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Saturday, November 10, 2012

Policy Thought for Veterans Day

The present unemployment rate is 7.9%.   But as Iraq War veterans have been flooding back home and Afghanistan War veterans are expected to be coming home in droves over the next 2 years, some are having a tough time adjusting to the cruel ways of market capitalism - the onus is on them to find a job in this tough economy.   There are institutions out there that try to make it easier for vets to transition.   But these aren't widely marketed and don't guarantee anything other than an increased access to a chance to be hired.   That's not the same thing as a job.

Meanwhile, the unemployment rate of recent US veterans is 2% higher than the national average.    And for some categories of recent vets (women, 2001-present), it's almost 2X higher: 15.5% and this is projected to rise rapidly as the surge of vets finally come home.

What is our country to do to support these men and women?   We could continue our current track of offering lip service, or we could work to enact a real policy change that could have a real positive effect.  The only way to directly solve this problem is to enact a thoroughly non-mainstream economic policy (albeit on a smaller scale): jobs guarantee specific to our returning vets.  

A jobs guarantee program is exactly what it sounds like.  Instead of trying to indirectly get people back to work by stimulating demand/spending, or by providing more opportunities for interviews etc, the government literally guarantees a public job potentially offering a laundry list of positions including: beautification, public works, counseling service to fellow vets, etc.  In the past I've expressed concern about enacting a nationwide jobs guarantee program, and I still have those concerns:  creating another unproven permanent government bureaucracy with the potential to increase beyond its initial scope, promoting potentially nontransferable job skills, disrupting the private labor market, creating a moral hazard of labor, etc.   But, when we are talking about creating this on a much smaller scale, and for a specific segment: for recent veterans, most of those concerns become minuscule compared to the potential benefit - the necessary sacrifice we owe our returning soldiers.  The least we can do is guarantee them a minimum wage paying job while they are undergoing private sector job-search.  This point of this program would not be to give a solider a permanent job - but to give them temporary work, to more fully employ their expertise and resource, until they can find a better higher paying private sector job.

It's time to do this.  Stop wasting money on all these government services that don't get vets jobs - they maybe just get them in the door.   That's not good enough.  In the meantime, we waste precious expertise, talent and labor resource that could be adding to our GDP, and our tax revenue.   The other added benefit of this program is that it can act as a small-scale trial / test for a more broadened nationwide program.  Maybe it will prove the skeptics, like me, wrong.  And if it doesn't, if it does have unintended consequences, the scale of it means the costs are small relative to the potential debt we owe our soldiers.

Thursday, November 8, 2012

Capital Gains Vs. Net Wealth

Yesterday stocks plummeted by the biggest % all year.   No one knows exactly why, but most think it's from a combination of things including the fact that Wall Street doesn't like our status quo politics, and they particularly don't like the looming fiscal cliff: the series of tax hikes and government spending cuts scheduled to kick in in a couple months.

It may be that investors are worried about what Obama might make them pay as he continually hammered during the election that people like Mitt Romney and Warren Buffet actually pay less in taxes relative to their income compared to a typical worker because their incomes are largely earned by capital gains.   Are capital gains tax increases destined to be part of any cliff negotiations ?

Classical economists (conservatives) generally don't like taxes on capital gains because it essentially acts as a negative incentive to save money.  Keynesians don't fret as much about that since in their view investment often leads the savings and wealth creation and investment decisions by firms are partially benefited by furthering demand (consumption).  Say's Law is rather outdated!

I'm against capital gains hikes personally much as I also dislike income tax hikes (or income taxes in general).  For one thing they are taxes on flows not stocks.  That is, you are taxed based on an annual increase or decrease in wealth via capital gains (or income).   Well I could be a billionaire but have one bad year in terms of my income and thus owe nothing to the government despite my wealth.  In fact, that was the case for many firms during the recession.   They had net operating losses and owed $0 to Uncle Sam.   Or, you could be a recent college grad making mad bank and therefore paying big taxes even though you are still young, have no wealth to speak of, have $0 in your 401K and have $100K in student loans.  Income taxes are stupid.

Similarly regarding capital gains, if the stock market takes a dive and they make no capital gains, then they don't pay the taxes.  If we care about distribution of wealth (and most conservatives don't, but I do) then we should care about this inherent loophole.  Another reason I don't like capital gains tax is that it creates a perverse incentive: it makes people want to save less for their futures.  If we want a populace that cares about its future and how it's going to pay for their golden years, then we should care about not promoting the next car purchase over the next Roth IRA purchase.   Notice this is not the same argument classical economists make.  Classical economists are pathological, and don't give a shit about you personally.

Some European countries use a net wealth tax, which to me is much more preferable (though perhaps not at the exorbitant rates as some of those countries) - it compares your assets minus your liabilities (stock variables) and the more you have, the more you are taxed.  Simple, efficient, dynamic.   So if I'm an average Joe, I won't feel queasy about saving for my future.  I might feel a little queasy if I'm a billionaire in terms of net wealth: if I have a McMansion on the hill, 10 porches, and private jet... but frankly, if you are a billionaire and you are queasy about giving back to society that has helped you so much to get where you are, then you are an asshole and I don't particularly care.

Tuesday, October 23, 2012

Get Out the Vote: A Scourge of Modern Politics

Many polls are open early across this country.   And everyone from celebrities, to Super PACs to special interest groups to politicians are pleading with the American people to get out and vote.  It's every American's civic duty, they say.

Even though most don't know what galaxy you are living in, Americans are told to vote on matters of domestic policy you likely know or care little about.

Even though a third don't know who the current Supreme Court Justice is, Americans are asked to decide the fate of judicial branch with your vote.

Even though half don't care to follow whether Obamacare was ruled constitutional or not, Americans are asked to decide the fate of it.

Even when one in ten think our sitting president is Muslim, they are asked to decide on the role of religion in our discourse.

Even though nearly half think that China is a greater economic power than the US, Americans are asked to decide the outcome of our foreign and economic policies.

Even though that scientists say that all the stupid Americans are dooming us with  voting, many will listen, and will cast uninformed biased votes based on what your friends, celebrities tell you, or what your gut feelings say to you, or the fact that your skin color matches the candidate....   These are not reasons to vote.  These are reasons to do your real civic duty and abstain from your vote.  

The saving grace for our country is that due to the corrupt nature of our modern political process, most votes likely will not count anyway.   Unless you live in Ohio or Florida or one of the few 'battleground' states, one should have no incentive to vote other than as a symbol.   Most of you that vote anyway, whether you are stupid or not, will use your vote to symbolize your belonging to either the Democrats or Republicans.   The rest will be disenfranchised - locked out from the process.  We will continue to have 2 overly-powerful parties beholden to their Super PACs and special interest deciding the fate of the future with little to no hope for process changes to how congress or our electoral system could operate more effectively.

My friends may not agree with me now on this broader point, but in time I hope they do.   The only solution is to demand real change from outside the system.   So I urge every American not to get out and vote, but to boycott our political system - shock it into changing.   Only when we eliminate the legitimacy of the system can we fix it.   We must sacrifice any individual gains via party-support for true long-run gains for our country.

Thursday, October 4, 2012

Keen Connects to MMT

Continues to interest me:

or for a more encompassing version of lesser quality (sound):

Keen has a unique definition of Aggregate expenditure (closed economy):
=C + I + NetAssets + (G-T)

....he didn't explain that enough for me to fully understand what he's saying here.  But here is my take (updated since I previously mentioned I too was confused) since many bloggers are just outright calling Keen's work nonsense.  This is partly Keen's fault for not clearly defining things.

