlights the modest growth in the US economy and the slow growth in the rest of the world, with the exception of Germany.  The US has a mature economy that is more dependent upon internal consumption than faster growing economies in Asia which depend upon exports.  It can't grow much faster due to slow population growth and slow growth in productivity.  China has been the engine of growth but its recent slow down has affected nations that depend upon exporting commodities to China.

Monday, August 24, 2015

Cornell President Offers Defense Of Higher Education

The newly elected president of Cornell argues that we need to look at higher education through a new lens.  She then extols the virtues of a liberal arts education, which focuses on citizenship for the common good, as well as the critical role that research universities play in the development of knowledge.  This is not a new lens.  It is distinct, however, from the new lens that has gained credibility in recent years.  Scott Walker, the Governor of Wisconsin, and a leading candidate for the GOP presidential nomination,  has made large cuts in the state budget for higher education, and he claims that the mission of the state university system is to provide the skills required by the business community.  In other words, the state university system is simply the last step in a vocational  education system. It does not exist to promote active citizenship and the common good. 

Scott Walker is only one of many conservative governors who look at higher education through a similar lens.  They leap on the bandwagon when one of the state universities excel in popular sport but they have been cutting university budgets and they are doing what they can to limit academic freedom.  The President of Cornell University should not have to defend the university system by proposing a new lens.  It is the new lens that should worry us.

Why There May Be No Need For Fed To Raise Interest Rates

Larry Summers is concerned about secular stagnation.  He does not believe that the US economy is being stalled by temporary headwinds, or that interest rates should be increased to promote financial stability.  He argues that the Fed should be more concerned about market forces that are operating to increase the risk of financial instability.  There is no need for the Fed to increase the risk of financial instability by raising interest rates during a market sell off.  He expects low interest rates to be the new normal for the next decade.

Friday, August 21, 2015

The Cost Of a Low Neutral Rate Of Interest

The retiring president of the Minneapolis Federal Reserve provides an excellent analysis of the effects of a low neutral interest rate, and the pros and cons of raising the neutral rate.  The neutral rate is defined as the rate of interest consistent with the Fed's mandated goals of full employment and its 2% inflation target.  The neutral has been falling in recent years and it creates two kinds of problems.  In the first place, it reduces the effectiveness of traditional monetary policy when nominal interest rates are close to the zero lower bound.  The Fed has resorted to the use of extraordinary policies which have their own strengths and weaknesses which are well described in this article.  Secondarily, low interest rates on safe assets, issued by the Treasury, encourage investors to seek higher yields on riskier assets.  This increases the risk of financial instability.  Our recent financial crisis provides a good example of what can happen when investors seek higher returns on riskier assets.

The government can increase the neutral rate of interest by issuing more securities and increasing its level of debt.  If we are agnostic about the effectiveness  to which the new debt is used by government, we have to consider the welfare effects of a higher debt burden.  That issue is well described in this article.  There will be winners and losers from this policy.  Elected officials who are responsible for fiscal policy must make those decisions. Paul Krugman provides many examples of how our politicians think about government debt. He is not very hopeful.  Krugman is not agnostic about how government might use the new debt that it creates.  He suggests lots of good investments might be made at very low cost.  Most of our politicians have more expertise, and concern, about running for office than they have about the development of effective fiscal policy.  They feed the public what it likes to hear. 

Wednesday, August 19, 2015

Why Google Reorganized

Bill George understands the problems faced by many large corporations.  In this article he argues that Google's management understands these problems, and that it has addressed the problems by creating a new organization structure that fosters innovation.  Each of the new organizations, within Google's holding company, is headed by successful innovators.  They will be able to take the risks, that are associated with innovation, that most large corporations avoid.  They will not be managed to satisfy shareholders who seek short term growth in the stock price or large dividend payouts.  Their mission is to innovate for long term growth that will enable Google to continue to grow its enterprise.  Google is attempting to avoid the mistakes made by Microsoft and Hewlett Packard which managed for the short term and lost their ability to innovate.

Tuesday, August 18, 2015

Scott Walker Proposes A New Healthcare Plan

Walker offers a new plan to replace the Affordable Care Act.  It will help him in the primaries because anything that is opposed to Obama's plan appeals to the GOP base.  There are two problems with his plan.  The first problem is that Republicans do not have enough votes to repeal the ACA.  The second problem is that his numbers on funding the plan don't add up.  Moreover, his substitution of a new conservative plan for the ACA, which follows the outlines of a proposal made by the conservative Heritage Foundation,  is short on a rationale for moving to his plan that goes beyond electioneering.

