Saturday, October 31, 2015

David Brooks Votes For Marco Rubio

Jeb Bush and Ted Cruz are no longer viable candidates.  The only candidate left standing according to David Brooks is Marco Rubio.  We are told that Rubio is candidate of this century and not the last century like some of the other Republicans.  He also harvests ideas from conservative think tanks which are developing something that Brooks calls "Reform Conservatism".  Brooks has just packaged his favorite candidate.  He is a 21st Century, Reform Conservative, who like David Brooks, harvests the ideas incubated in conservative think tanks.  The American Enterprise Institute is one of the leading conservative think tanks.  If you are interested in Reform Conservatism you may want to find out more about the ideas and the staff at AEI.  The Heritage Foundation is another of the leading conservative think tanks. I have a hard time finding 21st century ideas at these sites.  Reform Conservatism seems to be pretty old hat to me.

Betting Odds On Presidential Race In US

A large number of people are betting on the primaries and on the 2016 election.  The betting odds change over time as do poll results.  However, the betting odds have usually been a better predictor of the eventual results.  The latest betting odds provide good news for Marco Rubio and bad news for almost every other GOP candidate.  There were slight declines in the odds for Trump and Carson and a 10% drop for Jeb Bush.  Rubio's odds improved by 8.5%, which is almost equal to the decline in Bush's odds.  In fact, one of Bush's billionaire backers switched his support to Rubio after the last debate.  Unless things change rapidly for Bush his campaign may be history.  Rubio is now the front runner and more wallets will open up to him as long as he avoids a costly mistake.

There has been little change in Democratic nomination. Clinton is the odds on favorite for the nomination.  She is also is the favorite in the general election.  This is partially because she is assured of being one of the candidates in 2016.  However, the odds in her favor exceed the odds for the of total  for the entire group of GOP candidates.  This will change, of course, when the GOP gets behind the candidate who has the best chance of winning in 2016.  Right now that is Rubio.

Friday, October 30, 2015

Lessons From The Republican Debate

Catherine Rampell has a tough job.  She is a fact checker for the Washington Post.  She checks the claims made by politicians and she gives them a truthfulness score.  The last GOP debate taught her a few lessons.   The first lesson that she learned is that it pays to tell lies.  The candidates tell big lies that the GOP base wants to hear.  There is an art to telling lies and how to deal with fact checkers in the media.  She provided several examples of this art form from the last debate.  Apparently, its OK to lie as long as your followers like what you said.  Several candidates were asked questions about there fiscal policy proposals.  Marco Rubio discovered a great way to explain why his plan did not add up.  He gave an arithmetic lesson to explain why rich people get a bigger tax break than poor people from his plan.  He said that 5% of a million is larger than 5% of a thousand.  The audience applauded his response and many in the media awarded him with points for handling a tough question with force.  The third lesson that she learned is how to deal with a question for which you have no good answer.  Several of the candidates blamed the media for asking the question.  That worked well for them.  If you can't blame the Obama Administration or Hilary Clinton for something you can blame the media for their liberal bias.  That strategy works even when CNBC, which moderated the debate, is much closer to Fox News than it is to the "mainstream media" which does not follow the Fox script.  

Rampell reached a conclusion that must be discomforting to her.  The media are partly to blame for the state of politics in the US.  Much of the reporting following the last debate focused on which of the liars did the best job of getting a favorable response from the conservative audience which attended the debate.  The media seems to be primarily concerned about the relationship between the candidates performance and its impact on their poll numbers.  I'm getting pretty tired of reading about Jeb Bush's poll numbers and about the rise of Ben Carson and Donald Trump in the polls.  The media defaults on its primary responsibility to inform the public.  That doesn't attract an audience. It also provides free advertising to candidates who make the most outrageous claims.

Thursday, October 29, 2015

What Do Exxon And Tobbaco Companies Have In Common?

