Wednesday, June 29, 2016

An Argument For A Universal Mimimum Income

Voters in Switzerland rejected a proposal for a universal minimum income (UMI} by a wide margin.  There are many moral and political objections to UMI.  This article explains why a UMI may become necessary as productivity increases reduce the need for labor.  It also counters several moral and political objections to UMI.  It also argues that income inequality will continue to accelerate as long as increases in productivity flow primarily to the top 5%.  They don't need to work harder in order to increase their income, but we assume that workers need to work harder in order to increase their incomes. Those with inherited wealth are also able live well without depending upon their own labor.

Sunday, June 26, 2016

Britian's Referendum Signals A Change In The World Order

This article provides a big picture view on Britain's exit from the European Union.  It links together the impacts of economic globalization,  the rise of nationalism in Europe and the collapse of nationalism in favor of sectarianism in the Mid East.  The West has been unable to deal with the huge surge of refugees from the war torn Mid East and the wave of immigration from Eastern Europe.  A stagnant economy has also raised questions about the political leadership and economic integration in Europe.  Russia has also raised questions about NATO and its ability to provide security in Eastern Europe and elsewhere.  China's economic rise has also raised questions about the order that had been put in place after the second world war.  Most of the economic growth has been occurring in Asia and China accounts for the lion's share of that growth.

Thursday, June 23, 2016

What Explains The Decline In Global Trade?

A nation typically pays for imports with revenues it receives from its exports.  A major portion of the decline in global trade has been the drop in export revenues in nations that sell commodities to the rest of the world.  The drop in oil prices accounts for large share of the lost export volume in oil producing states.  Other commodities, such as iron ore, are no longer bringing in enough export revenue to support the purchase of imports.  BRIC nations represent a significant portion of the global trade volume.  They are importing much less than they had in the recent past because their export revenues have declined substantially.

Sunday, June 19, 2016

Why Populism In On The Rise In The US And How To Address Political Decay

I have posted a quote from an article by Francis Fukuyama which is in the current issue of Foreign Affairs.  You can read the full article by registering at Foreign Affairs at no cost.  The quote below summarizes the article but the details are informative.  Fukuyama argues that both of our political parties have largely ignored white working class voters.  Moreover, the political system has become so dysfunctional that it will be hard for either party to do what is needed to rebuild a political system that has been captured by elites in both parties.

“Populism” is the label that political elites attach to policies supported by ordinary citizens that they don’t like. There is of course no reason why democratic voters should always choose wisely, particularly in an age when globalization makes policy choices so complex. But elites don’t always choose correctly either, and their dismissal of the popular choice often masks the nakedness of their own positions. Popular mobilizations are neither inherently bad nor inherently good; they can do great things, as during the Progressive era and the New Deal, but also terrible ones, as in Europe during the 1930s. The American political system has in fact suffered from substantial decay, and it will not be fixed unless popular anger is linked to wise leadership and good policies. It is still not too late for this to emerge"

Saturday, June 18, 2016

Washington Post On Trump's Past Business Deals And Connection To Russian Oligarchs

Donald Trump has excluded Washington Post reporters from his press conferences.  The Post has not been a friend to The Donald.  This post provides information in a book, written by Post reporters, that will be published in August.  It will not be good for his reputation as a business leader or as a person that one should trust.  Trump's has also used his connections in Russia to extend his real estate ventures into Moscow.  Trump has also sold luxury housing to wealthy Russians who are closely connected to Putin.  Perhaps that is why Russia has hacked into the Democratic website that contains information that may be used to discredit Trump in the election campaign.  The Donald's entry into politics has been more revealing about his political and business dealings than he might have imagined. 

Sunday, June 12, 2016

The State Of Macroeconomics

Macroeconomics suffers from a serious problem.  It provides a poor description of reality.  The major models of the economy are not useful in forecasting.  The financial industry tried to use them for forecasting interest rates but they were not helpful.  Central banks, including the Fed, use them but they have been forced to supplement these models with a variety of home made sets of data in order to make more accurate forecasts.  The basic problem with the models is that they make unrealistic assumptions about how individuals and firms really behave.  Garbage in and garbage out is the best description of what has dominated in academia in recent years.  The best descriptions of what happens at the macro level come from economists like Keynes, Hayec and Minsky who have long been ignored in academia.  Their descriptions of economic activity were based upon intuitions derived from experience in the real world.  Its likely that the the future of macroeconomics will include insights from psychology, sociology and studies about what really happens in firms.  It will also make greater use of data that will be used to test the validity of hypotheses.

