Wednesday, September 30, 2015

Volkswagen May Be Worse Than Enron

Enron was a criminal enterprise.  Business schools use Enron as a case study that shows how a corporation can be corrupted by its leaders.  This article in the Financial Times argues that Volkswagen's damage to society may exceed the damage caused by Enron.  It provides seven kinds of damage related to VW's emissions scandal that support its conclusion.  Beyond the legal liabilities and reputational damages to the German car industry, VW has contributed to environmental pollution, and its actions have made it more difficult to explore technological solutions to our environmental problems.

Monday, September 28, 2015

Trump's Tax Plan Is Not A Populist Plan

You didn't really think that Trump's tax plan would soak the rich and cut taxes for the middle class did you?  Of course not, you would have been right if you questioned the rhetoric he uses to sell his tax plan to the public. This article examines Trump's tax plan in detail and it is really a plutocrat's tax plan with populist clothing.  It is much like Jeb Bush's tax plan which cuts tax rates for the rich while throwing a few bones to everyone else.  Trump's plan even eliminates the inheritance tax.

Trump's tax plan is like Jeb Bush's tax plan in another respect.  It would reduce the government's tax revenue by trillions over the next few years.  Trump and Bush both use dynamic scoring to argue that the revenue lost from the tax cuts would stimulate the economy and increase the tax base.  In other words, it is the same old voodoo economics that started with Ronald Reagan's huge cut in the top tax rate.  George W. Bush used the same dynamic scoring scam to justify his cuts in the top tax rates and the reduction in the tax rate on capital gains and dividend income.  We are still waiting for the economic growth promised by Reagan and Bush.  Apparently, both Trump and Bush believe that the public will like their rhetoric, and that most of the public will not look at the details.  They are probably right.  Otherwise politicians would not keep using the same scam.

Saturday, September 26, 2015

What's Wrong With America:?

The majority of Americans are concerned about a future in which their children will not live as well as they have lived.  Many believe that the system is rigged against them.  However, most Americans are unaware of the extent to which political power, and the ability to rig the system, has shifted over the last four decades.  Robert Reich, who was in the Clinton cabinet, and is now a professor at Berkeley, delivered a speech at a meeting of political scientists that offers an apt description of the changes that have taken place.  He told them that they needed to do their job as political scientists and not leave this up to economists who refuse to go beyond the factors that encourage economic growth and efficiency.  He explains how the system has been rigged to discourage real discussions about income distribution.  In general, he argues that we no longer have a system of countervailing power that led to a more equal distribution of wealth and power.  He provides lots of details on how this has happened, and he goes well beyond the role of the economics profession in aiding and abetting the transformation.  We have undergone a quiet revolution that has taken place without firing a shot. 

John Boehner's Resignation Is Simply A Matter Of Geography

John Boehner, the Speaker of the House from Ohio, resigned his speakership because he has lost control of the House.  His resignation is easily explained by geography.  The GOP House is dominated by representatives from "Red States".  Conservative Republicans win almost all of the elections in Red States.  There are almost no Democratic members of the House from Red States.  Moreover, Republicans in the North East, Midwest, Mid-Atlantic and West Coast face stiff competition from Democrats.  Many Republicans in these areas have drifted away from the Republican Party as its politics increasingly reflect the cultural and social values of the Red States.  Representatives from Red States are willing to shut down the government in order to end funding for Planned Parenthood and other organizations which are inconsistent with the cultural and social values in their geographies.  The House of Representatives has become a symbol of a nation divided by geography. 

Friday, September 25, 2015

Rational Drug Pricing Is Desirable For Society But Not For Drug Firms

Jeff Sachs argues that the pricing of drugs by pharmaceutical firms has little to do with free market forces.  The industry depends upon government sponsored basic research by the NIH.  It turns that research into useful products for which it receives patent protections which limits competition.  It then hides the profits in tax havens so that it does not have to pay taxes to fund the NIH or the patent protection services by government.

This description of the drug industry is not atypical of modern industry.  Firms are dependent upon government services to help them create and defend their intellectual property rights.  Government services become even more important in our global economy.  Governments protect their access to markets and they negotiate trade agreements which protect patents and copyrights.  Much of the competition in the market is between industry groups which care primarily about the goods and services they provide.  They fund the lobby's which shape government policies in their interest. 