He goes on to say that:
Income + Change in Debt = Output + Net Asset Turnover

...which suggests to me he thinks that changes in assets (prices bubbles)are a result of changes in debt (a la Minsky, which makes sense).

From what I understand, what Keen means by Net asset turnover is speculative and ponzi financing.  That is, financing of financial instruments that do NOT have a backing of a physical good or service and therefore are not expected to fully repay the principal and interest of the financing absent bubble formation.

In this way, Keen income and debt partially financing real goods and services, but also partially financing speculative and ponzi investments (the value of which is not based in real output).

In this view, neoclassical economics ignores this new class in the usual Y = C + I + G formation.  The real question to me is then, why does he include G-T instead of just G in his above formula.  That is still unclear to me.

UPDATE: had a brief back and forth with Prof. Keen about why he nets out taxes in his effective demand function.  Not very insightful.   He just said it's "cash flow."....hope he describes his re-formulation of the usual demand function in a more user-friendly way in the future.... Maybe he's too in-the-weeds.

Saturday, September 15, 2012

Indiana Gov Race: Pence v. Gregg

Having recently attended the Fall 2012 session of the Indiana Economic Development Conference, I had the chance to hear Sue Ellspermann (Mike Pence's (R) running mate) and John Gregg (D) give their thoughts regarding how to improve Indiana's economy.  Below I will outline what I heard, and give my opinion on who has the better direction:

Highlights from Sue Ellspermann for Mike Pence:

In regards to labor force and education, Ellspermann indicated that the Pence campaign wants to strengthen vocational and technical schools by working with high school and employers throughout the State.    They want to eliminate the stigma of these schools and slowly get people to realize that 4-year colleges aren't for everyone and not necessary for many high-paying careers.  While I don't think this focus would work for every State, I do think it's the right one for Indiana given the kind of labor pool and demand we have.  This is in some sense an extension of the what the Daniel's administration has already started, so no marks for originality.  Unlike the Gregg campaign, the Pence campaign wants to reduce education costs mostly by incentivizing students to graduate early or at least on-time by basically paying them to do so.  I don't know how I feel about that.  To me, there's usually a good reason students don't graduate on time.  I'd rather see some of that money being spent on high schools to do a better job of helping students figure out their likes, dislikes, strengths etc.... Grade: B-

In regards to government operations, the campaign wants to have a "moratorium on regulations."  Sue (I'm tired of typing her complicated last name) didn't give any specifics on this, and I consider this to be a throw away item that every politician says.... Grade: F

And of course the Pence campaign wants to support Veterans.  Sue mentioned that the existing unemployment rate is about 15% for Veterans (twice the national average nearly).  She gave no specifics other than wanting to put a Veteran on the IEDC Board.  All in all, I don't see the point of that and consider this to be another throw-away political stance:... Grade: F

Of course, Sue wouldn't be a Republican if the main part of the platform weren't about cutting taxes.  So, the Pence group wants to cut income taxes over 2 years by 10%.   And again, like most Republicans, there was no mention of how this would be paid for (see regulations above).  So, Grade: D

Sue talked about the need to increase exports, particularly with ag.  She went on to talk entrepreneurship and partnering with universities, creating an Indiana jobs cabinet that can be movers and shakers that can spread the word about Indiana's strong business climate, and also talked about hosting a national site selector conference.   Some of this seems like it might be beneficial, but she was a bit vague on specifics, so I'll go with a B-

Regarding energy, the Pence campaign supports an all-the-above strategy - which is the best any politician can do in coal grade on this.

Overall, I was impressed with Sue Ellspermann's presentation (if not a majority of the content) and it is refreshing that she actually has an econ dev background (which I'm sure is why Pence sent her) but it's also disheartening that Pence didn't show up himself - just further exemplifies the fact that he is all social-issues, which is concerning to me.  I think there were a couple good ideas, a lot of old ideas, and some throw-away vagueness.  So, overall grade is a C-

Highlights from John Gregg:

John Gregg showed up on Friday to speak and I was struck my many similarities to the Pence campaign's ideas.  First, some democrats don't realize, but John Gregg is just as (if not more so) conservative when it comes to social issues (which is part of the reason why he chose Vi Simpson as his running mate - to mask that).  But also, on econ dev, there are more similarities than differences with Pence.

The first point he made was about energy - Gregg wants to eliminate the sales tax (not the use tax) on gasoline.  He tried to persuade the audience that the amount of money saved per family is significant, but that is laughable for all but the poorest of families.  Also, while I don't support tax increases on gas like many economists do, I certainly don't support eliminating taxes on them.   This seemed more to me to be a political populist ploy more than anything else, though perhaps he has his heart in the right place, we are never going to close the gap on the clean/coal cost differential if we cut the cost of gas.  Like Pence he claims to have an all-the-above strategy and mentioned something about making more wind turbines here....Grade: D-

Like the Pence camp, he wants to have an 'efficiency audit' which just means he wants to spend a lot of time looking at the regs to see if we can save money.  Given that the Daniel's administration spent 8 years doing that, I don't see the value.   Also, he gave the same talk about Veterans although he didn't mention anything about putting one on the IEDC board.  I'll give this the same grade I gave Sue: F

Regarding specific econ dev stuff, Gregg wants to cut the corporate income tax (with a credit) particularly on HQ relocation to Indiana.  I see two difficulties: one is that we just don't see that many HQs relocating anywhere except for Indianapolis metro or Fort Wayne (so it's hardly a big benefit Statewide), and two is we already have tax credits to do this!  He went on to talk about how he wants to target specific industries like life science and advanced mfg. but again, these are targets the State already has.  He mentioned a tax credit also for companies that relocate jobs from overseas (I think Obama had a similar idea?) Again, while the IEDC doesn't have a credit specific to that, we already have credits we can give companies to relocate back home.  It's REDUNDANT.  My biggest disappointment is he made no mention of his recently announced idea to create a midwest econ dev cooperative (which I love) - so I can't factor that into his grade.  Grade: F

Regarding international trade, again like Pence, he wants to increase exports.  Gregg says he'll accomplish this by creating a new office at IEDC devoted to international strategic exports.  He was very vague on this, but I imagine this might involve expanding our already-existing international office.   He also wants to fight unfair trade practices abroad.  While I applaud that sentiment, that seems like a federal issue.  The US can't get China to change, how in the world is Indiana?  Finally, he wants to create a 'heritage to home' program essentially turning foreign students into ambassadors for the state.  I suppose the idea being he wants all this foreign talent to earn degrees here, then leave, and spread the word about Indiana in India, China....I would rather the focus be on keeping them HERE.  Grade: D-

Unlike Sue's speech (actually the two were very different deliveries, Sue's was polished and professional and Gregg's was very off the cuff and folksy to the point of being obnoxious), Gregg kept preaching to the crowd (of mostly local econ dev officials) that he wants the State to better engage the localities on how to do econ dev.  He gave no specifics and I mostly thought he was just trying to push his populist preaching, but I DO wish the State were more collaborative with local officials.  So, I'll grade that a C.