The US tobacco industry hid their own evidence about the deadly relationship between smoking and cancer (among other deadly diseases).  They continued to fight the mounting evidence about the impact of smoking on public health and they questioned the motivation of scientists who attempted to inform the public about the dangers from smoking as long as they could.  It turns out the EXXON has been doing the same thing for 40 years.  They hid evidence from their own research department about the impact of carbon emissions on climate change, and they have funded the climate change denial industry for 40 years.  They have been getting a lot of help from Congress in the process.  The Republican representative from Texas, who heads the House Science Committee, has been doing what he can to intimidate climate researchers who publish research that he does no like.  The GOP controlled House has granted him the right to demand all of the supporting data in the government's files on his own authority.  His behavior is consistent with one of the major platforms the Republican Party.  All of the GOP candidates for the presidential nomination are global warming deniers.  It would be death for any of them to admit they have been lying about global warming for decades.  It would be equivalent to telling their true believers that God was dead.

The GOP base does not have much faith in science when it provides data that counters its belief system.  They will probably find a way to find fault with visual evidence that shows how global warming is causing the ice to melt in Greenland.  They will blame on the liberal bias in the media.

Wednesday, October 28, 2015

The Natural Rate Of Interest In US Is Around Zero

The natural rate of interest is the rate at which the economy operates without a risk of inflation or deflation.  In other words, it is the rate of interest which ought to be the policy goal of the Fed.  Paul Krugman reports on a study which shows that the natural rate of interest has varied over time and that it is currently around zero.  This suggests the current Fed inflation target of 2% may be too low.  The real interest rate is the nominal rate of interest minus the inflation rate.  A 2% target rate does not provide much room for the Fed to lower the real interest during a recession. 

The Fed has been accused of using monetary policy to keep interest rates too low.  This study suggests the zero rate of interest is exactly what the economy requires.  That is, it is the natural rate of interest.

Monday, October 26, 2015

US Treasury Secretary Is Concerned About Congressional Blackmail

There is a limit on the borrowing authority of the US government.  It is called a debt ceiling.  The US Treasury cannot borrow funds that are needed to pay for its current operations when it comes up against the debt ceiling.  It will hit that ceiling in 8 days.  Congress has the authority to raise the debt ceiling but it uses that authority as a form of blackmail.  It refuses to raise the debt ceiling unless the Administration agrees to policies which it believes to be harmful.  This form of blackmail can have harmful effects.  A government that cannot pay its bills may lose its AAA credit rating;  a government that must agree to policies which may be harmful is not an effective government.

Paul Krugman Offers His Explanation For Weak Global Economy

Krugman's argument is rather simple.  Emerging markets borrowed in dollars and didn't invest the funds well. Consequently, the flow of funds from investors has shifted from emerging markets to developed economies.  The developed economies have not responded to the flow of capital and low interest rates by making productive investments.  Secular stagnation is the outcome when interest rates close to zero do not stimulate investment.

A Future In Which There Is No Unemployment And In Which Nobody Has A Job

This is an interesting article that describes a future in which robots are able to do more tasks that workers do today, and in which most people perform several jobs part-time.  The traditional connection between workers, and a specific company that does that work, would be severed as specific tasks are outsourced to a variety of specialized firms that perform one of the tasks involved in producing the final product.  We are a long way from this imagined future. On the other hand, it is derived from extending current trends into the future.  The future of labor may be something like the future imagined in this article.    

Thursday, October 22, 2015

A Nobel Prize Economist Comments On US Politics And Cultural Trends

Angus Deaton is the latest recipient of the Nobel Prize in economics.  The Royal Economic Society published his Letter From America in which he comments on Donald Trump's campaign for the Republican Party's nomination for the presidency.  Trump's popularity with a segment of the electorate is viewed as a symptom of deeper issues in the US political system.  Deaton also commented on the rise in drug addiction outside of the minority population.  He attributes it to changes in the economic system and to changes in the distribution of addictive drugs.  The narco industry, which imports illegal drugs for resale in the US, has become more sophisticated and the pharmaceutical industry has become more predatory.  One drug company paid a large fine for claiming that one of its addictive drugs was not addictive. 

Deaton's economic research has not followed the the usual path towards earning a Nobel Prize.  His commentary on US politics, and changes in the US social fabric,  are also atypical.  Economics cannot be easily separated from the social and political environment is which it takes place.