David Brooks Offers His Eulogy To The Republican Party

David Brooks has left the reservation.  He cannot bring himself to defend the political party of his mentor William F. Buckley.  Under Buckley's tutelage he helped to develop Young Americans For Freedom.  They had a vision of the Republican Party as the party of free enterprise.  They opposed their contemporary generation of college students who were radicalized by the Vietnam War.  Brooks has been radicalized by the efforts of GOP presidential candidates to win the votes of the most backwards looking segment of its political base.  He longs for the forward looking remnants of what was the Republican Party.  He worries that it cannot survive politically given the demographic trends that are in place.  He hopes that it can resist the reactionary elements in the GOP and return to what he believed it to be in his youth.  He fails to believe that his Party been captured by an elite group that has cultivated the reactionary forces in our society in order to gain control of the government which is the only threat to its power.

Thursday, September 24, 2015

Jeb Bush Claims That US Ranks 46th In World On Ease Of Starting A Business

Jeb Bush was given a platform by the Wall Street Journal to blame Obama for over regulating business.  One of his claims is that Obama has made it hard to start up a business in the US.  He used data from the World Bank to support his claim.  Kevin Drum did some fact checking and found that the World Bank data cited by Jeb refers to the time it takes to register a business in New York City.  It has nothing to do with Obama or the national government.  The other facts that he cites also refer to local and state regulations.  The US ranks 6th on the World Bank scale at a national level. 

Bush was a state governor in Florida.  He must be familiar with the state and local regulations to which he referred.  His friends at the WSJ provided him with a platform to mislead the public and bolster his position among other GOP hopefuls who make similar promises about easing regulations on business.   Some of the regulations that he would eliminate are at the national level and they primarily benefit multinational corporations.  Bush offers little that make it easier to start a new business.

Wednesday, September 23, 2015

Tom Friedman Raises Concerns About The Politics Of Hate

Donald Trump and Ben Carson have been doing what politicians in Israel did prior to the assassination of its prime minister.  The head of the Likud Party took advantage of the fears in his nation to destabilize the Labor Government.  In doing so he also damaged democracy.

Friedman blames Trump and Carson for crossing a civilized red line but he misses his target.  Trump and Carson are leading in the polls because they are appealing to fears that exist in the GOP base.  An entire industry has been created and funded by wealthy extremists to develop the fear, hatred and anger that characterizes a large segment of the GOP base.  In Europe new parties have have been created to lead a similar base of the disaffected.  The two party system in the US is different from the parliamentary system in Europe.  The Republican Party may regret its efforts to win elections by appealing to the worse elements in America today.  It has a majority in the House of Representatives but divisions within the Party have turned the Party into an unreliable partner in governing our great nation. 

Monday, September 21, 2015

Why Japan Should Not Eliminate Social Sciences And Humanities From Universities

Noah Smith spent a lot of time in Japan and he is familiar with the way things work in its government.  He argues that Japan made a big mistake when one of its government agencies made an unbinding order to eliminate the study of social sciences and the humanities from its public universities.  The order puts the emphasis on the STEM curriculum.  Smith claims that Japan's movement towards a services economy demands more emphasis on social sciences and the humanities.  Two of Japan's top public universities must agree with him.  They refused to comply with the order.

Curiously, many conservatives in the US would like our universities to follow a similar path.  STEM is currently the rage, and some state Governors have made unfavorable comments about courses which encourage students to think critically about society. 

Sunday, September 20, 2015

How Should We Think About China's Economy?

A lot of concerns have been raised about the slowdown in China's growth rate.  Many predict disaster for China's economy because it is different than our own.  This article, by the President of the Federal Reserve Bank of San Francisco, offers a more balanced view about the Chinese economy.  He argues that China cannot keep growing at 10% year because growth always slows down as nations become more prosperous.  Wages rise and their products become less competitive.  China is going through the process of shifting from an export led growth strategy to one that is more reliant on domestic consumption.  It is also moving away from a dependency upon manufacturing and it is following the path of other advanced economies towards a service oriented economy.  That process will take time, and China's growth rate will gradually move closer to that of more mature economies.  China will also manage that transition differently that other nations because its government is more active in managing the transition than nations with a more liberalized economy. 

