Wednesday, April 27, 2016

Why Competition Does Not Eliminate Rent Seeking

The Booth School of Business at the University of Chicago is one of the citadels of free competitive markets.  The basic idea is that market competition produces ideal outcomes.  Sellers make fair profits and buyers maximize the value that they receive from their purchases.  Robert Shiller makes a counter argument in this interview.  He suggests that competitive markets force sellers to deploy marketing techniques that rely upon deception in order to stay in business.  In other words, excessive profits, or rents, are not unique to markets with low levels of competition such as monopolies or highly concentrated industrial structures known as oligopolies.  Marketing techniques are designed to take advantage of known levels of awareness and irrationality among consumers particularly in highly competitive markets.  Shiller provides numerous examples to make his point that competition between sellers does not make markets more fair than less competitive markets.

Saturday, April 23, 2016

The Importance Of History In Economic Development

This is an excellent article by a historian who relates innovation to human capital formation.  Special conditions must exist to foster human capital formation and innovation.  Unfortunately, most societies are hierarchical, and hierarchy is often designed to keep people in their place.  Innovation most often occurs where there is ample opportunity for human capital formation.  Access to education plays an important role but children born under conditions of extreme poverty fail to achieve many of the conditions that are prerequisite to success in school.  We are all shaped by our history.  We interpret much of what we perceive by the accidents of history.

George Will Unites Climate Policy With Authoritarian Progressivism

The Washington Post provides George Will with a platform to instruct his readers, which includes those who read his syndicated articles in small town newspapers, on the evils of progressivism.  In case you wonder what progressivism is George Will defined it in this article.  This allowed him to kill two birds with the same stone.  Most of his readers have been told that progressives are evil people who are often in positions of authority.  In this case, they have abused their authority by attacking energy companies for misleading the public on the link between carbon emissions and climate change.  Most of his readers have been taught, by George Will and others, to deny the relationship between carbon emissions and climate change.  They will be reinforced in their belief by George Will who has connected climate change activism with something else that they hate.  That is, progressivism and the political Party which they identify with the progressive policies that they have been taught to hate.  This article is pure propaganda written under the guise of libertarianism.  It is directed toward a well defined segment of the Republican Party.

Thursday, April 21, 2016

Paul Krugman On Carbon Pricing And Free Trade Qualifications

Paul Krugman is usually a very clear writer.  In this article he makes some very important points but he was not very clear.  I have simplified the important points that he embedded in more complex article.

The basic economic case for free trade was made many years ago by David Ricardo who explained the concept of comparative advantage.  Since Ricardo, economists have proclaimed that free trade is good and that protectionism is bad.  Krugman tells us that free trade does not drive global economic growth unless there is technology transfer from rich to poor countries.  Technology transfer has no role in Ricardo's concept of comparative advantage.  Therefore, it cannot be the sole basis for trade policy.

Krugman also thinks that putting a price on carbon is a good way to reduce carbon emissions.  On the other hand administrative actions that would reduce the use of coal for producing electricity would be a huge step in reducing carbon emissions without the need of carbon pricing.  In other words, there are alternatives for reducing carbon emissions that are independent from market based solutions based upon the pricing mechanism which may not have the desired impact on consumer behavior.

Tax Cuts Do Not Increase Tax Revenue By Stimulating Growth. But Who Cares?

Nobody likes to pay taxes.  Therefore, cutting taxes is very popular with politicians.  They give small tax cuts to lots of people to win their support for the large tax cuts that they give to those who fund their campaigns.  Tax cuts, along with deregulation, have defined the Republican electoral strategy since the 1980's.  The basic problem with that strategy is that one can't cut taxes without also cutting government tax revenue.  That produces budget deficits unless politicians cut popular spending programs.  One way out of this dilemma is to argue that tax cuts and deregulation will stimulate economic growth.  Economic growth will increase the tax base and pay for the tax cuts.

Since tax cuts are fundamental to Republican electoral campaigns there are lots of economists who come to their rescue.  They argue that consumers will have more money to spend, and that businesses will be encouraged to invest when their after tax return on investment is increased by cutting the tax on business profits.  That has been a compelling story despite the fact that there is no evidence to support the story.  This article provides all of the evidence that any reasonable person would need to dispute the magical story about cutting taxes to increase tax revenue.  For readers who care about data it might matter.  On the other hand, it will not stop Republicans from claiming that tax cuts will pay for themselves by stimulating economic growth.  They have been unable to come up with a better way to fund and win elections.  You may get a kick out of this interview of the Ohio governor who is one of the remaining GOP candidates for the presidential nomination.  He can't really tell the story without enlisting the support of friendly economists who are better at telling the story.  One would think that John Kasich would have learned the story by now.  Kasich was also asked about climate change.  He does not deny climate change but he offers lots of reasons for not doing anything about it.