Monday, October 19, 2015

An Interesting Discussion About The Kernals Of Economic Thinking

A biologist interviewed a a prominent economist and asked him several interesting questions about economics.  The answers that he provided went right to the heart of economics. They should be a part of everyone's thinking about economics.  The entire interview is well worth reading.  I have just selected bits of the discussion to pique your curiosity.

Every introductory textbook has a story about Adam Smith and his idea of the invisible hand which is a central idea in economics.  Smith lived in world that included monarchy and a powerful church that influenced everyone's behavior.  He and other philosophers during this period reacted against the overuse of authority; they were advocates for greater personal freedom.  It was common for nations to compete against their trading partners by limiting imports and expanding exports to other nations.  Smith pointed out that consumers preferred local products to imported products.  They acted in their self interest, but in doing so they benefited the national interest.  The perversion of Smith's idea is that greed is good since it is an expression of self interest and personal liberty which benefits everyone.  Smith clearly thought otherwise.  He believed that empathy, or sentiment for others, placed an important limit on the misuse of personal liberty. 

Efficiency is another fundamental idea that is pervasive in economics.  It is based upon the idea of scarcity. Scarce resource are required to produce the products and services that we desire.  We can enjoy more of these products and services if they can be produced more efficiently.  In a competitive market, efficient producers will prosper and less efficient producers will disappear.  The efficient use of resources to gain competitive advantage has been extended to the labor market in Europe.  Labor market flexibility has become more desirable in order to more efficiently use human capital. Wages must also be reduced to gain competitive advantage.  These neo-liberal ideas conflict with the extensive use of social welfare programs which have been popular in Europe.  Many believe that these programs reduce the incentive to work and that they drain resources from the private system.  There is a good discussion of these issues in the interview.

The interview also included comments on Milton Friedman, Hayec and other proponents of neo-liberal ideology.  Hayec an Friedman were advocates for liberalism but they had very different ideas about the topic.  Hayec is also described as a pretty nasty person. 

There is also a discussion about the origin and value of equilibrium theories which have a dominant role in economics. 

Sunday, October 18, 2015

How Did Government Response To Great Recession Impact US Economy?

There has been a lot of discussion, uniformed by evidence, about the impact of fiscal and monetary policy at the onset of the Great Recession.  This article summarizes the results of a study by two leading economists who analyzed a mound of data to determine the impact of countercyclical government policies.  One of the most interesting conclusions from the study is that the ratio of the budget deficit to GDP would have been LARGER in the absence of countercyclical policies.  The ratio was smaller because GDP was larger than it would have been without government stimulus.  This contradicts the argument made by critics of the government stimulus programs.  They believed that the government should have cut spending in order to reduce the debt to GDP ratio.  That would have lowered GDP (which includes government spending) and the ratio would have been higher.

Saturday, October 17, 2015

George Will Tells Us That We Don't Need Less Inequality

George Will is one of the Washington Post's most widely circulated opinion writers.  His op-eds are syndicated to a large number of smaller town newspapers in the US; he is also one of the most frequently featured conservatives on television news shows.  In this op-ed he hauls out many of the most common used conservative platitudes that are used to justify income inequality.  

Bernie Sanders has been focused his campaign on policies that government can employ to reduce inequality.  Will accuses Sanders of being poorly motivated.  Will tells us the he is motivated by envy which is one of the seven deadly sins.  Certainly, we should not pay any attention to politicians motivated by envy.  Furthermore inequality is a good thing because it is a product of freedom.  Everyone is free to pursue whatever career they choose.  Some careers pay a lot of money and others pay less.  Attempts to limit inequality are bad because they limit freedom of choice.  This assumes that we have equal opportunity to pursue whatever career we choose.  It is well understood that children from high income families have more freedom of opportunity than children from poor families.  Will deftly shifts attention away from the relationship between opportunity and family income.  He puts the blame on families which have bad cultures.