Saturday, September 19, 2015

Pope Francis Will Adress US Congress

John Boehner, the Chairman of the GOP majority in the House, has wanted a Pope to speak to the Congress for 20 years.  He has finally got his wish.  Pope Francis will address Congress but he may not tell Republicans what they want to hear.  Some of his public comments about capitalism seem to be very radical, and they will not set well with Republicans.  This article connects the Pope's comments on capitalism to a wider body of Church doctrine on the economy.  Its basic message is that firms should benefit society as well as themselves.  The Pope argues that they have served their own purpose better than their social purpose.  The rapid rise in inequality, which few deny, speaks for itself.  The economy operates in a framework of rules established by governments.  Many believe that those rules have been modified by government over the last 40 years in ways that have fostered greater inequality.  Republicans have sponsored most of the rule changes, and they continue to campaign on changing the rules in ways that would increase inequality even further.

The Effect Of QE On Inflation Expectations And Stock Prices

Roger Farmer provides his answer to John Cochrane's argument against Fed intervention in a market economy that is intrinsically stable according to the Chicago School.  He provides two graphs which show the impact of QE on the Fed balance sheet and its relationship to expected inflation and the S&P 500.  Expected inflation had reached -4% prior to the Fed's QE program.  The Fed's purchase of $1.3 trillion of mortgage backed securities reversed the deflationary trend, and brought the inflation rate closer to its 2% target.  It also reversed the downward spiral in the stock market and brought it closer to the level that existed prior to the financial crisis.

Farmer takes the position that the financial system does an inefficient job of allocating capital and that the real economy is linked to the value of asset prices.  Many economists believe that the capital market is efficient, and that the real economy is not affected by asset prices.  Its easy to see why economists from the Chicago School which believes that asset markets are efficient, and that the real economy is not affected by asset prices,  would have a problem with Farmer's data.  QE had a major impact on inflation and asset prices.  It may have prevented another Great Recession. Since the impact of QE on the economy cannot be explained by Chicago School theory, Cochrane rejects the idea that QE was responsible for the reversing deflation and the rapid decline in asset prices.

Friday, September 18, 2015

Phools And Their Money Are Soon Parted

Robert Shiller wrote a humorous article about political economy which makes two excellent points.  His first point is that Adam Smith's description of the economy provides only a partial picture of the real economy.  He uses some modern terminology to make his point.  We are all aware of the phishing that occurs on the Internet.  A lot of smart people have invented schemes to steal our money.  Unfortunately, much of the economic activity in the economy is dependent upon deception.  The "phishers" turn many of us into "phools" (pun intended).  They get paid a lot of money in order to convince us that we need what they have to sell.  In particular, the finance industry excels at phishing.  Shiller argues that our recent financial crisis was just one of many examples of successful phishing which led to disaster.  He second point is that the financial crisis would have been a lot worse if central bankers had not taken coordinated actions to prevent a Depression.  He argues against critics who claim that bankers would not have taken excessive risks if they had not expected central banks to bail them out.  The phools who purchased their toxic assets were indifferent to what the central banks might do.  They were phished.  The central banks may have avoided an increment in moral hazard by doing nothing but the result would have been worse.  We live in world that is quite different from Adam Smith's idea world.

The GOP Debate According To Paul Krugman

Paul Krugman has the virtue of writing an opinion column for the NYT; consequently, he does not have to conform to the journalistic custom of reporting on the debate as if it were a sporting event in which some scored more points than others.  David Brooks has a similar position at the NYT.  He declared that the winners were Marco Rubio and Carly Fiorina.  His op-ed explains why they would be great for the country.  After reading the Krugman op-ed you may appreciate the skill the David Brooks exercises in maintaining the fictions about their ability to run our nation.  Brooks knows how to put lipstick on a pig. According to Brooks, Rubio and Fiorina were the only candidates that did not fall flat on their faces.  Brooks has a tougher job than Krugman.  He had to find something good in the debate.  Its hard to believe that this is the best that we can do in selecting our leaders.

