Monday, August 29, 2016

Donald Trump And The State Of Democracy

Fred Hiatt is the Editorial Page Editor for the Washington Post.  He makes some obvious points about the implications of Donald Trump's presidential nomination.  Democracy loses if the unlikely happens and he wins the elections,  but it has also been harmed by his nomination.  The rest of the world can't understand how Trump won the GOP nomination.  He then turns his attention to Hillary Clinton and President Obama.  He claims that the rest of the world has become less democratic during Obama's presidency and he asks whether President Clinton will reverse that trend.  In other words, he largely ignores the state of democracy in the US and he shifts his attention to an impossible role for any US President.  Donald Trump defeated the best candidates that the Republican Party could pit against him in the GOP primary.  Over 40% if the electorate will vote for Trump in the general election.  We have no business holding a US president accountable for the state of democracy in the world when it is in such serious trouble at home.  Unless we address the problems at home we are in no position to preach democracy in other parts of the world.  Democracy must go well beyond running elections.  That is especially true when electioneering becomes the primary focus of our political parties along with raising millions of dollars to run political campaigns.  It is also a problem in world that has not come to grips with globalization and economic stagnation.  Political failures are at least partially to blame for the discontent that we have in the US and in other democracies. That should not be surprising when one of our major political parties wants to reduce the role of government in a world that requires an active and competent government to deal with rapid economic and social change.

Saturday, August 27, 2016

Globalization Requires A Larger State In Order To Avoid Populist Backlash

We have seen the rise of Donald Trump in the US as well as the rise of populist parties in Europe. Immigration and trade agreements have been under attack for good reasons.  Globalization increases the size of the economic pie but it is not equally shared.  The losers from globalization have been getting a smaller share of a bigger pie. The global economic expansion was arrested by the financial crisis and that made things even worse for the losers.  Monetary policies, which have been the favored response,  increased the value of assets held by those who benefited from globalization but that only made it more expensive for the losers to purchase housing and financial assets which have increased in value.  The political backlash that we are seeing should not be surprising.  It has happened before under similar circumstances.  This article provides us with a history lesson that has been largely ignored by economists and the political leadership.  Globalization could easily be reversed in dangerous ways unless something is done to deal with the unintended consequences of poorly managed globalization.

One of the reasons for the political backlash is that our political leadership views the state and markets as substitutes.  Their focus in on reducing the size of the state and privatizing many of the activities of the state.  The market and the state are complements and not substitutes.  We will continue to see backlash, and threats to market integration,  unless the state is expanded to address the needs of those who been left behind by poorly managed globalization. If the Tory government in the UK wanted to remain in the EU, it was a bad idea to reduce the level of public services when many were worried about sharing those resources with immigrants. It would be unfortunate if rational responses to globalization turned into the irrational forms of populism that we have seen in the US and in much of Europe.

Friday, August 26, 2016

Drug Pricing In The US And EpiPen Price Increase

EpiPen is a product that can save lives for those with allergies.  The firm that owns the patent has been raising the price of its product for the last six years.  Drug companies tend to raise prices to milk as much profit as they can prior to the appearance of less expensive generic drug.  The firm created a political storm when it recently increased the price of the EpiPen by 400%.  The CEO of the parent firm defends its price increase in this article.  Her defense is quite simple.  She is the CEO of a for-profit firm and she is responsible to her shareholders.  The anticipated generic competitor to EpiPen has not been approved by the FDA so the firm can raise the price without the fear of price competition.  The only problem with the CEO's decision is that the high price might make a life saving  product less available to customers with deadly allergies. 

For most of EpiPen's customers, who have commercial health insurance or government insurance, the price increase is not a real problem.  The real story is about the market for drugs and other healthcare services in the US. In the first place, the consumer will only pay a small portion of the price increase in the form of a deductible.  The bulk of the price increase will be paid for by the insurer or by government.  That will cause insurance premiums to rise so that insurers can recover the higher cost.  The real price negotiations are between insurers and healthcare providers.  As long as insurers can pass the costs on to their policy holders everyone is happy.  Healthcare providers have considerable pricing freedom, which is good for profits, and consumers with insurance have access to life saving products and services.  The only problem with this system is that healthcare spending in the US is almost twice as high as it is in other rich countries.  Insurance premiums, and, or government spending on healthcare, will continue to rise.  The higher our spending on healthcare, the less we have to spend on other things.