Will's op-ed includes a number of other common platitudes such as the role of heredity.  Nature causes a lot of inequality.  That is certainly true.  Some occupations require more intelligence or other factors that determine performance and compensation.  If we assume that there is a normal distribution of intelligence, for example, we would not expect that occupations requiring above average intelligence would have a disproportional number of minorities in those occupations.  It is fairly clear that other factors limit the opportunities of minority groups.  We waste a lot of human intelligence by failing to develop the innate intelligence in minority groups.

How Tax Policies In The US Contribute To Rising Income Inequality And What Can Be Done

The US tax system used to be much more progressive.  That is, the tax rate increased in relation to income. The tax system has been made less progressive over the last 45 years.  It began with Ronald Reagan, and  George W Bush made the tax system even less progressive.  All of the Republican candidates for the GOP presidential nomination have proposed plans that would make the tax system even less progressive.  A major cause of rising inequality in the US is a consequence of Republican tax policies that have made the tax system less progressive.  This article describes many of the changes that have made the tax system less progressive.  At the top of the list is a reduction in the top tax rate on income but other gifts to the very rich have also lowered their tax burden.  For example, capital gains made by selling investments used to be taxed as ordinary income.  Similarly dividend payouts were also taxed as ordinary income.  These taxes on capital gains and dividends were cut substantially by Ronald Reagan and by George W Bush. These cuts on capital income taxes is one of the reasons why top corporate executives have changed their compensation packages.  They receive most of the compensation in the form of stock options and dividends which are taxed at a much lower rate than ordinary income.

This article describes some of the tax changes that would restore some of the lost progressiveness to the tax system.  It also shows what might be done with the additional revenues.  For example, it would be possible to make all of the public colleges in the US free of cost by a modest change in the tax code.

It has taken the Republican Party several decades to redistribute income and wealth to the richest segment of our society by making the tax system less progressive.  It will not be easy to reverse the changes that were made in the tax system over the last 45 years.  If the Republican Party has its way the tax system will be made even less progressive and inequality will continue to accelerate.  Republicans manage to get elected to office because they have been able to confuse the public on tax policy.  The tax system is very complex and that makes it easier for the public to be fooled.  I have listed a few of the ideas below which might make it  easier for the public to better understand the issues.

* Nobody likes to pay taxes.  Consequently, those who want to cut taxes for the rich throw a few bones to ordinary citizens.  Most of the proposals made by GOP candidates during the current campaign provide modest tax cuts to those in lower tax brackets.  That makes them more likely to support the much larger tax cuts to the wealthy.

*  The government needs tax revenues to provide important services.  Consequently, the GOP uses several tactics to sell their tax policies.  They tell the public that cutting taxes will stimulate the economy and increase the tax base.  Economic growth may actually increase tax revenues.  That false claim began with Reagan and it continues to be used today.  Most economists reject this claim.

*  Many government programs provide benefits to minorities.  Many citizens like the idea of cutting these government programs even if they benefit from them.  Therefore, it is easy to convince some people to oppose government spending in general.  Its OK if tax cuts reduce government spending.

*  The Reagan tax cuts and the Bush tax cuts failed to pay for themselves.  Government spending was not reduced and the federal government had large budget deficits as a result.  The government borrowed money to fund the deficits which resulted from the tax cuts.  The rich would rather pay for government services by borrowing instead of paying taxes.  The GOP only gets upset when budget deficits occur when Democrats are in office.  That gives them an opportunity to tell the public that out of control federal spending produced the budget deficits.  The tax cuts that they managed to legislate are never responsible for budget deficits.  The Republican Party wants to be seen as the fiscally responsible party.  They have done a good job, with help from the media, of selling this image to the public.

*  A more progressive tax system would shift the tax burden to high income households.  This is a form of income redistribution if the government uses the tax revenue to fund programs that benefit the less well off.  The GOP calls income redistribution a form of socialism.  The public does not understand socialism but they don't like it.  Therefore, many programs that the GOP does not like can be criticized as a form of socialism.  Republicans argued against the development of the public school system by calling it a form of socialism.  More importantly, however, we should not forget that the GOP has been engaged in income redistribution for 45 years.  Cutting taxes for the rich, along with other things, has redistributed income and wealth upwards.  They totally approve of upwards income redistribution.  A More progressive tax system would simply reverse some of the redistribution that has been engineered, primarily by the GOP, over the last 45 years.