Thursday, September 17, 2015

The Hollowing Out Of The Middle Class And The Lack Of Big Ideas To Reverse Trend

Most of the voters in the US belong to the middle class.  Therefore, it is not surprising that Democrats and Republicans claim to be on their side.  Bruce Bartlett was in the Reagan Administration when it came up with the big idea of supply side economics.  That big idea convinced many in the middle class that they would be better off if taxes were cut and government intervention in the market system were reduced.  Bartlett's review of a book on the hollowing out of the middle class claims that politicians on both sides of the aisle still cling to the idea of supply side economics.  Republicans have a strong version of the idea, and Democrats offer a weak version sprinkled with ideas like raising the minimum wage.  He does an excellent job of describing the dynamics that are responsible for the hollowing out of the middle class and he concludes that the left has prescribed half measures to solve a big problem.  His summary of the issue applies equally well to the UK as it does to the US.  Thatcher and Reagan sold the same big idea to the public and the left has moved to the center in response to the movement to the right by conservatives.

It is tempting for progressives to stick with relatively small ideas, like raising the minimum wage, that test well in polls and focus groups and don’t engender too much resistance on the right. That moves the ball forward, but will never change the game. The left needs the most critical thing the right got from supply-side economics: It was a Big Idea that had the potential to fundamentally change the terms of the debate and was something around which many different policies and coalitions could be built. In short, progressives need to think bigger if they hope to win.

Wednesday, September 16, 2015

GDP Growth Has Outpaced Median Income Growth At State Level

The Pew Trust released state level data on output per person and median household income between 2000 and 2013.  Output per person has grown in every state while median household income has declined in almost every state.  The gap between GDP growth and median household income is much higher in states like North Dakota that have experienced a boom from capital intensive investments in energy extraction.  Median income growth in North Dakota has been positive but output per person has grown much faster than income growth.  The article includes an interactive graph that provides state level detail on GDP per capita growth and growth in median household income.  The graph below is not interactive.

Tuesday, September 15, 2015

Does Spain's Recovery Prove That Critics Of Austerity Were Wrong?

Paul Krugman makes two arguments against the the claims made by the austerity advocates:  In the first place, Spain's recovery has been rather weak relative to typical recoveries.  Moreover, austerity did what it was supposed to do.  That is, it made Spain's exports more competitive through a very painful process of high unemployment and wage deflation.  The critics of austerity made a similar assumption about the effects of unemployment and wage deflation.  They supported an approach, however, that would have been less painful, and might have led to a stronger recovery.

What Drives The Movement In Stock Prices?

Warren Buffet does not care about the daily ups and downs of stock prices.  He invests in firms that are likely to grow and be profitable over the long term.  He has been successful with this strategy but the typical money manager has to worry about the short term fluctuations in market prices.  That is because many of their clients will shift their funds to hot money manager who made the right guess about the short term swing in prices.  Consequently, money managers play a game that has been described as a beauty contest by a famous economist.  That game is aptly described in this article; it differs dramatically from the way the game is supposed to work according to the efficient market hypothesis which is believed to be the best explanation of the movement in stock prices by financial economists.  The EMH assumes that the price is always right because every investor has all of the information needed to make an investment decision.  The quote below provides a short description of the beauty contest that offers a behavioral of the investment game.

Keynes’s beauty-contest analogy remains an apt description of what money managers do. Many investors call themselves “value managers,” meaning they try to buy stocks that are cheap. Others call themselves “growth managers,” meaning they try to buy stocks that will grow quickly. But of course no one is seeking to buy stocks that are expensive or stocks of companies that will shrink. So what these managers are really trying to do is buy stocks that will go up in value—or, in other words, stocks that they think other investors will later decide should be worth more.

Buying a stock that the market does not fully appreciate today is fine, as long as the rest of the market comes around to your point of view sooner rather than later. Remember another of Keynes’s famous lines, “In the long run we are all dead.” The typical long run for a portfolio manager is no more than a few years, often just a few months! So to beat the market, a money manager has to have a theory about how other investors will change their minds. In other words, their approach has to be behavioral.

Saturday, September 12, 2015

Which Colleges In US Have The Most Indebted Students?

Student debt is over $1 trillion in the US.  A Brookings study found that for-profit private colleges have generated a lion's share of student debt burden.  In 2000 only 1 in 10 for profit colleges were among the top 25 colleges in student debt.  By 2014, 13 of the colleges on the top 25 list were for-profit colleges.  The University of Phoenix is at the top of the list with $35 billion of total student debt.  The rapid growth of the for-profit college industry has been extensively funded by the availability of federal student loans.  The for-profit colleges also generate the largest number of defaults on federal student loans.  That is because they have very low graduation rates and their graduates have not been able to get high paying jobs upon graduation.  Although some graduates from these institutions may be better off upon graduation, there is a real sense in which it is a predatory system that has been enabled by government programs.  It has also been fueled by the rising costs of attending publically funded community colleges and universities.  The rising cost of public higher education has been driven by reductions in state funding for higher education.