Are We Becoming A Nation Where Objective Facts Don't Matter

A famous French author once said that "people believe what they want to believe".  I have always thought that he was a good observer of human nature and that we do have a strong tendency to believe what we want to believe.  However, I also thought that most of us would change our minds if we were confronted with facts that were inconsistent with a belief.  I may have been wrong.  It would appear that strongly held beliefs are very resistant to contradictory information.  Modern information technology has provided everyone with access to objective information, but the social media, which occupies much of our time, has provided propagandists with the means to shape our beliefs and to make us resistant to falsifying information.  Everyone can choose the interest groups to which they want to belong.  Sharing a belief system provides all of its members with resistance to objective information that is counter to their belief system.  This article describes the sad state of objective information in the US and how the Internet has been used to systematically misinform many of our citizens and share their ignorance within their social media universe. They never have to question their belief system within their information cocoon.

Thursday, August 25, 2016

Donald Trump Understands His Base Better Than Most

Donald Trump needs to win Florida and other states with large Hispanic populations.  His extreme positions on immigration have attracted many of his followers but this has alienated many potential voters.  Trump has softened his views on immigration but that does not bother many of his followers.  What does Trump know about his followers that makes him successful with them?  Trump's hard views on immigration sent a strong signal to this followers.  He will be tougher on immigration than the weaker politicians to whom he is compared.  Even if Trump softens his positions for practical reasons, that does not change the opinions that he established with his followers when he took stronger positions.  Many still believe that he is on their side.  Most of them knew that it was impossible to find and evict 11 million illegal immigrants.  Trump can still tell them that he will build a wall between the US and Mexico.  That softens his position but his followers still believe that he will be tougher on immigration than politicians who never established their identity as strong opponents of illegal immigration. He can soften his extreme positions without losing his base in the hope that he can hang on to Republicans who worry about many of his positions. Trump can also talk tough about keeping Muslims out of the country, and reducing the risk of violence, and the potential for the imposition of Sharia law on evangelicals.  Trump and many of his followers are less interested in the details of policy that occupy most politicians.  He is a personality and his followers identify with the personality that he projects.  That is why he loves running Trump Rallies more than having policy discussions with talking heads on the conventional media.

Facebook Is Where It Is All Happening

Facebook has changed politics in a significant way. Bernie Sanders and Donald Trump surprised everyone by their performance in their respective primary campaigns.  Most of us agree that politics has become more polarized.  Much of this is due to the ways in which Facebook has changed how we consume news.  Misinformation which would never have made its way through the editorial process in traditional media is routinely published on Facebook.  There is a positive relationship between the inflammatory potential of content and its potential to go viral on Facebook.  This article explains how entrepreneurs have set up "news sites" that organize and feed "information" to likely readers or watchers of videos.  They can earn a good living if they are successful at misinforming their audiences of true believers.  Its not surprising that those with strong, and often strange views, are reinforced and supported by the ways in which Facebook creates groups of followers with strong convictions that puzzle many of us.

Donald Trump's new campaign manager is also the CEO of an extreme right wing news site that has millions of followers.   This article provides a good sample of the information that he feeds to his followers.  Most of his followers are ardent Trump supporters.  They use Facebook to share the information that originates on this news site.

Tuesday, August 23, 2016

David Brooks Attempts To Explain Why Leadership Fails In The US

David Brooks correctly observes the failure of leadership in our political system.  He understands that politicians are forced to deal with powerful private interest groups but he insists that politicians with the proper motivation can rise above the pressures placed upon them by those who hope to manipulate the political system.  He argues that politicians are either motivated by careerism or by ideals which lead them to view a political job as a vocation. The system can wear down the idealists, and turn those who entered politics to serve the public interest, but he holds that the properly  motivated politician can be an effective leader.  He concludes that Hillary Clinton entered politics with the proper motivations but that she has been worn down by the system.  He wishes her luck if she wins the election. In order to succeed she will have to shed her careerist shell and ignite the idealism which caused he to enter politics as a vocation.  In other words, if Hillary Clinton does not succeed as a leader it will her own fault.