Why Are Most of The GOP Candidates Proposing Cuts In Social Security?

Social Security has often been called the third rail of politics because of its popularity with most voters.  Krugman tries to explain why all of the candidates, with the exception of Trump, are taking the electoral risk by cutting SS benefits.  He argues that 50% of the campaign funds available to GOP candidates come from 130 families, and that cutting SS is part of their plutocratic agenda.  Its hard to understand why they want to cut SS because they do not pay for it through SS taxes.  There is no SS tax on income from capital, and no taxes are paid on incomes above a ceiling which is a bit above $100,000.  The explanation must have something to do with the plutocratic agenda which he does not discuss.  Moreover, they probably realize that other taxes will have to be raised in order to pay future benefits since the SS trust fund only contains IOU's from the Treasury which has "borrowed" money from the trust fund to finance general government spending.  The government must raise taxes or sell more treasuries to other sources in order to fund future payouts.

The Berkeley Blog

I just discovered the Berkeley Blog.  There are over 300 contributors to this blog from a wide variety of academic areas.  This blog reviews the presentations at an international conference in Ravello, Italy on biotechnology.  It offers a delightful description of Ravello and it argues that biotechnology provides for advances in a wide variety of areas including, medicine, agriculture and new sources of energy.  Its a great way to access the seminal ideas from one of the world's great universities.

Tuesday, August 11, 2015

Donald Trump And The Split In The Republican Media

Bruce Bartlett has been a Republican insider since the Reagan Administration.  He reviews the advent of the libertarian movement in the GOP, and he describes how David Koch transformed a grass roots populist movement into the Tea Party.  The Tea Party controls primary campaigns and it threatens to run an opposition candidate in primaries against any GOP incumbent who violates oneof its sacred principles.  Its goal is to transform the Republican Party into the Tea Party.  Donald Trump has been winning support from Tea Partiers, but there has been a split in Republican media.  The Republican TV news channel had supported Donald Trump but he offended some of the Fox propagandists in the debate that it sponsored.  However, the most important talk radio shows that misinform Tea Partiers have defended Trump.  Trump's future will be determined by how the major sources of conservative propaganda respond to his bombast. Despite the split in the Republican media, Trump is still ahead in the most recent polls.

Is China's Growth Miracle Over?

China's economy grew at a 10% annual rate for 30 years.  That has never happened before in any country.  China also accounted for one third of the global growth in 2013.  What happens in China is very important to the global economy.  China's growth rate has fallen to around 7% in the last few years and some are concerned that China will fall into the middle income growth trap from which it is difficult to escape.  This study attempts to explain the factors behind China's impressive growth rate; it also evaluates its plan to escape the middle income growth trap.

Monday, August 10, 2015

Pentagon Moves To Curtail Freedom Of Press

Lyndon Johnson escalated the US war in Vietnam during his presidency.  The war did not go well and public sentiment turned against Johnson.  He determined that he could no longer conduct the war as he had planned after he lost the support of Walter Cronkite on his popular TV news show.  He realized that popular support for the war would continue to erode.  George Bush learned a lesson from Johnson's experience.  He restricted journalist access to war zone action by pairing journalists with specific military units.  He also benefited from cable news networks like Fox News which did its best to create propaganda in support of the Iraq war.  Fox even created military heroes who not done anything heroic in order to bolster public sentiment for the war.  Reporting on the Iraq war was nothing like the reporting on the Vietnam war. 

Apparently, the Pentagon believes that it must restrict war reporting even further.  This NYT editorial describes the steps taken by the Pentagon to control war reporting even further.  It declares that journalists will no longer be protected as citizens in war zones and that they may even be regarded as spies.  That is what authoritarian governments in the Mid East have done to restrict the freedom of the press.  Several US reporters have been arrested for spying.  The Pentagon must believe that it should have the same freedom of operation as military dictatorships.