He ended on education.  His plan to cut costs is to look at our schools and ask the question, 'is that building needed?'  'Is that program redundant with this program?'  Again...fluff.  He wants to give a tax credit or other incentive to keep kids in Indiana after graduation (which to me seems counter to his plan for a foreign ambassador program).  Perhaps his biggest difference with Pence is that he seemed largely resigned to the fact that kids take more than 4 years to graduate these days - it's the new normal.  As such, he has no plans to incentivize on-time graduation.  Grade: C-

Overall, while funny, his speech was a lot like his campaign: lacking a clear direction or focus and overly folksy.  He actually made a point of not asking for anyone's vote, which I found odd to say the least.  Another oddity was that (and yes, I was keeping track), he not only said "IEDC operates good (folksy grammar)" but he also credited Mitch Daniels with 4 things:  Indiana Buy-IN program, BMV makeover, strategic overseas focus, and community college focus.  Gregg kept his best econ dev idea off the table for this group and largely either has a copy of the Pence campaign or imop has some really uninformed ideas.  So, his grade is a D.

So, it's Pence/Sue by a nose -  but certainly nothing to write home about.

Saturday, August 25, 2012

Dangerous Precedent: Patenting Cool

Apple vs. Samsung proves that we don't have anywhere close to a free market economy.   We have an economy that has a lot of the negative elements of one: greed and corruption, and an economy that has taken away the ability to have the positive elements: namely, competition.

When you can patent a look, a feel, a size dimension... it erodes competition.   You are eliminating the rights of companies to learn and imitate, which in reality is a much more powerful force than to innovate.   Innovations are a once in a generation find most of the time.   And the catalyst for them are usually not monetary gain - but passion.  Jobs and Wozniak innovated because they were passionate.  Imitation allows companies to learn from each other, and to pass that learning on the customers in the form of lower prices.   Imitation is not just a sufficient condition for competition, it is a necessary one.   When the system takes even the most basic form of imitation away from companies, it takes away the positive power of markets.

If you own Apple stock, you should be happy, but if you own stock in the American dream, you should be very afraid.

Thursday, August 2, 2012

Reason over Vitriol

If we truly believe that business institutions are not 'people', then we shouldn't be attacking them for their leader's beliefs.  And if you do believe businesses should be treated like coherent organisms, why stab the heart if it's the head that hurts.

If they break the law or there is evidence of systematic actual job discrimination or customer discrimination / abuse, then that's a different story.   But what we have here is a misdirected attack on an independently operated chain.

And as for the whole Chick-fil-a supports killings gays argument, which seems to be the strongest argument for all the hateful words on this issue, it again is misdirected and has so many degrees of separation that it's nonsensical.

Chick-fil-a leaders decide to provide some profit to a separate non-profit arm WinShape.  WinShape then takes some of its money and donates to the Family Research Council.  FRC then takes some of its money and lobbies the US congress not to denounce Uganda's 'kill the gay' bill - no money is actually directly supporting Uganda's bill - it's being used to not support US denouncement of the bill.  If you even believe that's what the FRC's goal was in the first place....

That is a lot farther and a lot different than "Chick-fil-a supports killing gays."

Friday, July 20, 2012

Privatizing Profits and Socializing Losses

This phrase has become all-to-familiar post-financial crisis with bankers receiving government bailouts and allowed to continue their abhorrent bonus structures and other practices unchecked.

But, if you think about it, this problem is pervasive in our modern economy, even absent government intervention.

Textbook economics assumes perfect competition.  Students are often told, "well, nothing is ever truly perfectly competitive, but capitalism tends towards that."  It's often stated as a truism, even though evidence suggests that our real-life capitalism whether due to some combination of economics of scale, cronyism, information and power asymmetries, etc actually tends toward oligopoly.  Oligopolies have some significant degree of price manipulating power and can actually take losses for years and still not be forced to exit a market.  In oligopolistic economies, price is usually not the factor that businesses in an industry compete on.   Rather, they usually compete over product differentiation and advertising in general.   (A nice example here)

The point is, if an industry or even just an individual firm in that industry is hit by a significant loss (negative profit, say due to a financial crisis, or whatever), oligopolistic firms need not cut their prices in the face of low demand - they can simply cheapen their product, or tack on hidden fees, etc (all the while marketing the fact that their products are new and improved and inexpensive).   The result is that the losses that should at least partially be born by the industry, are actually largely passed on to the masses (the consumers) who are duped (via asymmetric information).  IE, losses are socialized. In the opposite case, due to their market power inherent in their structure, during 'good times', oligopolies can reap huge private profits.

A more obvious way in which losses are socialized is that poor decisions (and by poor, I mean fraudulent in most cases) by the institutional management in a firm creates costs, but those costs are often passed on not via punishments to the bad decision maker but to the employees in the form of pink slips.  Employment in financial and insurance services has fallen 7% from its peak in 2006 - about 400,000 employees.

Tuesday, July 17, 2012

Bernanke: Misguided, Egomaniac or Weakling?

He's definitely got to be one of the three.  

Bernanke the misguided:
Maybe he truly believes the words that come out of his mouth in these hearing - that the Fed is 'ready to act' as if it has anything it can do at all.   What we've learned is that interest rates matter very little in these kinds of deep financial recessions, and even if they did, the Fed has already pushed even certain mid/long-term rates to record lows.   Is it possible that Bernanke wants to believe that he can help and truly is just misguided.  Perhaps, but I think the probability that he could be duped this easily is low.

Bernanke with the big ego:
Maybe he's fully aware that the Fed's actions are likely to do little to stimulate the economy but he wants to come off to Congress and the American people as someone with a lot of power.  He wants to continue living in a fantasy where everyone hangs on the Fed chair's every word as if at this point it really means anything.   I don't know the man personally, but again, I have a hard time seeing Bernanke being Mankiw-like in this way.

Bernanke the weakling:
At this stage in the history of economic policy, Bernanke has had opportunities to really take it congress, to really express what I must imagine is his and certainly the average Joe's frustration with the deadlock, vitriol, and general dysfunction that defines our legislative branch.   He could talk about how the fiscal dangers are not of 'running out of money' but of failure of the public sector to invest in our future or to help the private sector rebound - leaving employment and with it tax revenues fairly stagnant.  But instead he talks in low tones about 'fiscal cliffs' - he suggests no innovative legislative actions beyond maintaining the status quo (not letting tax cuts expire, and not reducing government-driven demand beyond current levels).  In other words, Bernanke the weakling knows the only potential solution, if there is one, lies with the legislative and executive branches, but he is too scared to push the point.   This sounds like an academic economist - someone who is good at numbers but not good at message.   Could this be the real Bernanke legacy?

Bernanke's response:
I've been assigned to focus on maximum employment and price stability, not to hold threats over Congress’ head. Congress is in charge here, not the Federal Reserve.

I don't know if it's his 'job', but it seems like the right thing to do for the country.

Thursday, July 12, 2012

Our Legal System Supports our Crony Capitalism

What's wrong with this picture:

One the one hand we have individual citizens who steal things or money from other individual citizens.   Laws vary from state to state, but here in Indiana for example, theft can get you anywhere between 6 months to 8 years in prison depending on what was stolen and how much of it was stolen etc.   The average American will earn about $1.6 million over their lifetime, and so an individual thief may essentially lose up to 10% of their total lifetime earnings due to loss of income in jail (assuming the average person lives to be about 78 years old).

