A Billionaire's Critique Of Economics

Charlie Munger is Warren Buffet's partner who has been a major contributor to the fantastic success of Berkshire Hathaway.  He was asked to give a talk at the University of California at Santa Barbara about economics.  He was generous in his praise for many of the ideas in economics, but he was unsparing in many of his criticisms of the profession.  His perspective, of course, is that of an investor who has to put a value on businesses.  He and Warren Buffet are pretty good at that game and they avoid using many of the tools used by economists and consultants.  His talk is sprinkled with interesting insights that he has gained from experience; it is also very humorous.

How Germany Can Help The Global Economy

Ben Bernanke is concerned about the global imbalance between investment and savings.  When savings exceed the level of investment a shortfall in aggregate demand is the outcome.  His first effort to describe this problem focused on the global imbalance.  In this post he focuses on the Eurozone.  The EZ has a trade imbalance with the rest of the world which is primarily the result of Germany's trade surplus.  As the euro declines in value relative to the rest of the world Germany's trade surplus will increase.  Bernanke argues that Germany could take steps the improve the imbalance within the EZ, and with the rest of the world.  He believes that Germany would benefit along with the global economy if it invested more of its surplus savings in infrastructure and if it stimulated business investment and encouraged growth in wages.

Is Finland A Victim Of Secular Stagnation?

Finland has been a poster child for a successful economy in the Eurozone.  Finland now looks like a nation with a stagnant economy; it may be a victim of secular stagnation.  That is, a period of slow growth despite abnormally low real interest rates. 

There are a couple of explanations for the growth slow down in Finland.  Its demographics are unfavorable, and its wages are not competitive with many of its trading partners.  Finland may have to undergo some difficult structural changes to restore growth. Some politicians believe that it will have to reduce wages to restore growth.  Nokia's success, however, was not based upon cost competitiveness.  Its not clear that Finland can become a net exporter by cutting wage costs.

Finland ran large trade surpluses during its boom years.  That was driven by technology exports by Nokia which has been losing market share and exports over the last several years.  Finland now runs trade deficits which reduce its GDP.  A boom in residential housing cushioned Finland's transition from a surplus nation to a net trade deficit nation, but there does not seem to be anything available to replace the housing boom.  Finland and the Eurozone may be facing an extended period of low growth in which monetary policy has limited leverage.  The decline in the value of the euro may boost exports, but it won't affect trade patterns between nations within the EZ.

The Global Savngs Glut Versus Secular Stagnation

Ben Bernanke argues that a global savings glut provides a better explanation for low global interest rates and slow economic growth than the secular stagnation hypothesis.  Both of these explanations imply that the global supply of savings is greater than the level of investment.  The secular stagnation hypothesis argues that the demand for investment capital in the US will be weak over an extended period because of weak fundamentals.  For example, slow population growth, and a less capital intensive economy will produce a long term reduction in business investment demand.  The policy response to this problem is to increase the level of government investment in productive infrastructure.  The savings glut explanation argues that the entire global economy can't be in the grip of secular stagnation.  Capital should be able to flow to profitable investment opportunities where the exist.  According to Bernanke, government policies have interfered with the efficient allocation of savings to their most productive uses.  For example emerging market economies (EME) in the late 90's used their current account surpluses to acquire foreign assets to increase their reserve accounts.  This caused their currencies to decline in value and it stimulated exports.  There is a current account surplus today in the eurozone.  The level of savings exceeds the level of business investment.  That is due to a large trade surplus in Germany, but primarily due to a lack of investment in the countries damaged by recession.  That has caused the value of the euro to fall and it may stimulate EZ exports at the expense of imports from nations whose currencies have risen in value relative to the euro. 

Since government policies are the major reason for the misallocation of capital, Bernanke believes that changes in government policies should use to rebalance the allocation of savings.  That should cause interest rates to rise to a more normal level in response to an increase in investment demand.

Paul Krugman has entered into this debate. He tends to favor the secular stagnation hypothesis and the use of fiscal policy to increase aggregate demand.  His argument is a bit technical but these discussions between three top economists, which includes two high level policy officials,  touches on some of the central issues in the global economy.