Friday, October 16, 2015

The Different Nations Within America

In theory the US is one nation.  On the other hand, our early settlers came from very different cultures and those cultural divisions differentiate each section of our nation from the others.  This article makes an effort to describe the various nations within America in relation to the cultures that they either inherited or developed as the nation expanded westward.  Its not surprising that we have difficulty finding political solutions to many of our problems.  Gun control is one of many examples.  Guns are a powerful part of the culture in several of our "nations".  The federal government does not have the power to change these cultures.  We have two political parties that struggle to build a coalition among these nations.  The Democratic Party lost the deep south, as Lyndon Johnson predicted after he passes the Civil Rights bill.  The Republican Party has captured the Dixiecrats in the deep south, but it risks losing some of its historical base in other parts of the country as it adapts to the cultural climates in other parts of the country. 

Wednesday, October 14, 2015

Has The Republican Party Really Changed?

David Brooks claims that the Republican Party is no longer a conservative party.  He offers his definition of conservatism, and describes how the Republican Party has become more radical in violation of the conservative tradition.  Corey Robbins is a political scientist who has written a book on the history of conservative thought.  He would agree with Brooks about the incompetence that is being put on display by candidates seeking the GOP presidential nomination. He disagrees, however, with the definition of conservatism provided by Brooks. He goes point by point through Brooks' definition of conservatism, and provides quotes from conservative thinkers and politicians which vary considerably from each point made by Brooks.  Robbins shows that conservatives have a long history of radicalism.  They become reactionary when they perceive a threat to the status quo.

Some of you may be interested in Robbin's history of conservative thought.  This is a link to his book on conservative thought from Edmund Burke to Sarah Palin.  During this election cycle the political candidates will be telling us how they will reform our political economy.  Most of their ideas come from economists who are employed at conservative think tanks. We have a lot to learn from political scientists like Corey Robbins who have a better understanding of the political side of these discussions. 

An Overwiew Of US Economy And Outlook For Future Performance

The Group Vice President of the Federal Reserve Bank of San Francisco provides an excellent analysis of the US economy and how he expects it to perform in the near term.  One would have a hard time finding a more thorough description of the US economy.  He expects the economy to grow at its average trend rate at around 2%, and he sees no signs of a spike in inflation.  His explanation of the factors that drive inflation is as good as his description of the forces that contribute to economic growth.

Tuesday, October 13, 2015

David Brooks Tells Us That The GOP Is Incmpetent And No Longer Conservative

David Brooks has been one of the most respected Republican pundits during his long career.  In this op-ed he argues that his favorite political party is not fit to govern.  The Republican Party has become a radical party that is leading a revolution.  Conservatives respect the past and they believe in the kind of incremental change that is consistent with the democratic tradition. This Republican Party is not interested in governing.  Some of their leaders would prefer to eliminate government instead of participating in its management.  They are not only radical; they are not fit to lead.

This was not an easy op-ed for Brooks to write.  Mr. Republican can no longer defend the incompetence that is visible to all but the crazies who only respond to craziness from their leaders.  It wasn't too long ago that John Birch Society tried to take over the GOP.  They were doing fine until they claimed that the Republican President, who led the US Army during WW ll was a Communist.  The Koch brothers, who have funded and organized the take over of the GOP, have been more successful than their father who was a prominent leader of the John Birch Society.

Monday, October 12, 2015

Which Flavor Of Capitalism Do You Want?

Robert Reich argues that it is foolish to discuss alternatives to capitalism.  Some form of capitalism exists in every major nation.  The real debate is about the government rules that determine the flavor of capitalism in every nation.  It is possible to have a form of capitalism in which the rules provide most of the benefits to an elite; its also possible to have a capitalist system that distributes the benefits of the system more equally.  He argues that the rules that shape capitalism in the US have been modified to favor an economic elite.  The political decisions that increased inequality in the US could be reversed if the political environment were changed.  Populism is on the rise in both political parties.  The status quo is under attack from the right and from the left.  The attack from the right is basically anti- democratic, while populists on the left advocate a more democratic form of capitalism. Reich, of course, favors capitalism with a more democratic flavor.  In a sense, he argues for a return to the rules that existed in the US between the end of WW ll and 1980 when the counter-revolution was initiated by ultra conservative forces.