Now take not a person, but a large bank.   A bank that has  'stolen' millions of dollars through fraudulent and just outright deceitful practices.  This action just isn't one theft like someone stealing a painting or a car: it literally ruins entire families: hundreds or thousands of families across the nation.  Yet, this bank, because of the power granted to them in our supposedly capitalist system, means they get a slap on the wrist of $175M.  A bank like Wells Fargo has aprox. $80 Billion in gross income in one year.  Therefore, Wells Fargo's slap on the wrist equates to about 0.2% of it's annual income.  But wait, that not a good comparison to what Wells Fargo can earn and finance over its life.   If we assumed Wells Fargo's 'life' was 78 years (just like a typical American), Wells Fargo's lifetime earnings would be over $6 Trillion, which makes $175M look like toilet paper.  And Wells can earn exactly the same amount of money at age 78 as at age 20, because unlike individual people, banks never age and never have to worry about things like  healthcare, social security, etc.

Let's recap.  One person loses years of their livelihood and a signification chunk of lifetime earnings and all the family support that could have been provided during that time, all for stealing something as mundane as a car.

One bank, loses less than 1/5 of 1% of it's annual earnings for destroying hundreds or thousands of families across the nation.

Think about that.

Friday, July 6, 2012

Thursday, June 28, 2012

Affordable Care Act Decision - My Opinion

The Supreme Court this morning published its final opinion on the matter of the Affordable Healthcare Act (ObamaCare) and the decision effectively finds the individual mandate is upheld, while the ability to withhold Medicare funds from States based on their unwillingness to accept the federal government's broadening of Medicare is unconstitutional.   So this is a win-lose for Obama by the numbers, but a win-win in terms of the most important thing (individual mandate) being upheld, and that the Court did not find the entire Act unconstitutional just because part of it was ruled so.

I spent some time today reading both the majority opinion (written by Chief Justice Roberts) and the dissent (from the usual conservative Justices).

Recall the individual mandate says basically you either buy healthcare or you pay a 'penalty'.   This will be enforced beginning in 2014.

The main argument with respect to the individual mandate from the majority opinion is that the Act is unconstitutional from the argument of commerce clause of the Constitution.    Basically, the argument is that a lack of behavior (failure to buy health insurance) or the potentiality of eventual behavior does not constitute 'commerce' and therefore may not be relegated to the federal government.

However, they find the individual mandate is, overall constitutional because the federal government had argued that the mandate is, in essence, a kind of tax, and therefore is within the feds purview.   In his argument, Chief Justice Roberts points out that the mandate, even though the President and Democrats in congress went to great length to not call it as such, is still a tax in practice as it is a revenue generating scheme that will be administered by the IRS should certain individuals choose not to buy health insurance.

The dissent argues that the majority is wrong in calling the mandate a tax, because Congress and the President clearly intended it to be a penalty, and in their view, never before has the court ruled something simultaneously both a "penalty" and a "tax."
“‘[A] tax is an enforced contribution to provide forthe support of government; a penalty . . . is an exaction imposed by statute as punishment for an unlawful act.’”
But, the Act itself never makes not buying healthcare 'illegal' so it doesn't fit the dissenter's position well. From the majority:
While the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to doso is unlawful. Neither the Act nor any other law attaches negative legal consequences to not buying health insurance, beyond requiring a payment to the IRS.
  I would slightly modify the definition of 'penalty' (to give the dissenters the benefit of the doubt) to suggest that rather than 'punishment for an unlawful act' it is really just an attempt, in aggregate, to 'modify behavior in some manner.' But even given this, in my view, the dissent's position is weak.  Per the definition there is nothing to say that a tax cannot be both a revenue generator and a device used to change behavior.  From an economist's perspective, these kinds of 'taxes' abound:  taxes on cigarettes, taxes on CO2 emissions, etc.... are all money that is taken from the private sector, added to the public sector as 'revenue' and with the additional goal of changing behavior (using a stick to do so).   And this is an argument that the majority makes persuasively.  From the majority: 
None of this is to say that the payment is not intended to affect individual conduct. Although the payment will raise considerable revenue, it is plainly designed to expand health insurance coverage. But taxes that seek to influence conduct are nothing new. Some of our earliest federal taxes sought to deter the purchase of imported manufactured goods in order to foster the growth of domestic industry.
In any case, this case seems to point out the very sketchy legal line between what is a "tax" and what is a "penalty."  From the dissenters:
In a few cases, this Court has held that a “tax” imposed upon private conduct was so onerous as to be in effect a penalty. But we have never held—never—that a penalty imposed for violation of the law was so trivial as to be in effect a tax. 
To me, it is interesting that Obama and the Democrats could have avoided this whole problem had they been straight with the American people and called this what it is: a tax.  And to most laymen, a tax is always a penalty.  It's a penalty for the aggregate private populace not voluntarily contributing to the public welfare.   In some economic circles, all taxes could be considered nothing but a kind of penalty (ie., their purpose is only as a penalty or something to modify behavior such as saving and spending decisions, not to raise revenue).  This can be true because the government need not tax to spend so long as it, in a broad way, has it's finger on the trigger of the printing press.   In this sense, the distinction between a 'penalty' and a 'tax' is somewhat nonsensical.

Wednesday, June 27, 2012

Patent Laws Are Destroying Competition

In economics textbooks, students are usually taught by assuming a particular good sold at market is identical in all respects to its competitors.  Of course in the real world, that is not the case - hence why there is no such thing as perfect competition.  Goods are sold in different ways, in different locations, under different brands, with different materials and qualities, etc. 

Patent law, which was created to protect intellectual property seems to have morphed over the decades as our society seems to have become more corporatist than capitalist to be less about protecting true intellectual property and more about stifling competition.  

Take this recent Apple lawsuit against Samsung for allegedly violating some IPad  patents.  Now I'll admit they look the same on the outside - they are both black and rectangular with a glass front.  Last I checked black was not a patentable color, nor was the shape of a rectangle nor was the fact that the front needs to be glass to see the screen.  Having seen both products, while they cursorily look similar, they have different OS's, different feels, different button locations, etc.  It's not as if Samsung took the exact IPad mold and stamped "Samsung" on it instead of "Apple."   

But this kind of litigation happens all the time, and happens more and more.   It stifles competition, erodes product-brand diversity in the market, and keeps prices higher than they otherwise should be for consumers - all to protect the corporate interest of a company like Apple which is flush with cash and simply does not need such protection.  

If we want to get back to being a society with an economic system based on competition rather than corporate power, we need to revise our archaic patent laws to defer towards competition, not protectionism.

Thursday, June 7, 2012

Federal Reserve: Powerless

Bernanke spoke to congress today and said more of the same thing he's been saying for years:  "we'll be ready to act...." my question is, "doing what exactly?"

Interest rates are already at record lows and there is growing skepticism that, particularly in economic environments like we are in today, that lower interest rates really do much stimulating.  There certainly are winners and losers though.  From a macro perspective it seems that interest rate policies are a wash.

So there's nothing the Fed can do, and there is nothing congress can do because of our broken politics.   So, let's all cross our fingers that Europe stops digging the ditch of economic destruction any further....

Tuesday, May 22, 2012

Becker on Grexit

" Nevertheless, I believe Greece in the long run would be better off through having the additional flexibility from controlling its own currency."


It's shocking to me that all the analysts are dreading Grexit like it's a bad thing.  It's not a bad thing relative to alternatives.  Staying with the Euro and at the mercy of Germany and the European Bank is a much less tenable long-term solution that just draws the painful process out, puts the Greeks through an incredible pinch, and shows Europe's dysfunction.