This article offers some additional comments on the state of macroeconomics.  It is followed by lots of comments.

Wednesday, June 8, 2016

What Is The Primary Cause Of US Income Inequality?

Economists tend to look at the labor market to understand job and income growth.  One common explanation for the decline in middle class incomes is to claim the market is rewarding the well educated, especially those with technical skills.  The rise in executive compensation is explained in a similar fashion.  Executives have scarce skills and the high demand for those skills rewards executives with a premium that is determined by an assumed market for CEO's.

This article shifts the attention away from a labor market explanation based upon the advance of technology and the scarcity of technical and executive skills to changes that have occurred in our large corporations.  The basic argument is that they used to retain and invest their earnings to improve their competitiveness.  They are now downsize and distribute organizations.  That is, they cut costs primarily by downsizing their permanent labor force in order to increase profits.  In turn, they distribute their profits to shareholders by increasing dividends and buy repurchasing their own stock. The metric that governs CEO asset allocation is earnings per share (EPS).  For example, IBM's EPS in 2011 was $13.44.  Its CEO announced that its goal for 2015 was $20.00.  It attempted to reach that goal via an extensive downsizing operation, and by spending $70 billion on dividends and stock buybacks.  In other words, IBM redistributed 70% of its net earnings to shareholders in an effort to reach a singular target of EPS.  Despite that effort,  it was only able to hit $14.72 EPS target.  Slow growth in its traditional markets prevented IBM's efforts to manage its EPS growth through downsizing and distribution of profits to shareholders.  HP distributed 120% of its net income to dividends and stock buybacks between 2004 and 2011.  It also reduced its labor force from 349,000 in 2011 to 302,000 in 2014 to cut labor costs.  Cisco distributed 108% of its net income to dividends and buybacks 2002-2014.  All of this is being done to manage EPS in order to satisfy a common goal.  That is, to increase shareholder value.  Accordingly,  CEO and top executive compensation is primarily based upon the award of stock options and dividends.  They are among the largest shareholders of the corporations that the serve.  The management for shareholder value has also been good for the financial industry.  It has grown along with the effort by CEO's to manage EPS through the agency of financial institutions.

The income growth of the top .01% includes a large share of top corporate managers as well as managers in the financial industry.  Many of the victims from corporate downsizing have been college educated middle managers. The stagnant incomes of the middle class cannot be explained by the loss of unskilled jobs to low wage countries.  Stagnant income growth for the middle class and increasing job insecurity is built into the downsize and distribute model that drives corporate behavior.

Tuesday, June 7, 2016

David Brooks On The New Traditionalism

David Brooks is tired of the culture war that has been the weapon used by his favorite political party since Richard Nixon invented the "silent majority" in response to the counter culture that developed in the 1960's.  He seems to recognize that Donald Trump captured the culture war and used it to take over the GOP which didn't take it seriously enough.  He tried to ward off Trump by promoting "reformed conservatism" and nominating Marco Rubio as the leader of a movement that did not exist.  He lost that battle and he has invented a new idea to replace reformed conservatism.  This op-ed describes his idea of new traditionalism.  He argues that is superior to the old traditionalism which was at the center of the culture wars spawned by the GOP and which set the stage for Donald Trump.  It would be nice if the old traditionalism could be infused with the spiritualism that Brooks advocates.  However,  Donald Trump's supporters are not eager to become Buddhists.  They seem to prefer anger to love and spirituality.  Moreover, GOP leaders are not ready to promote community over individualism.  Nor are they ready to give up the idea of utility maximizing individuals which is at the heart of their worship of a market based society. David Brooks is desperately seeking an alternative to replace the political party that he can no longer promote.

Sunday, June 5, 2016

Why Did Industrial Revolution Start In Great Britian And Not In China?

This is a review of a book which reviewed many of the major books written on this subject and finds fault with most of them.  In particular, it reached a conclusion that is diametrically opposed to the conventional wisdom on this subject.  Adam Smith's Britain did not exist.  Britain's success is best explained by factors which are assumed to impede economic growth.  It had a big government which funded a powerful navy; it had high taxes and it had an industrial policy that enabled its economy to expand through trade.  China lacked most of the ingredients present in Great Britain that enabled the industrial revolution.  This suggests that a strategy of low taxes and small government is not the magic assumed  by most economists and politicians today.  It is not supported by historical or economic analysis.