I believe that Reich is essentially correct.  The real issue is about the flavor of capitalism that will shape our future.  I have a sense, however, that the forces of globalization have changed the game.  Most of our large corporations participate in a global market.  It has become more difficult for any nation to determine the exact flavor of capitalism in their own country.  Tax policies provide a good example of the tension that exists between nation states and corporations without a national identity.  It is impossible for any nation, acting alone, to prevent multinational corporations from taking advantage of tax havens which reduce their share of the tax burden in nation states.  OECD is working on a system to make it more difficult for corporations to use tax havens.  International cooperation on rules that affect multinational corporations is a form of social organization that is still in its infancy.

Sunday, October 11, 2015

Free Market Ideology And Other Nonsense

According to economic ideology we would have the best of all possible worlds if we had a perfectly competitive market and governments made few efforts to regulate the market.  This ideal world view assumes that consumers make rational decisions that maximize their utility.  Efforts to regulate markets would prevent consumers from maximizing their utility.  The first welfare "theorem" in economics tells us an unregulated market would be Pareto Optimal.  Everyone would maximize their utility and nobody could be better off without making someone else worse off.  Pareto, an Italian economist, objected to this misuse of his idea but it is part of the catechism in all introductory economics textbooks.  Advertising and marketing play an important role in maximizing consumer utility by providing important information about the choices that we make; they are not intentionally deceptive. Robert Shiller, a Noble Laureate in economics,  disputes this idealization of the real world by describing the critical role that deception plays in shaping consumer decisions.  We are not very good at maximizing our utility.

Most of us understand why consumers would be better off with intelligent government regulation of many markets.  The problem is that governments do not always do good job of regulating markets.  It is not easy to develop good regulations and some markets are made less competitive when producers are successful in influencing the regulations. In large part, this is because our political leaders are dependent upon campaign contributions to run for office.  Almost half of the seed money used by political hopefuls in the current election cycle came from only 158 families.  Most of them come from the energy and finance industries and 138 of the them are supporting Republican candidates who they expect to keep their taxes low and limit government regulation of their industries.  They live in a very different world than the ideal world imagined by economists.  For them it is Pareto Optimal.

Saturday, October 10, 2015

Why Ben Bernanke Is No Longer A Republican

Ben Bernanke was a life long Republican.  In this interview he offers an explanation for leaving the GOP.  Many of my Republican friends no longer recognize the Party to which they belonged for most of their adult life.  They are particularly embarrassed by the candidates running for the GOP presidential nomination.  Bernanke's explanation for leaving the GOP is more reasoned.  It was based upon his experience running the Federal Reserve.  Republican politicians did everything they could to undermine the economy that the Fed was trying to rescue.  He speaks like an economist when he discusses the economy.  He refers to whats left of his political party as the party of no nothings. Every nation has large numbers of people who are full of wild and crazy ideas about how the economy works.  The Republican Party has become dependent upon harvesting them for political purposes.

Friday, October 9, 2015

Why The House Of Representatives Can't Govern

Stan Collender argues that there are actually three Republican Parties in the US House.  The Freedom Party is the new Tea Party.  It has about 50 members and there are about 50 GOP members who Collender refers to as the Scared Party.  They are from districts that only elect GOP reps.  The Freedom Party keeps them in line by threatening them with a primary if they don't vote the right way.  There are about 150 members from the establishment group that Boehner once led.  He resigned because he was unable to control the Freedom Party members and the Scared Party members who they intimidate.  It might be possible to get something done by working with Democratic members,   but that would be too much like a parliamentary system.  If we had a parliamentary system the House leader, who is like a Prime Minister, would have to call for new election.  Instead we just have a House that is ungovernable.

Thursday, October 8, 2015

Why Hasn't Democracy Slowed Inequality?