David Brooks is a very smart person and lots of smart people read his articles in the New York Times. I have listed a few of the comments that I found insightful below:

*  It would be hard to find a politician who was more vocationally oriented when he was elected twice as our president.  The Republican leader of the Senate declared that his objective was to limit the president to one term in office.  Its hard to assess Obama's leadership ability without considering the careerist motivations of the Republican senators who did want him to succeed.  The same could be said for Republicans in the House and even for Democrats who had to face elections in conservative states.  Hillary Clinton will face the same obstacles to leadership as those which Obama faced.

*  Money has always played a powerful role in politics because candidates must raise large sums of money in order to run for office.  We have made it easier for money to affect elections in the US in two ways.  It costs more money to run a successful campaign with each election cycle.  Moreover, the Supreme Court made a decision which made it easier for individuals and groups to contribute unlimited amounts of money to candidates who want to run for office.  They audition the candidates before granting them the funds that would enable them to run a political campaign. That places a limit on the quality and number of candidates that run for office.  In a sense elections are over before they begin.  David Brooks and most Republicans have not opposed the decision by the Supreme Court.

* Ronald Reagan declared that government cannot provide solutions to our problems.  He told us that government is the problem.  That has become the motto of the Republican Party.  How can a president lead our country if the goal is to limit the role of government in our society?  David Brooks and most Republicans share the same opinion about limiting the role of government.  That is why they promote tax cuts that benefit their friends and why they oppose the use of fiscal policy in recessions.  Reducing budget deficits is more important to them than reducing unemployment.  Those who contribute to their campaigns do not face the risk of unemployment.

* The GOP primary campaign was won by Donald Trump.  David Brooks is one of many who question the ability of Donald Trump to be an effective president.  He won the GOP primaries for two reasons:  His opponents were unable to provide a compelling reason why they were good candidates for president; The GOP has cultivated a base that responded favorably to Donald Trump because it, and many in the media, have conditioned millions to believe much of what was on offer from Donald Trump who understood the GOP base better than they did.  The GOP base did not believe that the candidates favored by the "establishment" were motivated to serve their interests.  They were perceived as careerists and Trump was viewed as the vocational leader that Brooks described.

* The Democratic primary was a contest between Hillary Clinton, who has a low favorability rating for many reasons, and Bernie Sanders who had little chance of winning the nomination until he inspired many disillusioned Democrats to support the populist agenda which defined the Democratic Party during a period in which labor unions provided the funds and votes that were needed to win elections and legislate social welfare programs.  Sanders did better than many expected but that was not enough to win the nomination.  The striking thing about the Democratic primary, however, may not have been the contest between Clinton and Sanders.  What struck me and many others was that it was hard to come up with the names of Democrats who would be strong candidates for the presidency.  The shortage of strong Democratic candidates, and the large number of weak Republican candidates, raises an important question that Brooks did not consider.  We have not been able to attract large numbers of vocational leaders, like those described by Brooks.  Most of those attracted to politics are either career motivated when the enter the game or they have been worn down by the system as they move up the ladder.


Thursday, August 18, 2016

Right Wing Extremism And The Liberal State

We are witnessing the growth of right wing extremism in Europe and the US.  It  often feeds on hatred directed against minority groups.  This raises difficult questions for the liberal state.  We are compelled to protect the freedom of speech because it is central to the operation of the democratic state.  On the other hand, it can lead to violence which is harmful to the groups that have been targeted by the extreme right.  Carried to an extreme, we have also seen how it can destroy the liberal state and the democracy that we value.  This article provides a good summary of the issues that are being raised by the spread of right wing extremism in Europe and the US.  Many nations in Europe have laws which are intended to reduce the threat from right wing extremism.  They have not been effective in containing right wing extremism.  Donald Trump has selected a new campaign manager who operates an extreme right wing news outlet that has targeted the leadership of the political party that nominated him as its presidential candidate as well as many minority groups.  Trump's campaign is likely to become more extreme than it has been in recent months. The US protects free speech even when it is false. That will not help him to win the election in November but it could easily lead to the formation of a right wing extremist party led by Donald Trump.  Trump has been paving the way for him to declare that the election was rigged and that he did not lose the election fairly.  Trump has a valuable asset derived from the millions of Americans who want him to destroy the "establishment".  He may choose to turn that asset into political gold.