Wednesday, April 20, 2016

Globalization And US Politics

Donald Trump and Bernie Sanders have demonstrated that a large number of Republicans and Democrats are concerned about the economic and social impact of globalization.  Populism is on the rise in both political parties.  It takes different forms in each party, but the underlying problem is that the benefits from globalization have not been equally distributed.  Many citizens believe that our political parties are aligned with the interests of multinational corporations.  Populism, blended with nationalism, is on the rise in the US and in much of Europe.  Economists have traditionally supported the concept of free trade.  However, millions of manufacturing jobs have been lost in the US and those jobs have not been replaced by equal or better employment opportunities.  Moreover, one of our major political parties has actively resisted the introduction of government programs that might ameliorate the economic damages from globalization.  This article provides a historical perspective on how economists have attempted to explain the changes that have taken place in the labor market.  Less attention is being placed on the impact of technology on the labor market and many economists are turning their attention to the problem of poorly managed globalization. 

Monday, April 18, 2016

Why Are Large Corporations Reducing Capital Expenditures?

Paul Krugman, Larry Summers and other economists have been trying to explain secular stagnation.  That is what they call an economy that is not stimulated by a very low rate of interest.  In this article Krugman suggests that the lack of competition in many industries may be the reason for low levels of business investment in plant and equipment.  He offered Verizon as an example of a firm that has monopoly power and little reason to make investments that would improve customer service.  Verizon has not expanded its very fast FIOS network because it faces little competition in its market.  It is more profitable for Verizon to milk its existing network infrastructure than it would be to expand its fiber optic FIOS network.  Verizon is not unique.  The market share held by the four largest firms in most industries, which is a sign of industry concentration, has been increasing along with a decline in capital investment.  There is little need to compete on price or on superior customer service in industries with little real competition.  That is why many large corporations are not taking advantage of very low interest rates to expand and improve their products and services.

Thursday, April 14, 2016

The Normalization Of America From A European Perspective

Many Americans have been surprised by Donald Trump's political appeal and by Bernie Sanders' popularity with young Americans.  This article provides a European perspective on politics in America.  It argues that America is becoming more like Europe.  Young people are disenchanted in Europe and in America, and they view globalization as threat.  Immigration has been a problem in Europe for some time and it is becoming a bigger problem in an America that is less protected from immigration by its unique geographic isolation. 

The article concludes that America is no longer exceptional but that the world will miss its efforts at being exceptional.

Tuesday, April 12, 2016

The New Employment Era In The US

Almost all of the job growth in the US since 2005 has been in alternative employment.  That includes a variety of part time and temporary assignments.  The historical relationship that used to exist between a firm and its employees no longer exists for many workers.  Firms get a more flexible labor force and workers face more employment uncertainty and they are more responsible for providing for their health and retirement security.

Friday, April 8, 2016

Does Income Inequality Retard Economic Growth?

This article was written by a labor market economist.  He argues that income inequality has reduced consumer demand for goods and services.  That, in turn, has reduced the demand for business investment.  Consequently, the economic stagnation that has been underway for almost a decade is best explained as a shortfall in aggregate demand. We can't have a full employment economy under conditions of growing inequality.

Some liberal economists agree that we are suffering from a shortfall in aggregate demand.  They also believe that monetary policy has been ineffective as a stimulus because interest rates are at the zero lower bound.  They argue that fiscal stimulus is necessary but that governments have imposed fiscal austerity which has contributed to economic stagnation. Most of them do not believe that income inequality is responsible for economic stagnation.

Conservative economists also reject any relationship between economic stagnation and income inequality.  They believe that the labor market is efficient and that labor market participants are rewarded or punished in relation to their contribution to output.  They tend to reject the use of monetary policy or fiscal policy.  Government intervention will only distort the efficient operation of the idealized competitive market that they worship.

One of the conclusions from this analysis is that soft core and hard core neoliberal models of the economy have shifted western economies away from the goal of a full employment economy.  Stagnant growth in wages and consumer demand are the outcome of the move toward an economy that is driven by growth in corporate profits.  The financial industry plays a more important role in this economy that it has in the past.  So has a poorly managed globalization of the economy and the necessary liberalization of capital movement.