Thursday, May 3, 2012

Let's All Talk Past Each Other

Cullen Roche: 

The govt CAN set the price of anything it wants. It can also put us all in jail, murder everyone, give everyone a job, tax us all 100%, etc etc. But none of this means they SHOULD. MMT takes the monopolist argument to this extreme claiming that the govt SHOULD hire everyone just because it can – based on the idea that this is just what monopolists do – they set prices, etc. It’s just wrong because the idea of the money monopolist is wrong. And instead of building a persuasive moral argument here they build a faulty economic argument based on a misleading perception of the way the monetary system works. Wray says it’s all just based on an understanding of modern money. Except the MMT idea of the way the money system works is wrong! Which is why they make these faulty conclusions like the JG. Personally, I think they’d have more luck selling the JG as a moral policy because the economic argument is very weak in my opinion. (

L. Randall Wray:

Here’s the rub. Bank money is privately created when a bank buys an asset—which could be your mortgage IOU backed by your home, or a firm’s IOU backed by commercial real estate, or a local government’s IOU backed by prospective tax revenues. But it can also buy one of those complex sliced and diced and securitized toxic waste assets that created all the trouble since 2007. A clever and ethically challenged banker will buy completely fictitious “assets” and pay himself huge bonuses for nonexistent profits while making uncollectible “loans” to all of his deadbeat relatives.   

The bank money he creates while running the bank into the ground is as good as the government money the Treasury creates serving the public interest. And that crooked banker will happily pay outrageous prices for assets, or lend to his family, friends, and fellow frauds so that they can pay outrageous prices, fueling asset price inflation. This generates nice virtuous cycles in the form of bubbles that attract more money until the inevitable bust. I won’t go into output price inflation except to note that asset price bubbles can fuel spending on consumption and investment goods, spilling-over into commodities prices, so on some conditions there can be a link between asset and output price inflations. 
Since government is the only source of the currency required to pay taxes, and since at least some people do have to pay taxes, government has pricing power—that is, can set the conditions according to which it will supply the currency.  
Just as a water monopolist does not let the market determine an equilibrium price for water, the money monopolist should not let the market determine the conditions on which money is supplied. Rather, the best way to operate a money monopoly is to set the “price” and let the “quantity” float—just like the water monopolist does.  
My favorite example is Minsky’s universal employer of last resort (ELR) program in which the federal government offers to pay a basic wage and benefit package (say $12 per hour plus usual benefits), and then hires all who are ready and willing to work for that compensation (Wray 1998). The “price” (labor compensation) is fixed, and the “quantity” (number employed) floats in a countercyclical manner. With ELR, we achieve full employment (as normally defined) with greater stability of wages, and as government spending on the program moves countercyclically, we also get greater stability of income (and thus of consumption and production).   ("Keynes after 75 Years...")

Cullen obviously completely misinterprets(and misunderstands) Wray.  Yes, the federal government is the monopoly issuer of our currency, but that doesn't mean they have 100% control over what happens with that currency (anymore than a monopolist of water has control over how their water is consumed or used at the end of the day).  Further, I would presume the MMT folk would agree that the private demand for credit can have a feedback (circuit / horizontal) effect on the issuance of more and more currency.

The other annoying thing about Cullen's analysis is he seems to think he's (and Steve Waldman) come up with a fresh new paradigm he calls "diaganolism."  I don't know if he's aware, but the concept of an upward sloping credit money curve goes back to the 80s and 90s and the horizontalist v. structuralist debates which Wray is perfectly aware of.   Wray: "There are structural and horizontal aspects of the money supply process."

Wray equates MMT understanding of money monopoly with Minsky's jobs guarantee (employer or last resort) idea.   Though, to my knowledge, he never ties the two together. IE, how is the government the monopoly issuer (demander) of labor jobs?  I don't get that.  I don't see the relationship.  It's made up.  It's not at all the same.  That neither suggests JG is a good idea or a bad idea (I've expressed skepticism but that's just me) but it also doesn't at all mean: "because government is the monopoly issuer of the dollar therefore they should become an employer or last resort."  I don't see this connection.  Feel free to enlighten me but it's almost like he's taking a positive statement about how money operates to conclude a normative statement about how labor should operate.  

Tuesday, May 1, 2012

May Day May Day, our Movement is Dying

So today is May Day, which means supporters of the Occupy movement were to, in essence, disengage from our capitalist overlords (ie., skip work, skip shopping, etc.).


Hopefully I'm preaching to the choir at this point, but for those of you who still may be holding out hope that this movement goes anywhere, you need only consider what they are asking for to see how completely hopeless a cause it is.

So far, in New York, the origin of the major part of the movement there has been sparse activity.  Yeah, go ahead and blame in on the rain, but just remember Milli Vanilli faked it too.

And let's discuss what OWS thinks this strike of workers will do vs. what it actually will do.  OWS, first of all, doesn't think anything since it is anarchist by nature with no leadership or spokesperson (indeed if the media is to believed, there is fear that the Democratic Party will step into that vacuum).  What actually will happen is people will not want to risk getting fired or reprimanded (which incidentally would only hurt the 99% in the long-run) so that this "mass" strike will not be of any significance.   As for putting an end to shopping for a day, well the same concept was tried with gasoline - people protested gas prices and there was a call for a national 'don't buy gas' day.   I bet you can guess how that turned out.   Yeah, people still bought gas.

At the end of the day, OWS has all these ways of demonstrating, all these instruments, that they try to inflict on the system, but they don't know what they want the end result to be.   So it all comes off as half-assed and half-thought-through.    So, OWS supporters, go ahead and tie yourself to a bank blocking other 99%ers entry, or pretend to stop shopping only to go back and buy double tomorrow, or call off work putting you and your family at risk.

Until you grow up and grow a head, all of your methods will be for naught and to the detriment of real change.   Because the one thing OWS is really good at is annoying the hell out of or confusing the hell out of the 99% of the 99% that think OWS is nonsense.

So you say, but Garth, what would you have done differently.
Well that's another topic but I'll summarize with two points:

1.  Shrug off the anarchist roots and embrace capitalism - but a reformed capitalism (that isn't corporatism)
2.  Focus your message with a leadership team that is less about income distribution and more at the core of changing our system - our screwed up politics.   So, rather than 99% vs. 1%, the message should be about the hazards of our existing two party system and how it interacts with the 1%.   After all, you can't affect tax policy and redistribution issues easily until you correct the political machine that sets those policies.  And, I think one would find much broader consensus on the nature of our politics than on the nature of our income distribution.

Friday, April 27, 2012

Mosler - Keen Connection

I was reading a thoughtful blog post from Warren Mosler and when I came across one of his responses it reminded me that there is still significant work that needs to be done to connect MMT work with Steve Keen and the circuitist works that tend to focus on the interactions of banks and individuals in credit and debt formation.  

This raises an interesting question:
Is it ‘better’, for example, to facilitate the increase in spending through a private sector credit expansion, or through a tax cut that allows private sector spending to increase via increased income, or through a government spending increase?
The answer is entirely political. The output gap can be closed with any/some/all of those options.
Is it really entirely political from Keen's perspective?   In one circumstance, say a tax cut, there is no additional private debt added, whereas in the other case of private credit expansion there is necessarily a private debt increase.  I would imagine from that perspective, the latter may pose more of a problem - beyond the politics in so far as it may facilitate an unsustainable debt bubble.

Perhaps the options would mainly be political in an ideal MMT world where policy makers acted as if MMT explained reality, but in the environment we presently live in, I would suggest when given the choice to facilitate recovery between increasing private debt levels or increasing public 'debt' levels, the safest course of action would want to choose the latter.