Thursday, September 10, 2015

The Party Of Hatred Visits Washington

Ted Cruz and The Donald entertained the far right segment of the GOP at a rally opposing the Iran deal.  They fed them the meat that they enjoy eating.  They oppose the GOP leadership for not stopping the Iran deal and they oppose but they particularly hate Obama.  They were provided with a punch bag in the president's image to vent some of their hatred.  The crowd included Zionists and Christian groups who fear the spread of Islam in America.  To them all Muslims are terrorists and a threat to our Christian nation.  The Likud Party in Israel and conservative Christian groups have joined together to create a unique blend of conservatism in the US.  It has distorted the normal operation of government by limiting the power of the GOP leadership to reach any agreements with the Obama Administration.  Ted Cruz capitalized on the ability of The Donald to attract a crowd and The Donald sounded much like football coach who wanted to take over a losing team.  He claimed that we would stop losing and win more battles than they might imagine under his leadership. He did not need to be specific about battles that were lost or those that we might win. He left that to the imagination of crowd.

Elect Jeb Bush To Get Ronald Reagan 111

Jeb Bush hired two conservative economists to create his tax plan.  To the surprise of no one they followed the basic idea created by Ronald Reagan's conservative economists, and which his brother revived when he was president.  The basis idea is simple.  Given everyone a tax cut but give most of the cuts to the richest Americans.  Of course, that will reduce government tax revenue in the short term but there are two ways to deal with that problem.  The preferred way is to argue that the tax cuts will increase the growth rate and expand the tax base.  Jeb Bush believes that his plan will cause the economy to grow at a 4% rate.  Few economists, who are not paid to be hired guns for the super rich, believe that rate can be achieved through tax cuts.  The other way to pay for the tax cuts is to reduce entitlement expenditures.  Americans who hate providing benefits to the "wrong kind of people" would support that strategy. It would also appeal to those desire a smaller government.  It seems like a fail proof strategy for rewarding those who fund the GOP's political campaigns.  Details of the plan are provided in the article but the basic idea is quite simple.

Wednesday, September 9, 2015

The Economics Of Higher Education In The US

The higher education system in the US is a multi tiered system, and each tier has a unique economic structure.  Adam Davidson describes the economics of each tier and he explains the relevance of each to our social and economic structure.  He argues that society benefits in numerous ways from a more highly educated population.  Increasing access to education in the US is strongly related to the rapid growth in the US economy as well as to the social progress that has made during much of our recent history.  There are also personal and social costs to the lack of access to higher education.  Unfortunately, access to higher education in the US has been declining in the last few decades.  The US once produced more college graduates per capita in than any other nation.  That is no longer true.  Other advanced nations are doing a better job of providing higher education to its citizens than the US.  Some of this decline is the result of unfavorable politics that led to reductions in state funding for higher education.  Education is one of the largest budget items in most states and Republican governors, in particular, have courted political favor by cutting outlays for higher education.  They win elections but their decisions undermine economic growth and associated tax revenues in the longer run.  Reduced access to higher education also increases the cost of social welfare programs as well as expenditures on the criminal justice system.

Some of the information that Davidson presented is fairly well understood. Fortunately, he provided an analysis of middle class budgets during two periods in US history which sheds new light on the relative cost of higher education to middle class families.  The cost of buying a new car is pretty much the same today as it was several decades ago. That is not the case for higher education.  Middle class families today have been hit with a double whammy.  They earn less income, and the cost of higher education has inflated more rapidly than other major budget items.  They have been priced out of the market.  Moreover, some of their lower cost alternatives are economic scams.  They take out publically supported loans to enroll in private institutions that are best described as scams.  Most who enroll in them do not graduate, and few who graduate have access to jobs which enable them to pay back their loans and enjoy some of the amenities of a middle class life.  Unfortunately, they have also been priced out of the market in many state university systems which do not have the funds to provide financial support to middle class households.

Davidson describes some of programs that have been developed to address these problems.  Some are promising but more are needed.