Inequality has been rising in the US much faster than it has in most advanced economies.  One would think the electoral process would reverse this trend.  This article shows that the share of campaign contributions to both political parties from wealthy donors has been rising rapidly over the last few decades.  That has made both parties more responsive to the needs of wealthy supporters.  That effect is amplified by the rising costs of political campaigns.  It costs much more to run an effective campaign and most of the money comes from wealthy donors.  Consequently, both parties are more attentive to the needs of the wealthy.  On economic issues there is less difference between the two parties than there is on social and cultural values.  The Democratic Party has been more successful among wealthier and better educated voters than the Republican Party.  The Republican primary campaign illustrates the dependence of the Party on voters who reject the liberal social values that they attribute to Democrats.  Many minorities are also turned off by the more liberal social values that they associate with the Democratic Party.  On the other hand, they value many of the social welfare programs that are more strongly supported by the Democrats.  Comments made by several GOP candidates have made it more difficult for them to appeal to minorities who may share some of their social values.

The bottom line is that democratic forces have done little to slow down the rise in income inequality. It is less of an issue in political campaigns than social and cultural values. We are faced with two bad alternatives.  The country is difficult to manage with a Republican Congress and a Democratic Administration.  Our worse nightmare would be a Republican Congress joined by a Republican President.

Monday, October 5, 2015

Old Energy Versus New Energy In US

The cost and effectiveness of solar and wind energy has been getting better but the supporters of old energies like oil and coal have purchased the services of the Republican Party to limit the use of new energy.  Almost all of the political contributions from old energy firms have gone to the GOP.  They have also advanced their cause by corrupting education and the news media.  The Koch brothers have funded academic positions in many universities and think tanks that are supportive of old energy and opposed to new energy sources.  Exxon has operated in a similar fashion.  Newsweek, for example, recently published an op-ed which was written by an author who did not disclose his relationship with his funding sources.  Their goal is rather simple.  They only need to plant the idea there is doubt within the scientific community about global warming and the potential for renewable energy sources.  They wrap this up with doubts about the ability of governments to make intelligent decisions about new sources of energy and by painting governments as opponents of free enterprise.

Sunday, October 4, 2015

Why The IMF Abandoned The Washington Consensus And More

Ostensibly, this article provides a tribute to Olivier Blanchard who recently retired from the IMF after many years as its chief economist.  However, since Blanchard led the IMF through some dark times during the financial crisis, the research that he led at the IMF caused him to change his mind about economic theory and its practical applications in the real world.  The changes that occurred in Blanchard's thinking, and at the IMF during his tenure, provide a unique glimpse into changes that have taken place in macroeconomics over the last few decades.

The IMF plays an important role in funding economic development and in assisting nations that get into fiscal difficulty.  For many years it operated under what was known as the "Washington Consensus".  Their clients were expected to support the free flow of capital into their markets.  They were also required to reduce inflation and government spending.  Blanchard found out that these policies did more harm than they did good.  The Washington Consensus no longer guides IMF policy decisions.  Paul Krugman praised Blanchard for changing his mind about "expansionary austerity" when IMF research showed that the imposition of fiscal austerity, particularly when interest rates are at the zero lower bound, is contractionary.  He believes that too many economists adhere to their belief system in the face of disconfirming data.

This article also does a nice job of describing the ebbs and flows of macroeconomic theory after the rise of rational expectation theory at the universities of Chicago and Minnesota.  One of the implications of rational expectation theory is that government efforts to steer the economy are bound to be ineffective.  Rational agents are presumed to calculate the effect of government policies, and they will respond by making decisions which counter the intended effect.  We have learned that rational agents are not as rational as the theory assumes, and that economic decisions are affected by emotion as well as they are by reason.  The financial crisis provides a classic example of herd behavior in financial markets. It also showed Blanchard, and the IMF, that credit markets play an  important role in the economy.  They were assumed to be external to the real economy by economists associated with rational expectation theory and real business cycle theory with which follows from it.

The battles that have occurred within economics have a more powerful effect on the real world than one might expect.  They are more than academic.  Most of the world's central banks and international agencies such as the IMF and World Bank are strongly influenced by prevailing theory.  