The Religious Freedom Bill And Its Impact On GOP Presidential Hopefulls

The strong reaction from the business community, and most of the media, about the Indiana "freedom" bill has put GOP presidential candidates in a difficult position.  Most of the candidates came out in support of the bill even while the Indiana Governor, who was surprised by the negative reaction to the bill, promised to change the bill.  They understand the the coming primary elections will determine the GOP presidential candidate.  The primary elections are different from the general election that will take place in 2016.  The turnout for the primary elections attracts the most conservative part of the GOP base which is sympathetic to the "freedom" bill.  Even those without strong religious beliefs oppose gay rights.  The majority of voters in the general election, especially those under age 30, have become supporters of gay rights.  The GOP presidential candidate must win 65% of the white vote in order to win the general election.  That has only occurred once in American history.  The GOP position on gay rights, and minority rights in general, may even offend a significant portion of white males.

Popular opinion in the US about the rights of gays and minorities has become much more accepting over the last few decades.  A substantial portion of the conservative base in the US is less representative of the general population.  Curiously, their views are much closer to popular opinion, and government policies in many Eastern European countries, and in many Islamic nations that are not popular with American conservatives.

Increasing The Number Of US College Graduates Will Not Reduce Inequality

There is a positive relationship between obtaining a college degree and earnings potential.  Many believe that increasing the number of college graduates will lower the level of income inequality in the US.  This study did a simulation to determine whether a substantial increase in the number of college graduates would decrease the level of income inequality.  The simulation examined the impact of a 10% increase in the number of college graduates between the ages of 25 and 64 and found that this decreased the wage gap between those with and without college degrees and it reduced the level of inequality between those at the top of the bottom quartile and those in the middle quartile.  It did not, however, reduce the overall level of income inequality. There are a lot of benefits to individuals and to society that result from increasing the number of college graduates.  This even promotes improvement in secondary schools that must prepare more graduates for college.  Unfortunately, it is not the solution to our income inequality problem because it is primarily due to the gap between those at the very top of the distribution and everyone else.

Ben Bernanke Versus Larry Summers On Secular Stagnation

Its great for the economics profession, and for the public, to have Ben Bernanke posting blogs.  Bernanke is not only an outstanding economist but he was also the Chairman of the Fed during a very difficult economic climate.  His blogs reflect the thinking behind the policies adopted by the Fed during that period. Bernanke turns to the future in this blog.  He explains why he disagrees with Larry Summers' secular stagnation hypothesis.

The secular stagnation hypothesis was motivated by the failure of persistently low real interest rates to stimulate aggregate demand.  Summers concluded that we may have entered into a period of low economic growth because business investment and consumer demand were unresponsive to historically low real interest rates.  Periods of rapid growth over the last two decades were assumed to be in response to financial bubbles.  Therefore, sustainable economic growth was not possible without creating risk in the financial system. 

The secular stagnation hypothesis presented a real challenge to the mission of the Fed.  Its mission is to provide employment and price stability as well as financial stability.  Consequently, it is not surprising that Bernanke would seek to escape the constraints on growth and stability that were advanced by Summers.

Bernanke presented evidence which suggested that economic growth was not dependent upon financial bubbles.  US trade deficits were equal to 6% during the financial bubbles.  The bubbles only offset the trade deficits.  Therefore, financial bubbles would not be needed if US trade deficits could be reduced.  Bernanke concluded that the major weakness in the secular stagnation hypothesis is that it fails to consider international trade.  He argued that there must be opportunities for profitable investment somewhere in the global economy.  Capital should flow to places where investments would be profitable even without negative real interest rates.  That would be good for US exports as long as US firms supplied the physical capital to international manufacturing hubs.  The US trade deficit with China, for example, would be reversed if US firms shipped capital equipment to China in return for its finished products.

The US economy has been able to grow despite several headwinds that have restrict economic growth.  The reduced flow of credit, and the slow recovery of the housing market have been headwinds.  Fiscal policy in the US has also been a headwind.  Federal and State spending have been lower than they should have been during a recession.  Perhaps the US economy will resume a sustainable level of growth without financial bubbles as these headwinds dissipate.  Summers would like to agree with Bernanke's positive outlook.  However, he has several concerns about Bernanke's analysis of his secular hypothesis hypothesis.  As long as the amount of savings in the global economy exceeds the amount of business investment aggregate demand will be below the level required for sustainable growth.  Summers believes that government investment should help to equate the relationship between savings and investment.  That is especially true in an era of exceptionally low interest rates.  There must be a large number of productive government investment opportunities at zero real interest rates.