If one accepts this logic, and admittedly some may not, it shines the light on the ineptitude of current monetary policy and lack of present fiscal policy gumption.

Thursday, April 26, 2012

Gas Taxes: Indiana Style

John Gregg, Indiana's presumptive Democrat nominee for Governor has recently announced his policies would include an attempt to permanently eliminate the Indiana sales tax (7%) on retail gasoline. 

While I don't necessarily think this is the most effective way to get money into the hands of Hoosiers, I'm really wondering what the environmentalist side of the Democratic party are going to think about this.   Just a few years ago there was a debate nationally about whether or not to increase gas taxes as a disincentive to CO2 emissions.   Many economists and environmentalists jumped on board with the idea (though I did not).

Heck, even embatted Republican Senator Richard Lugar wants to raise gas taxes!

It will be interesting to see how this plays out nonetheless.

Wednesday, April 25, 2012

There Won't Be a Housing Price Rebound least not for a long time.
News outlets keep acting like we are all waiting with bated breath for a housing price rebound to pre-recession levels.   Maybe homeowners who signed on the dotted line expecting ridiculously high appreciation are waiting as such, but I'm not.  Frankly, any economist (or analyst) who believes that housing prices were in a bubble, aren't.

Price bubbles, by their very definition, are about prices that reach unsustainable heights.   This means, when they fall, they don't get back to those heights unless one of 2 things happen: 1. another bubble forms, or 2. natural long-term appreciation reaches that level.

I don't know of anyone expecting another housing bubble anytime soon, and I think it would be ridiculous to assume the housing prices should be - if accurately priced - at the levels they were in 2006.  Here's a nice graph from Robert Shiller (of the Shiller Price Index).  Does the top of that red line look like something we are going to get back to anytime soon?  No, it doesn't.

Economists all say the same thing - we aren't even at the bottom yet - there's still too much housing inventory to put much of a dent in price valuations now.    The next logical statement though is equally important  - even when we get past the bottom, our next top is not going to be anywhere near where it was in 2006.

So, don't hold your breath.

Monday, April 2, 2012

How Economists Are Like 9 Year Olds

If a nine year old thinks that they are right, they will yell and scream as such and will tend to tune out what other kids have to say to the contrary.

In some sense this is human nature.  Once we make an argument part of our core being, it's difficult to let something new in to challenge it.  I've done this to some degree in the past - we all do.  But we like to think that eventually, adults have this ability to let their guard down.  It's called learning.

But I've never seen a bigger group of 9 year-olds than amongst academic economists.  

I posted on Krugman's post, but since he may not approve it, I'll just state the obvious.  He, Fullwiler, and Keen need to meet for a few days, have some beers, maybe watch "A Beautiful Mind" on Netflix to get in the mood.  Then, have a nice deep discussion about each others' assumptions - actively listen to each other, instead of taking cheap pot-shots.

I teach part time but I'm a full time real world employee - we can't afford all this childish banter in the real world.  And frankly, economics as a profession, its students, and the policy-makers that listen to economics deserve better.   This same kind of behavior reared its head when I worked as an economist at the Volpe Center though - I really do think economists have stunted social skills.

I'm not saying economists can or should agree about everything, but Jesus Christ, monetary theory is a big important topic.  Economists need to at least agree on the basic mechanics of the financial system.   I teach 2 weeks of it in my macro course.   Right now, I have to teach it two ways: the mainstream way, and then teach it the heterodox way.   This is not my fault that I have to do this.   This is the fault of the profession - and it's sheer laziness and childishness.

Krugman: The Internal Struggle

Krugman is airing his internal struggles with understanding the monetary system for the world to see.
He responds to Fullwiler's blog post: here, and then decides he's not done digging , here.

What I find fascinating is his apparent own admission (and seemingly contradictory from earlier statements) that he believes the endogenous theory is correct.  He admits the following, even if he only admits it over a period of 6 week stretches: 
"the central bank will always supply as much monetary base as the markets demand, at a fixed interest rate."
Unfortunately, his quote above is a bit of a mi-characterization of what someone like Steve Keen would say and is not wholly accurate since the central bank doesn't supply base necessarily at a 'fixed' rate...but they do supply it insofar as it is inline with their target rate of interest.

The other thing I find fascinating about Krugman's new posts is the way he draws the money market model:
Here's the new Krugman:

and here's the old Krugman from his economics textbook "Economics, 2e":

So I guess the new Krugman is a bit more uncertain about the money supply.   I guess he concedes that increases in some fixed, federally set, money supply don't 'cause' interest rates to fall, after all.  Maybe he should update his textbook then.

He would argue today though that there is no difference between assuming the Fed sets the interest rate and assuming the Fed set money supply.  The problem is, there is a difference.  It's not just 'management technique' ---Krugman imagines far more power of controlling the economy at the Fed than exists, when in reality the power is in the hands of the market.  The Fed, whether they meet every 6 weeks or every year or whatever to set major policy, they can change their target interest rate and that may in fact have some moderate affect on the willingness to borrow (no one is disputing the demand curve), but the Fed's limited control on short-term interest rates do not an entire economy make.   There are many reasons to lend and borrow other than interest rates:  expected future profits, expected future inflation, business and consumer confidence, speculation, etc.  Bubbles don't need low interest rates, in and of themselves, to form.   The Fed can't easily control those things just as they can't control the markup over short-term interest rates that lenders/borrowers decide in aggregate.

In some way, this obsession with simple supply/demand diagrams is partly to blame.  By including only one factor that can affect lending/borrowing decisions (interest rates), it obscures the bigger picture.

Scott Fullwiler on Krugman

Link here.

Saturday, March 31, 2012

Philosophical Fencing

Krugman vs. Keen.

Of course I would love if one day Krugman and Keen would be all friendly like, but for now I'll just sit back and enjoy the show.

It's pretty much now or never for Krugman to 'see the light'.   If he doesn't now I fear he's only going to become further entrenched in the mainstream morass of faulty assumptions.  If he does, it may mean the slight (gasp!) mainstreaming of post-Keynesian theory. 

I truly don't understand how Krugman doesn't get this.  He's a smart, Nobel Prize winning economist.  The 'savings' doesn't come from some reserve pool in order to make a loan.   The loan is extended and the 'savings' is from the expected pool of future wealth.  The bank extends credit and accepts an IOU from your present self because it thinks your future self can pay for it.   If you don't understand this, you don't understand debt bubbles.  

Friday, March 30, 2012

The Mega Millions Lottery and Regret Theory

Maybe it's because of my neo-classical economics training, but I'm not like many of my coworkers, who did not have any interest in buying the Mega Millions lottery ticket when the pot was $300 million, all of a sudden couldn't wait to buy their ticket when the pot is $500 million or $640 million or whatever.  Like $300 million (even after taxes) is somehow chump change or as if expected value of the lottery isn't the same or much worse than before!  Rational economic models can't explain this kind of thing very well.  They can't largely because the models are not very realistic.  They assume static preferences and preferences based on a perfect calculation of odds into one's utility function- as if each one of us have set utility function that makes any sense!

But in the 1980s as behavioral economics was really starting to gain ground (just after Kahnman and Tversky published their idea called Prospect Theory)  To many,   expected utility maximization just wasn't sufficient to explain real behavior in decision-making.  One of the outputs from that was regret theory.  The basic tenet of regret theory is that people aren't just robotic maximizers of their own selfish satisfaction, but more-often in many cases they are regret minimizers.