Tuesday, September 8, 2015

Should The Fed Raise Interest Rates Part Two?

The Fed has to make difficult decisions in order to satisfy its three major missions.  It has a mandate to provide price and employment stability while maintaining the stability of the financial system.  Joseph Stiglitz argues that this should be an easy decision for the Fed.  Ordinarily, the Fed would increase interest rates if it were worried about a rise in inflation.  That decreases economic activity and the demand for labor.  That prevents a rise in wages which puts an upward pressure on prices.  Stiglitz does not see any evidence of inflation, and he argues that the Fed's 2% target rate for inflation may be too low under current circumstances.  A bit more inflation would be a good thing and so would moderate growth in wages which have been stagnant for most Americans.  He also minimizes the risk to financial stability that may be associated with low interest rates.  Low interest rates encourage investors to take on more risk when the yields on risk free US bonds are close to zero.

Carmen Reinhart makes a slightly different case for a more gradual approach by the Fed.  She argues that there is a greater threat of price deflation in most developed countries.  The inflation rate in most developed countries is below the 2% target held by central banks.

These discussions raise a question about the extraordinary policies adopted by the Fed and the ECB in Europe.  Quantitative easing has kept interest rates low but they have not had much of an impact on economic activity.  Central banks have been fighting a losing battle against price deflation and low wage growth because contractionary fiscal policies have diluted the effect of low interest rates.

Sunday, September 6, 2015

Should The Fed Raise Interest Rates?

There are two reasons why the Fed might raise interest rates:  If there was a reason to worry about  price inflation they might raise rates. They also may raise rates to cool down asset price inflation in capital markets.  There seems to be little indication of price inflation, and there are other ways to deal with asset price inflation.  This article suggests that the Fed is being pushed by inflation hawks who worry more about the potential for a tightening labor market, and an acceleration in wage growth, than they do about price inflation.  There is still slack in the labor market, despite the decline in the headline unemployment rate.  Moreover, wages could use a boost, and there is little reason to believe that this would harm the economy.

Labor Market Slack And Wage Growth

Wages tend to rise as the unemployment rate falls.  Therefore, wage growth is one signal that the Fed uses to determine the state of the labor market.  However, since wage growth is also linked to productivity growth, slow growth in wages may reflect slow productivity growth rather than a weak labor market.  Two Fed officials ponder this dilemma in this article.  One argues that wage growth has been equal to productivity growth in the last few years, and uses that relationship to conclude that their is no slack in the labor market.  The Fed Chairperson hedges a bit and suggests that slow growth in productivity may be one of the factors that have contributed to slow wage growth but that there still may be some slack in the labor market. 

This discussion among Fed officials is interesting but it leaves a more important question unanswered.  The relationship between productivity growth and wage growth is shown in the following graph.  Productivity growth has exceeded wage growth growth substantially over the last 35 years.  The relationship between productivity growth and wage growth no longer exists.  Most of the growth in productivity has gone elsewhere. 

Saturday, September 5, 2015

Why Republican Party May Be Better Sponsor For Climate Change

Greg Mankiw, like many economists, has supported a carbon tax.  He assumes that global warming is real, and that the social cost of consuming carbon should be included in the price.  This is pretty standard economic thinking.  He argues that the question that arises from a carbon tax is whether the carbon tax is revenue neutral.  He claims that Republicans would support a carbon tax if it led to the reduction of other taxes.  He further claims that Democrats who favor the carbon tax are not interested in cutting other taxes in order to get a carbon tax.  They are more interested in using the additional tax revenue to provide more government services.  In other words, the battle over the carbon tax is simply a war over the size of government.

Mankiw understands that the Republican Party has promoted global warming denial in its populist base.  He may also realize that the fossil fuel industry has rewarded the Republican Party for its efforts to do so.  Its hard to imagine, however, that his favorite party would agree to a tax on carbon if it were revenue neutral.  Its also a major leap to argue that major difference between Republicans and Democrats is really about the size of government.  There are deep divisions between the two parties about who pays for the taxes that are collected by government and how the revenues are spent.  The Republican Party has not reduced government spending when it has been in power.  It has made tax policies less progressive and it has used tax revenues for different purposes than the Democratic Party.  Mankiw is disingenuous to pretend that the real issue is over the size of government.