The article concludes with a presentation of an economic model based upon full employment and a well managed form of globalization.  This model is based upon a rejection of the key assumptions that underlie soft core and hard core neoliberal ideology which continue to dominate our conception of the macro and micro economy.  Understanding the role of these assumptions is probably more important than other contributions in this article.  They continue to shape our view of the economic world in which we live.

David Brooks Provides Justification For Brokered GOP Convention That Rejects Trump And Cruz

Donald Trump's performance in the Wisconsin primary convinced David Brooks that Trump would not have the required number of committed delegates to win the nomination.  In this article he describes a plan that might produce a nominee other than Donald Trump or Ted Cruz.  Brooks persists in the belief that neither Trump or Cruz represent the Republican Party that exists primarily in his imagination.

Brooks argues for a coalition of real Republicans which he calls the Lincoln Caucus.  He contrasts this coalition with the Freedom Caucus which is the new name for the Tea Party which consists of groups that support Trump or Cruz for reasons that are inconsistent with Brooks ideal of the Republican Party.  He might have come up with a different name for his coalition caucus.  The Republican Party is no longer the Party of Lincoln.  Its base of support in the Solid Republican South is not the Party of Lincoln. 

Brooks continues to believe that there is widespread support within the Republican Party for something that he calls reformed conservatism.  Jeb Bush and Marco Rubio carried that banner into the GOP primary campaign and they outspent Trump and Cruz to no avail.  The Republican base responded more strongly to the emotional sentiments conveyed by Trump and Cruz.  Workable ideas coming from either of them were in short supply.  Moreover, a large segment of the GOP base believes that the GOP establishment,  does not share their concerns.  They only vote for Republicans because they hate the liberal ideals which they associate with the Democratic Party.

Paul Ryan is probably closer to Brooks' idealization of the Lincoln Caucus than most Republican leaders.  However, Ryan and much of the GOP leadership, cling to the ideals that helped Ronald Reagan win two presidential elections.  It remains the Party of Reagan and not the Party of Lincoln.

Thursday, April 7, 2016

State Legislators Make Congress Look Good

We don't pay much attention to state politics during a presidential election campaign.  The state legislature in Tennessee has attracted some attention by naming the Bible as the official state book.  Some view this as a bad idea since the Constitution has a silly provision about the separation of Church from the state. What they don't understand that is state legislatures spend a lot of time  doing other silly things such as naming the state gun or the state XXXXX.  Maybe that is a good thing.  They do real damage when they attack more serious problems.  It gets even worse when the most ambitious legislators graduate, after serving their time at the state level, and get elected to Congress.

Wednesday, April 6, 2016

Blame Congress For The Next Economic Crisis

The GOP Congress has been critical of the Federal Reserve's policies which have kept interest rates very low for a long time.  Some Republicans have even promoted a move to the gold standard in order to protect the value of the dollar from hyperinflation which they have been predicting for several years.  This article, by the former President of the Federal Reserve Bank of Minneapolis, explains why there is little risk from the Fed's low interest rate policy.  The real risk to financial stability, according to this analysis, will be caused by the over use of leverage by consumers and by banks.  Congress encourages leverage by subsidizing mortgage debt and student loans.  Instead of encouraging debt Congress should subsidize desirable spending more directly.  For example, the government could reduce the cost of higher education in a number of ways.  That would be better than loading up households with debt.  Banks are also encouraged to increase their risk by the use leverage.  They, and their creditors, assume that the government will not let systemically important banks fail.

Sunday, April 3, 2016

Is There A Crisis In The Theory Of The Firm?

The Booth School Of Business at the the University Of Chicago hosted a conference that debated the theory of the firm.  The prevailing theory of the firm,  attributed to Milton Friedman, is that the sole purpose of the firm is maximize profits without violating the law.  George Stigler, another famous professor who taught at Chicago, held the view that firms would attempt to capture government regulators and write the "rules of the game" in order to maximize profits.  In other words, democracy and the narrow version of the firm postulated by Friedman are in conflict.  The government and large corporations necessarily interact in a social environment.  The question is how the system works to maximize social welfare.  Friedman's hypothesis assumes that the goal of profit maximization is consistent with the goal of social welfare maximization.

A number of interesting points of view were discussed in this article but the theory of the firm is so firmly embedded in Neoclassical assumptions about how the world works that Friedman's theory of the firm has prevailed, and it will continue to prevail.