Regret theory can explain this odd lottery behavior we see in many people today.  As the dollar signs skyrocket in unclaimed cash, for a given prices of a ticket the chance of a big regret (of not winning such a historic pot of money) grows significantly, so many people jump into the game to minimize the chances of their regret.

Thursday, March 29, 2012

What I really wish mainstream economists would stop doing...

I wish certain economists, like Paul Krugman, would stop failing to critically think about what arguably more realistic economists (like Steve Keen) have to say.   Krugman writes an entire article criticizing because of his  assumptions (of his models) that Keen doesn't make in his because they are not realistic (exogenous money for one vs. circuit theory).  Additionally, Krugman seems to be stuck in the dark ages using what I take to be some loanable funds argument suggesting loans are a wash in terms of aggregate demand because there is some pool of 'savings' from which loans are made.   That is a strange thing for a so called Keynesian to do, but he does.  Keen's point is that there is no such thing as some fixed amount of loanable funds.  Banks can create its own loanable funds - that's the endogeneity of credit!  That is why banks are important to model - and excluding them from a model is idiotic.

It would be helpful if Krugman actually sat down and talked to someone like Steve Keen and wrote an article based on that.

Wednesday, March 28, 2012

Global Currency Reserve

I don't understand how some liberal (read: New Keynesian) economists like Stiglitz want to, essentially, create the same conditions that Greece now faces - only on a global scale.

Let's pretend Europe is the world (I know that's hard for us Americans who are used to us being the world).  Once upon a time every nation in the world had completely separate governments with separate fiscal policies of taxing and spending.  They also each had their own banks and their own currency.   The Germans had the D. Mark, the French had the Franc, the Greek had the Drachma....  

Then one day, some big-brain economist comes down to Earth (again, Europe) and proposes that the world should adopt one currency and therefore one central bank:  Euro.   Most of the world agreed, and from that day on, those that agreed lost their sovereign control over their own currency but kept control over the taxes and spending.  Greece decided to keep spending and spend even more.  Meanwhile a recession hits which killed any tax revenues.  The result leads to huge deficits that in the past Greeks could handle by, essentially, monetizing the debt - printing new Drachmas and to pay for the shortfall (or put more round-aboutly, having the Greek bank buy up Greek debt instruments in exchange for reserve digits in a computer somewhere).  

But this isn't the past.  In this new world, there is no Drachma and there is no Greek bank.  There is one common Europe bank and the Europe bank, because it's not Greek, doesn't have to play by Greek rules.  The European bank, misguidedly, forces strict austerity measures on Greece before providing any money to help out.  This results in eventual correction at the huge expense of increased unemployment and a really pissed off (rightfully so) populace.    

Now, view the preceding in light our real world (you know, the US).   Why should all nations want to give away their sovereign currency and hope that some global bank doesn't' do the same thing to many nations in the next recession the same way the Europe Bank did to Greece?

Greece is probably already screwed, but the rest of us aren't yet.   And I happen to think Warren Mosler's idea from a year ago of essentially (and somewhat sneakily) creating a new Greek currency (but not quite) by turning Greek bonds into a form of money (means of payments for public debt - pay your taxes with a bond!) was pure genius.  

Wednesday, March 14, 2012

Wednesday, March 7, 2012

Case in Point: DOE

I recently posted about how our politics is tainting the government's ability to do innovative things for the better of society.  Nothing is a more obvious piece of evidence of this issue than the US Dept. of Energy's complete ineptitude shown right here in Indiana.  One day they say they support something and the next day they pull the plug on it with no real reason given.  It smells of politics.

If you aren't willing to swim the whole lap , don't bother putting your toe in the water.  If you are going to support an industry and use it to try to stimulate the economy and aid long-run growth, you either need to be more engaged from day one (if you are not trusting of the company's setup right at first), or you need to front the money, put some minimal requirement on it (not the existing nearly impossible ones) and get rid of the 3 years of red tape.

But again, it is possible our party politics present such sensible solutions.  Perhaps it forces inefficient setups like this.   It seems chronic whatever the reason.

Sunday, March 4, 2012

Time To Get Rid Of Political Parties?

I was at my book club recently discussing Stiglitz's "Freefall."   We were discussing page 207 and the common conservative argument that if markets fail, government can fail worse.   The section talks about 'false choices' between market and government and makes the valid point that government will always be involved in so-called 'market' transactions be it with regulations, monetary policy, etc.  

I made the point that while Stiglitz mentions it as a problem, he really doesn't expand upon the idea that our politics are broken to the point where it puts up real barriers to good policy (he actually mentions it but then after 2 sentences proceeds to ignore it).  So, we might hope to educate our children in a more pluralistic way but that education alone may not be able to make a dent where it really matters (policy making).  

The argument my group made to that point is that in the private 'market', leaders of business are often the decision makers and they have no real incentive to improve the social order, but government might - at least have the incentive to evolve toward improvement.  But again I say, we ignore the institution of our politics at our own peril.  Just like individual businesses make decision in the private economy, individual political parties make the decisions for our government - it's not even the individual politician.  They are often granted seats on important committees and other favors by the leaders of their party - provided they do what they are supposed to - which is vote a certain way, which largely is to keep the party alive, not to improve society.  

Here's a common theme.  Party A enacts a policy, and it succeeds in some areas and fails in others at correcting market failures.  Party B, to ensure it's party's survival, takes a counterpoint to Party A's position - focusing on blaming all failures on Party A.   Lost in the discussion and the media is the fact that some of the failures perhaps were or could have been worse had Party A not enacted its policy.  Party B gets elected, eliminates Party A's policy, and we are back to step 1 again. 

 This seems to be the cycle the US political machine is stuck in in modern times.  Whether it's financial reforms, health care, or just blame for the economic situation in general - lost are the real issues, replaced by party fighting and spin.  

So, even if our economics discussion become more realistic, it would seem we need to simultaneously focus on changing our politics.   Is it time to eliminate the idea of party?  What purpose do they serve in our modern times other than to provide powerful bickering and a large infrastructure to invite powerful lobbies.  Would we not be better served by each politician versus each other politician - turning our politics more local ?  This argument is not new, but it also to date has not been very convincing.  So I invite you all:  Why keep our party system as is?  Or, if you agree we need a major change, how can we go about it?

However [political parties] may now and then answer popular ends, they are likely in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.
GEORGE WASHINGTON, Farewell Address, Sep. 17, 1796

Wednesday, February 22, 2012

Mankiw: Posts a lot of nothing

I've noticed over the past few months or so that Mankiw has cut down his more opinionated and meaty posts in favor of re-postings or just links gotten from others.

Here he mentions Modern Monetary Theory, which I've taken an interest in lately, but that's it.   He just...mentions it.  I'd LOVE to know what he thinks he knows about it, and what he thinks about it.  Alas he seems to have reduced his blog to a link-site.

Maybe he's just scared of posting too many of his own opinions.  Though, I have no idea what would make him hesitant to do so.  

Monday, February 20, 2012

My Teaching Philosophy

I teach macro somewhat different from a textbook one size fits all. 

For example, today's lesson was an introduction to the classical model, but I also discussed heterodox counterpoints from: Minsky, Austrian economics, and modern monetary theory - and in a future class we will discuss the mainstream Keynesian model.  I told the students that I don't have all the answers.  And macroeconomics doesn't either - the answers are not clear and they are debated vigorously.  The only thing I can teach is a diverse set of well-rounded viewpoints not to provide answers, but to provoke the right questions and a better understanding of the various assumptions each school of thought employs.  To me, it's more important that macro students don't come away with an understanding that economics is black and white Classical-Keynesian, but rather an ever-evolving study of complex behaviors.  