Wednesday, August 17, 2016

What Might Trump's Concesson Speech Be Like After He Loses Election?

Trump never admits loses at anything unless the contest was unfair.  This is a version of his concession speech that is projected from things that he has already said on the campaign trail.  It is highly unlikely that he would do what those before him have done after losing an election.  He will not congratulate the winner and wish her well in her important new job.  This mock speech is more than funny.

After reading this mock concession speech it seemed to me as the perfect concession speech if Trump decided to harness the millions who voted for him into a new political party.  He just added two new executives to his campaign.  They were recruited from a conservative media site which is not a friend of the Republican Party.  They, along with the deposed head of Fox News, who has also been hired by the Trump campaign, would weaponize a far right conservative party with an experienced propaganda team.  That would devastate the Republican Party.  It would also threaten the Democratic Party if its more  conservative base migrated to Trump's new party.  It would have a profound effect on politics in the US which has effectively operated with a center right party contesting elections against a center left political party.  The presidential candidate who never loses could declare victory rather than defeat by announcing the formation of his America First Party following a rigged election.

Tuesday, August 16, 2016

What Do We Learn From Low Intrest Rates In Europe?

The ECB has done what it can to stimulate the economy.  Interest rates are at an all time low and neither consumers or businesses have increased spending or investments in response to low borrowing costs.  There is not much more that the ECB can do with monetary policy to increase economic growth.  Germany and France could borrow sell 30 year bonds at interest rates below 1% but that has not happened.  Apparently, governments do not believe that investments in infrastructure could produce a return greater than 1%.  Fiscal policy is the only government tool remaining but Germany and France are not able to use fiscal policy to stimulate growth.  They are prevented from increasing budget deficits even when the cost of additional debt service is almost zero.

Why Has The Press Been Tough On The Donald?

There are lots of reasons why the press is often criticized for a false equivalence when it covers politicians or issues.  For example, despite the overwhelming evidence that human behavior is causing climate change, the press often cites sources that disagree with 97% of the scientific community.  When it comes to politics in Washington the press cannot afford to lose access to politicians from both political parties.  Much of what they report comes from political leaders in both parties.  This time it is very different.  The press has been one sided in its reporting on Trump.  In the first place, they will not lose access to Republican politicians or Party leaders if they are hard on Trump; he has few allies within the Republican Party.  Moreover, so many of his statements are so patently false, and easily invalidated, that the press makes no attempt at false equivalency.  Trump claims that the press is biased against him because it does not follow the usual practice off false equivalency.  He fails to understand that he has provided the press with an opportunity to seriously report on a candidate who is an obvious liar, who cannot support his comments, and who is relatively unprotected by the Republican Party.  We are experiencing a new world of political reporting because of Donald Trump.

Monday, August 15, 2016

Trump's Campaign Strategy Manager Worked For Ukraine's Corrupt Government

"Birds of a feather flock together".  It should not surprise anyone that Donald Trump recruited a strategy manager for his campaign with a history of business relationships with corrupt politicians.  Paul Manafort's relationship with the corrupt government in Ukraine is described in this article.  Manafort was hired to launder money and to use his connections in the US to keep the corrupt government in power.

Friday, August 12, 2016

Market Efficiency And Asymmetric Information

Warren Buffet has set up a trust fund for his wife that consists entirely of passive stock index funds.  There are two reasons why he did that.  Most importantly, he understands how difficult, and expensive, it is to collect the information needed to make smart investments.  He made lots of mistakes when he started his career because he was poorly informed.  He learned more about investing through experience and he understands that few investors make well informed investments.  Of course, it is also expensive to pay wealth managers a fee so that they may make better informed decisions.  Buffet decided to fund his wife's trust with passively managed index funds because it is less expensive to bet on the entire market than it is to pay wealth managers to make better informed decisions on individual stocks.