Friday, June 3, 2016

A Satirical Commencement Address At Trump University

This make believe commencement address at one of Trump's failed businesses, that is being sued for misrepresentation by former students, tells us a lot about Trump and is very funny.  Trump is not a laughing matter; he is a serious threat to our nation, but sometimes there is much truth in jest.  It provides important information  about Trump with a large dose of humor.

Market Failure And Milton Friedman's Free Market Utopia

The Chicago School has historically provided the rationale against government intervention in the economy.  One of the difficulties with their position is that market failures are very common.  Markets often produce externalities.  That is, a decision to sell or purchase a product that pollutes the environment may be good for the seller and buyer but bad for the those who may suffer from the free market decision.  Governments tend to intervene in the private market when externalities affect social welfare.  The Chicago School found many ways to support its free market ideal in the face of externalities.  One method was to argue that government regulators would be captured by those who benefited from the externality.  The regulators would intervene in the market but make matters worse by producing weak regulations that led to market inefficiency.    Another method was to argue that left to their own devices market participants would find a way to reduce externalities without the need for government regulations.

The free market is presumed to be protected by competition which puts pressure on sellers to produce good products at competitive prices.  Anti-trust laws were designed to enforce market competition.  The government protected the market by preventing sellers from colluding in ways that limited competition.  Anti-trust laws have typically been opposed by large firms even though they provide a market based solution for a market failure.  Carbon taxes provide another form of a market based solution designed to let the market reduce carbon emissions which result from a market failure.

Milton Friedman was one of the leaders of the Chicago School.  This article argues that he was not really a ultra-conservative.  It describes some the ways in which Friedman was able to support government intervention in the free market in short term even though he was committed to the utopian ideal of the free market in long run. Unfortunately, externalities and market failures are so common in the real world that economists struggle to maintain the ideal of free market while they introduce a variety of ways in intervene in the market.  We might be better off if we did not invoke utopia to prevent governments from doing what every economy requires in order to serve society.

Paul Ryan Endorses Trump

The Republican Speaker of the House of Representatives has been a favorite of the Washington Post editors.  The Post has admired his efforts to balance the federal budget for many years. Its editorial board also applauded the principles that appeared to uphold when he chose not to endorse Donald Trump's presidential campaign.  It turns out the Paul Ryan puts Party loyalty over whatever principles he seemed to have.  This Post editorial explains its disappointment in one its favorite politicians.  It argues that a Trump presidency would be terrible for the nation and that winning the presidential election is more important to Ryan than the national interest.

Ryan defends his decision by arguing the President Trump would assist him in passing legislation that he has promoted for many years.  The implication is that Trump, who has opposed many of Ryan's policies, will turn his back on those who helped him win the election after he is elected.  The other possibility is that Ryan is not the principled politician that the Post editors has imagined him to be.  Personal integrity may not be any more important to Ryan than it is to Trump. 

Thursday, June 2, 2016

OECD Warns About Global Economic Growth Trap

OECD released a pessimistic report on global economic growth.  It places the blame on governments which have failed to respond properly to slow growth.  They have relied upon monetary policy to stimulate growth but low interest rates have not been able to pull the global economy out of its slump.  Governments should be taking advantage of low interest rates to stimulate demand with fiscal policies.  Moreover, reliance upon monetary policy has created its own problems.  It has increased risk in the financial system.

Wednesday, June 1, 2016

A Psychological Explanation For Trump's Appeal To Many Voters

Trump won the GOP primary by mounting a war against political correctness.  In many ways he ignited the resentment than many feel against cultural and social liberalism.  Much of the anti-government sentiment in the US is related to the civil rights movement which has been supported by the federal government.  Trump did not conduct a policy debate during the GOP primary campaign.  Those who focused on policy issues dropped out of the race quickly.  For example, Trump dismissed Jeb Bush as weak and boring. He certainly was in comparison to Trump.  Eventually only "lying" Ted Cruz, who appealed primarily to a narrow segment of the anti-liberal GOP base, and a conventional Republican governor from Ohio remained in the race.  They were unable to stop the Trump steamroller.  Attention is now turning to the November presidential election.  This article attempts to explain why Trump has been immune to rational criticism of his scattered policy proposals.  His supporters don't care whether his policy proposals will do what he claims.  They respond to him because he appears to share their resentments and he is willing to say things that other politicians disguised with code words.  It will be interesting to see whether disclosures about Trump's business practices have any impact on his popularity.