It's not a perfect method:  it leaves some of the less attentive students perhaps more confused that they might otherwise be, but to me, teaching them about a small set of textbook models without even acknowledging the growing disagreements in the field in the long-run will be more detrimental to their development.  I refuse to contribute to the robotic output of neo-classical drones.  

Sunday, February 19, 2012

You Know Economics Is Changing When...

Gary Becker says:
The Great Recession reinforced the lesson of prior panics and financial crises, lessons forgotten during the Great Moderation from about mid 1980s to 2006, that the financial sector has a fundamental built-in instability.
I have a really hard time thinking he would have thought this, let alone said this, pre-2007

Friday, February 17, 2012

MMT Divergence

Going to start following this

They seem to be at a place and voicing concerns similar to mine regarding MMT.

Particularly the jobs guarantee stuff.

Why Do We Care So Much About Inflation?

Which would you rather have to deal with:

Having to pay 8 dollars more for your average grocery bill a year from now but having a good paying job, or having to pay 3 dollars more for your average grocery bill a year from now but be out of a job?

Mainstream economists, particularly those with a more right-wing bias, have typically preferred the latter to the former.  I've never really understood why.  Textbook economics tells us the costs of high and unstable inflation: including the non-pecuniary costs of more ATM visits, more visits to stores to compare prices, and, in monetary terms, extra travel costs.  Textbooks also speak of concerns of unstable inflation leading to hyper-inflation and unstable inflation leading to mismatched expectations which can redistribute wealth from lenders to borrowers (which might explain why economists and bankers don't like inflation).

But it's never been made clear, to me at least, from an opportunity cost perspective, how these costs are so much more problematic than the costs of under/unemployment.  I've never understood why inflation - a nominal variable - has such a deferential place whereas employment and real output are sacrificed.   It's gotten to the point where pundits raise eyebrows with even slight increases in inflation.  As if somehow that extra 0.2% inflation is going to wreak havoc on our economy compared to the 15% underemployment rate, stagnating wages, etc.   

Luckily some economists are being more vocal in their annoyance at the inflation hawk positions, example: IMF, and the blogosphere:(1) (2).  

More people are calling for the Fed to stop focusing so much tunnel vision toward inflation at expense of the big picture.  At a minimum, the Fed should be required, as the authors of the IMF reports say, to:

... watch many targets, including the composition of output, the behavior of asset prices, and the leverage of different agents

Despite these arguments, the inflation hawks are still winning the war.  

I do think mainstream economics can learn something else besides breaking out of it's obsession with inflation.  I think they can learn from the Modern Monetary Theory crowd that, at the end of the day, the Fed has no real control over inflation.  All one must do to see this fact is observe that the Fed has reduced it's effective rate to 0% from 2008 to the present and pumped reserves into the economy.  Mainstream theory suggests that, via a money multiplier process, this should lead to inflation.  Reality is that there is no such thing as the money multiplier, and that the reserves are just sitting on the balance sheet of the banks.  The real economy isn't seeing those dollars and so there is no real inflation.  The Fed can only control inflation when viewed in tandem with the legislative and executive branches of government regarding taxing and spending policy, or insofar as the private economy changes it's behavior in the face an altered interest rate policy.  Since the Fed has limited control on the legislative process and on the behavior of the private market particularly during financial crises, the Fed has limited/no control over inflation.

I've expressed my skepticism in the past as to the functionality of so-called 'functional finance' so I'm not going to comment further on the reliability of politicians to help our economy, but I will say the big takeaway here should be the Fed should focus on things it has a direct positive impact (like better-regulating the financial sector to prevent bubbles and bursts in the first place) and stop focusing on something which they have little control over (inflation).

IE. Monetarism is dead.

I've been focusing on my view of the Fed's power or lack thereof if response to demand shocks.  I suspect that in fact, when a boom or bust is not demand led but rather supply (commodity) led that in fact the Fed's traditional tools are more effective.  In fact, most of our inflation/deflation have been due to supply shocks and the Fed has had success in correcting them in the past.  I suspect the only reason a traditional Fed tool (rate) is effective in supply shocks is that the Fed can more easily alter the behavior of the private market on aggregate demand when the crisis itself is not a crisis of demand. One might imagine that the reason for the demand shocks (like a financial crisis) means the Fed has little control over mitigating, while a supply shock in an otherwise healthy-demand economy can be mitigated by the Fed.  Textbook economics, as it is taught to million of econ students, meanwhile generally assumes the Fed to be equally powerful no matter the origin of the shock.  I would hope future research breaks through this assumption.

Wednesday, February 8, 2012

Ha-Joon Chang's "23 Things..."

I just finished reading one of my favorite authors, Ha Joon Chang's, "23 Things They Don't Tell You About Capitalism."

I was going to write a review, but then I figured I'm sure any review I do would be inadequate and I'm already a member of a book club so I prefer to not have to discuss specifics in two separate forums.

So, for the purpose of this blog, I will point to a review that I agree with the most and generally say:
Thumbs Up - Recommend!

Ok Ok...maybe I'll comment too:
... All in all, the reviewer is correct in that, while Chang does a great job explaining the myths and our present day problems, he doesn't deliver on solutions.  He doesn't say how we can overcome our political failings to ensure the government can act in ways that don't do more harm than good.  His argument is largely that there are specific cases that show the government can do this, but there are numerous cases of failure as well.  He provides no analysis to show that, if every country adopted his philosophy, that worlds' governments would be able to provide a net gain as opposed to a net loss.

In some sense the problem with Chang's solution(s) are the same problems that plague solutions put forth by mainstream economists: it all sounds great in theory but in reality it is much more difficult.   How do "we" know what are 'good' regulations vs. 'bad' regulations?  How do we hope, even if we could identify these things, that ideologically driven politicians would keep their bias to a minimum?  What is there to prevent corruption and abuse until and unless we address our political system problem first? Until money and media abuse is outside of our political sphere, what hope is there of common-sense solutions for society at large as opposed to solutions for special interests?

That is my major beef with Chang's solutions.  Fixing capitalism cannot start with economics, it must start with politics - because politics is the institution in which economics exists in the real world.  One can argue that our politicians are driven by what they learn from our mainstream economics.  So I do think that one thing that we can immediately change in our economics is the way economics is taught in our schools today.  It's a lot of hogwash mixed in with good thoughts - culminating in the creation of bad Samaritans.   But again, economics departments today are in and of themselves, fraught with bad politics.

Do you see the problem?  I've never heard a good solution.

Were you to say the "Occupy" movement might propose a solution.  I would respond: no way in hell.

Mr. Chang ironically points out a main reason why.  They have already been branded as crazy anarchists.   It's too late for that brand to change, IMOP.  The media and mainstream detractors is a good deal at fault here.  But Chang I think incorrectly ignores that most of the blame lies with "Occupy" itself.  It has been, from its inception, a poorly planned, poorly led, poorly designed movement with far too much 'kernel of truth' to the detractors.  To be honest, Occupy does consist of a huge portion of anarchists or extreme Marxists.  Indeed their whole system of 100% consensus voting shows how completely unrealistic and anarchic they are.

Occupy could have been great.  Instead it has, in fact, made things worse by providing great fodder for the right-wing ideologues.