The Financial Sector And The US Economy

There is an obvious relationship between the size of an economy and the need for financial services.  The financial sector in the US has tended to grow with the size of the economy.  In the late 19th century it was about equal to GDP.  It grew to 3 times GDP prior to the Great Depression and its share dropped by 50% after the Great Depression.  It was about 4 times GDP by 2000.  There is a strange relationship, however, between the size of the financial sector and financial services income.  There are no economies of scale in the financial sector.  Financial services income is a fixed proportion of total intermediate assets issued by firms in the financial sector.  For example, the income received by a bank for providing a $100,000 mortgage is twice the income that it receives for providing a $50,000 mortgage.  The cost of providing the larger mortgage is no greater than the cost of providing the smaller mortgage, but the banks income doubles by providing the larger mortgage at the same cost.  Similarly, the cost of managing a $50,000 portfolio by an financial firm is about the same as the cost of managing a $100,000 portfolio.  However, the income received for managing the larger portfolio is twice what the firm receives for managing the smaller portfolio. 

The graph below shows the historical relationship between the size of the US economy and two ways of measuring the size of the financial sector.  The orange line shows the market value of all assets provided by the financial sector.  The green line shows the income received by the financial sector for the services provided.  The income is a measure of the value added by the industry.  It is calculated by subtracting the total cost of purchased equipment and services from total revenue.  Most of the value added consists of wages paid by firms along with profits. Since income grows faster than costs, industry profits will grow faster than the economy.

Sunday, August 9, 2015

Donald Trump Provides A Sad Glimpse Into Our Democracy

We used to have two political parties in the US that disagreed on many issues but they managed to put the national interest ahead of Party interest.  That is no longer true.  The Republican Party has been a revolutionary party for the last 40 years.  Its mission is to overturn the democratic system that took so long for our nation to establish.  It is funded by oligarchs, who it serves, but it can't win elections without the votes of ordinary citizens.  Richard Nixon showed them the way. Most of the voters care more about social values than they do about other issues.  He claimed to represent the "moral majority".  The Democratic Party consisted of liberals who did not appreciate our traditional values.  It was the party of hippies who did respect our religious values or our economic system.  Its opposition to the war in Vietnam also showed that it hated America.  This strategy, which was known as the "Southern Strategy" was also tainted with racism.  It worked well for Nixon until he got carried away by his own zeal and got caught violating laws that he pledged to defend as our president.  The Tea Party movement, within the Republican Party, is a more organized version of Nixon's Southern Strategy.  Republican candidates cannot win primary elections without appealing to the belief system of its Tea Party base.  The clown show that we see today in the GOP primary campaign has been taken to an extreme by Donald Trump.  He does a better job telling the GOP base what it wants to hear than the other candidates who also worry about winning the general election if they are nominated.  They each have a story to tell, but its pretty much the same for all of them.

Krugman has little sympathy for the media.  They have to pretend that the debates are serious and that each of the candidates would be a good president if they were nominated.  They are forced to be irrational in order to ignore the irrationality that they observe.  Their attention is focused on the horse race.  They tell us who is winning and who is losing but little else.

At a deeper level, the real political debate is economic.  Thomas Palley argues that both of our political parties represent a slightly different version of what he calls the neo-liberal policy box.  Republicans blame government for our economic problems, and Democrats want to correct the "market failures" that were responsible for the crisis and for our slow recovery.  They offer slightly different versions of the neo-liberal policy box that has provided most of the gains from productivity to the oligarchs.  The neo-liberal policy box is subordinate to the financial sector which directs the game, and has provided the financial tools that have enabled the game to work. It is not surprising that neither party has offered an effective way to escape the neo-liberal policy box into which most of us have been placed. The GOP would make things worse but the box cannot be attacked by either party. The policy box originated in America, but it has been sold to much of the Western world.  Perhaps that is why value issues have dominated political debate in much of the Western world.  The policy box is off limits.

Saturday, August 8, 2015

Why Economic Stagnation Will Persist In Western Economies

Thomas Palley is a labor economist.  He argues that a neo-liberal economic consensus in the US (and also in most of Europe) consists of policies that are responsible for wage stagnation in developed countries.  Wage stagnation created a demand stagnation crisis that substituted debt and asset price inflation for demand creation.  The financial industry was able to restore growth in the 1990's but new regulations following the financial crisis, along with household debt overhang and wage stagnation will limit its ability to sustain consumer demand.  Consequently, the advanced economies will not be able to support economic growth as it did in the 1990's.