Saturday, October 3, 2015

The Hedge Fund Industry

Just received an article (via Manan Shukla) that provides a good overview of the hedge fund industry.  The author was an institutional investor who was involved in selecting hedge funds.  The outstanding performance of some hedge funds has stimulated a lot of demand from institutional investors and by wealth managers.  It is now a multi trillion dollar industry with thousands of hedge funds offering a variety of approaches to high returns.  My takeaway is that it is very difficult for most investors to do a good job of asset allocation in the selection process.  One of the problems is that few hedge funds provide consistent returns and that it is difficult to determine which of the new hot funds to include on one's portfolio.  The fee structure also provides a high hurdle for a hedge fund.  Any hedge fund must beat the market return by 4-5% in order to provide a net return to the investor.  Most hedge funds are unable to consistently beat the market rate of return. 

Friday, October 2, 2015

What Do GOP Tax Plans Have In Common?

Paul Krugman explains why all of the GOP presidential candidates, who have bothered to announce a tax policy, sound alike.  Frankly, they have been the same since Reagan.  They all cut taxes, primarily for the wealthy, and the tax cuts reduce government revenue.  They sell this to the public by giving ordinary folks a small tax break, and they claim that government revenue will actually increase because the tax cuts will stimulate economic growth.  It makes sense for them to cut taxes primarily for those who fund their political campaigns, and they really don't care whether government tax revenues decline.  They prefer a smaller government anyway and the best way to shrink government is to reduce tax revenues.  When budget deficits occur they then have an opportunity to shrink the government programs that they don't like.  This includes spending on education and social welfare programs that don't matter to their rich friends.  They can usually find economists who defend their policies.  That is why the wealthy make tax deductible donations to conservative "think tanks" and why the media usually provide them with a platform to sprinkle the nonsense with star dust. 

One would think the public would get wise to this game but tax policies are covered with appeals to social values that inspire the less wealthy in the GOP base. Many believe that government is part of their problem because they promote "liberal" values that reward the wrong people and which undermine family values.

Thursday, October 1, 2015

Elizabeth Warren Attacks HUD And FHA For Teaming With Hedge Funds

HUD and the FHA are selling non- performing mortgages to hedge funds at a steep discount.  The hedge funds hope to make a profit by assuming these mortgages at a steep discount from their face value.  That puts them in a position to foreclose on mortgages and sell the homes for more than the discounted value of the mortgages they purchased.  Warren argues that HUD and the FHA could have prevented foreclosures by cutting the principle on the non-performing loans instead of selling the mortgages to hedge funds at a discount.  Apparently, the hedge funds have more clout with HUD and the FHA than homeowners who were suckered into purchasing homes they could not afford by loan originators who sold the mortgages to banks that packaged them into toxic securities that they sold to investors.

HUD and the FHA are under the control of the Obama Administration.  They could have reduced the principle on the mortgages on their own authority.  Warren and Bernie Sanders have been advocating populist policies that are not popular with many Democrats who cannot run political campaigns without the support of wealthy contributors.  The Obama Administration would also be attacked by Tea Party populists who would rather see hedge funds buy mortgages at a steep discount than cut the principle on non-performing mortgages. 

The Tragedy Of The Horizon And Climate Change

Mark Carney, the Governor of the Bank of England, delivered a speech that coined a new phrase to describe his concerns about climate change and its potential to disrupt the world's economy.  He described some of his concerns at a meeting of one the nations largest insurance companies.  Ordinarily, a central banker is focused on fixing short term economic problems as they arise.  He stepped out of this role because he realizes that unless we take action today to address climate change it will be too late to save our society.  He called this the "tragedy of the horizon"  because business leaders and governments are all focused on the short term.  That makes it very difficult to deal with catastrophic changes that are likely to arise beyond the time horizon in which we typically operate.  It will be very difficult to shift the time horizon outward so that we can leave a decent world to future generations.  It will take more leaders like Mark Carney to make this happen.  Most of us are like cigarette smokers who know that they are likely to have health problems in the future unless they stop smoking.  Many smokers are unable to shift their time horizon beyond the present.