This article applies Buffet's lesson to financial markets in general.  It shows that financial markets cannot be efficient because buyers and sellers are not equally informed about the asset being traded.  That is what economists call the problem of asymmetric information.  Financial markets are heavily regulated in order to limit the problem of asymmetric information.  We learned the hard way that the deregulation of financial markets led to the financial crisis.  Sellers of opaque financial derivatives made fortunes selling assets that were sold to poorly informed buyers.  Buyers and sellers of those assets suffered huge losses when the true value of those assets became apparent.

Economists understand that markets cannot be efficient under conditions of asymmetric information.  Unfortunately, that does not have much of an impact on those who assume that markets are efficient, while many of the products that we purchase are poorly understood by consumers.  For example, drug companies are now able to advertise products directly to consumers who are poorly prepared to evaluate the products.  The consumer then puts pressure on medical professionals to write the required prescription.  That must be an effective strategy for the drug companies because they no longer have to pay sales professionals to call directly on busy physicians.  It must be less expensive and more productive to sell drugs directly to poorly informed consumers.  If we look at our household budgets we find that we are spending considerable sums on products that are very difficult to evaluate and price.  How many consumers can effectively determine the product and price differences on offer from cell phone service providers, TV service providers, internet service providers?  Moreover, many of the products and services that we purchase require the consumer to agree to conditions of the sale which would require a lawyer to effectively evaluate.  In many cases the consumer unknowingly agrees to give up the right to sue the seller and accept the decision of an arbitrator to recover damages.  The bottom line is that producers of goods and services have learned how to take better advantage of information poor consumers.  Markets have became less efficient, and market failures have become more common.  It is not surprising that businesses are willing to spend large sums on lobbyists who oppose regulations that would make markets more efficient.

Thursday, August 11, 2016

What Have We Learned From The Rise Of Donald Trump?

Donald Trump has been engaged in an exercise of self destruction after he captured the GOP presidential nomination.  He is unlikely to win the election in November but he has exploited issues in our economy, and within our political system, that will not go away after the election.  I have posted two articles which offer explanations for Trump's political success and the effect that he has had on our political system.  The Republican Party has been broken by Trump's success.  It has traditionally been supported by the business class which has been successful in setting the Party's economic agenda.  However, it has become dependent upon exploiting a cultural agenda which is often in conflict with the interests of the business class.  The cultural agenda is powerfully described by the Republican Party's platform in this article.  Trump has successfully exploited the cultural agenda but he has also taken advantage of the fall out from the Party's economic agenda which has not been good for a large segment of the population.  His appeals to nativism, racism and sexual values are inconsistent with the interests of most multinational corporations and with the values of the highly educated upper middle class. The conflict between the Party's economic and political agenda is apparent in Trump's weak effort to develop an economic agenda.  He has thrown a bone to the business class by making the tax system less progressive, in the Reagan tradition, and by blaming government regulations for our poor economic performance.  His tirades against free trade and globalization does not set well with the business class.

The second article  confirms the problems that Trump has exposed in the Republican Party.  It is dependent upon the support of those who are struggling financially but it has no solutions for them beyond the cultural issues which binds them to Trump's base supporters.  The Democratic Party has problems which are not easy to resolve.  It has accepted  many of the economic orthodoxies that have influenced Republican economic policy.  It has lost the white working class which formed the base of the Party since the New Deal.  Moreover, it has not found a way to better manage globalization which has been a root problem in developed economies across the world.  Trump's solutions are unworkable and offensive to many.  The problems in the Democratic Party were made visible by Bernie Sander's successful campaign in the primaries.

Tuesday, August 9, 2016

What Can A New President Do To Reverse Economic Malaise?

Hillary Clinton and Donald Trump are promising voters new programs that will increase economic growth and make them happier.  Robert Gordon describes some of the roadblocks that they will face and he offers some suggestions that would be helpful.

Economic growth is a function of the number of hours worked and the output per hour of work, or productivity.  It is hard to increase the number of hours worked in an economy that is close to full employment; it is also more difficult with a slow population growth rate.  It is even harder in an economy with a low productivity growth rate.  The slow rate of economic growth in the US economy is easily explained by these factors.  Moreover, much of the malaise that many are experiencing is due to an unequal distribution of the rewards from productivity.  The benefits from productivity, which used to be shared more equally in the US, now go primarily to the top 1%.