Palley claims that there are two versions of the neo-liberal agenda which shape policies and political debate in the advanced economies.  The conservative wing takes the position that the financial crisis and slow economic growth are the result of government failure.  The soft neo-liberal position is that the financial crisis was due to market failures.  The US response to the financial crisis was designed to deal with the market failures that led to the crisis, and to prevent the collapse of the international banking system and another Great Depression.  The financial industry plays a critical role in the neo-liberal economy.  It controls corporate behavior through the imposition of the shareholder value dictum, which links  executive compensation to the stock price; it also manages to global flow of capital in the world economy that supports globalization.  The neo-liberal model is dependent upon a heavily financialized economy. 

Palley concludes by offering an alternative to the neo-liberal model which manages globalization and restores the relationship between productivity and wage growth that prevailed prior to the imposition of the neo-liberal agenda.  His arguments will fall on deaf ears, but he has done a lot of homework, and the models that he describes are not an unreasonable account of the interconnections between the real economy and our heavily financialized economies which place the financial industry in the cat bird seat.

Friday, August 7, 2015

Publically Funded Private Schools In Sweden And Educational Performance

Sweden has a reputation as socialist state that is not very accurate.  There are lots of politicians in Sweden who are similar to conservatives in the US.  This article describes the publically funded private school program that was implemented in Sweden.  There have been predictable problems with the system, and Sweden's performance on standardized tests has eroded since the experiment.  Other factors may have contributed to Sweden's poor performance but it is very clear that it has not improved the performance of the education system.  The conservative government in Britain is promoting a similar program.  The faulty assumption in these programs is that the profit system and competition between schools will improve performance.  Schools must model private corporations in order to be successful.  Curiously, many of the conservative advocates for this model attended private schools that are not modeled after profit driven corporations.  Their motivation may have more to do with the funneling of tax dollars to private enterprises than it has with the improvement of education.

Thursday, August 6, 2015

What's So Bad About Trump?

Krugman argues that The Donald is not any worse than the other clowns running for the GOP nomination.  However, he may be too extreme for the "very serious people" in the media who find nothing wrong with the other clowns who oppose The Donald.  Krugman reserves his criticism for the VSP in the media who believe that the clowns are much different from The Donald. 

One can be critical of the GOP primary base for preferring Trump to the rest of "the gang that can't shoot straight" but they know that things are not going well for them.  Trump is more extreme on immigration because he is only concerned about winning the primary.  He will change his tune if he gets into a general election.  Trump also decided to blame China for the loss of US jobs.  He claims that he will bring those jobs back to the US because he is a great negotiator.  The other clowns can't go that far because they depend upon campaign contributions from the corporations that have out shored jobs to low wage countries.  Trump knows the he can't reverse globalization, but he also knows that attacking China is good politics among the disaffected. 

The rise of Donald Trump's popularity in the GOP base raises an interesting question about electoral politics in the US.  The GOP created the Tea Party to solidify its hold on a large segment of the economically disaffected by focusing on social value issues and a host of irrational fears that are amplified by their friends in the media.  The Donald, so far, has trumped the other contenders for the Tea Party vote.  The Democratic Party faces a different problem.  Its "liberal" policies have turned it into an enemy for a large segment of the economically disaffected.  It has struggled to find powerful messages that resonate to many Americans who are concerned about their economic welfare.  Ironically, it has taken a more rational approach that works around the edges of economic policy, and it has been more rational about immigration policy and other value oriented issues that have been exploited by the GOP, but the VSP  in the media continue to portray the GOP as the rational party that is more able to manage the federal budget.  They let the GOP get away away with cutting taxes for the rich, and borrowing to fund the federal budget, under both Reagan and Bush, who ran the largest peacetime budget deficits in our history.  They view the funding of popular social welfare programs like Social Security and Medicare as the enemy of responsible government. 

Tuesday, August 4, 2015

Why Supidity Is Smart In Politics

This article provides brief history of stupid remarks made by politicians in order to get attention.  Most of the politicians are not stupid but their remarks attract more of an audience than substantive comments on public policy issues.  Personal attacks are especially helpful in attracting an audience and demonstrating forceful leadership qualities.  The Donald helps to bring this strategy up to date in our polarized society.  It is working well for him.  His pretenders are much too timid.