Governments can develop programs that supplement lost income, but that is more difficult do accomplish in a slow growth economy.  Tax revenues are dependent upon economic growth.  Budget deficits would grow unless tax revenues were increased to pay for government programs.  One solution to this problem is to make the tax system more progressive.  The US tax system has been made less progressive over the last few decades but a change in political sentiment might reverse that trend.  The government can also spend more money on infrastructure.  That has the potential to make the economy more productive; it  will also expand the economy and provide jobs.  Both Clinton and Trump have proposed infrastructure investments.  That might increase government borrowing but the increase in productivity may pay for the cost.  That is especially true when the government can borrow funds at very low rates.  Budget deficits are not as important as the cost of servicing that debt.  Government spending on debt service relative to GDP is the more important factor.  Growing GDP in a low interest rate environment is a solution that has promise.  The only real barrier to the solution is a Republican congress.  They believe that an oversized government is the real problem.  Government regulations, high tax rates and spending on social welfare programs must be reversed.  One of the problems with that argument is that there is slow growth in much of the developed world.  There is almost no relationship between the economic growth rate and the size of government.  Gordon has a much better explanation for slow economic growth.

Trump's New Economic Plan Is Not A Plan

Donald Trump's campaign has been a disaster since the GOP convention.  He decided to turn back the negative tide that has turned against him by announcing a new economic plan to a business group in Michigan.  This editorial summarizes Trump's "new" economic plan and tears it to pieces. The Washington Post also criticizes the plan. Trump proposed several tax cuts that will appeal to many Republicans who fund political campaigns.  He justified the tax cuts with a well worn GOP argument.  That is, cutting taxes for the rich, and for corporations, will stimulate economic growth.  His plan ends the estate tax, which only affects a handful of families with estates above $5 million for a single family, and above $10 million for married couples.  That will do little to stimulate the economy, and it certainly does nothing for the great majority of Trump supporters who are not multimillionaires.  He did not ignore that group, however.  He warmed up his tirade against free trade and promised them that he would take steps to return jobs that have gone to low wage countries, particularly China, back to the US.  That is much easier said than done.  It is also totally inconsistent with the free trade ideology that is dominant in the Republican Congress.  It also has little appeal to large corporations who are eager to sell their goods and services to a growing middle class in China and elsewhere.  Trump offered to reduce the top corporate  tax rate to 18% but that is pretty close to the effective tax rate that affects many large corporations.

Trump's plan also deviates from Republican policy preferences which are centered around federal deficit reduction.  His plan would lower tax revenues and increase federal spending dramatically.  In that sense it is not a real plan at all.  He has simply made an effort to shift his campaign away from the problems that he has created by his own statements.

Tuesday, August 2, 2016

Warren Buffet Slams Trump's Business Performance

Warren Buffet is a legendary investor who also supports Hillary Clinton's campaign.  He looked at the performance of  company that Trump took public in 1995 and compared its performance to the performance of a passive stock index since 1995.  Those who invested in DJT would have lost 90% of their investment.  The passive index fund returned 150% over that period.  Trump packaged a handful of his worse performing assets into DJT when he took it public and sold the assets to investors who believed in Trump's magic.  Moreover, Trump received $44 million in compensation for his performance as CEO of DJT.  The Donald understands the old saying that " a sucker is born every minute".  His political campaign has  been based upon that premise.  He has sold himself  to those who believe that he will make life better for them.  A close look at his policies shows that they will do about as well as investors in DJT.  However, Trump's support is not based upon a careful review of his policies.  His supporters are indifferent to any criticisms of their personal savior.  The comments that follow this article include many of them.  Most of them accuse Warren Buffet of bias simply because he has presented an unwelcome fact.  Some even believe that Buffet expects to get favors from Clinton in return for his support.  Buffet is one of the richest people in the world and the great majority of his estate has been left to charity.  They know nothing about the person who they criticize and they don't want to hear anything negative about their idol.