How America Avoids Deflation
05/24/2016, Pago Pago, American Samoa
As I have written, America is dominated by republican supply side policies while what is needed are policies to promote aggregate demand instead. Republicans have it backward. Worse they do not understand that production is limited by demand. Produce more than demand and inventories rise and production must be cut back. At least that is the conventional wisdom.
There is another way, but its sustainability is more limited. It is this: when inventories are too high merchants and producers can cut their prices. Of course that eats into their profits, but it does reduce inventories by increasing demand. If sustained and increased, it can eat through profits down to variable costs and then fixed costs. The compromise of the latter two are not sustainable. Loss of profits is bad enough.
In fact, American commerce does have periodic sales and going out of business sales, but the primary means of controlling inventories to bring them into alignment is to reduce production to the level of demand. But there is another way and I have already alluded to it.
When prices are decreased, so are profits, but as long as there are some profits wide scale price reductions are sustainable, but such price reductions are what creates deflation, a horrible bugaboo in the American economic lexicon.
The desire of producers and merchants to maintain their profit margins is what makes prices so "sticky" to downward adjustment. That is why production and sales cutbacks are the preferred means of keeping inventories in line with demand. Lower prices of course increase the quantities demanded.
This is the primary means America avoids deflation and it is also the mechanism by which we live in a "new lower low" as a consequence of excessive income inequality which constrains demand.
Few understand these matters or what is truly needed are not supply side policies, but policies to increase aggregate demand on the demand side. We are getting it backwards.
It is a Demand Side Problem, Stupid, Not a Supply Side Problem
05/24/2016, Pago Pago, American Samoa
Republicans are hung up on a whole range of supply side issues including --
-regulation interferes with productivity and output,
-lower taxes increase investment,
-robber barons are all hard working Horatio Algers,
-welfare bums don't hold jobs and work like they should,
-wealth and prosperity "trickle down" from the rich at the top,
-higher marginal tax rates are a disincentive to work,
-entitlements undermine work effort (think SS and Medicare)
Republicans have virtually zero discussion or thought on demand side problems, how national income can better finance wants to create more economic demand.
Supply deals with output or production, what capitalism does well. Demand deals with want that is financed mostly by income. Income is acquired mostly from producing things. Demand is the problem in America because too much income goes to the top which hoards it and the bottom doesn't have enough to finance its wants and create demand. Republicans don't understand this or refuse to care.
They focus only on how they think we should be producing more, but unless there is demand, production gets gets cut otherwise business inventories will build up and become to high. Production is cut back to roughly equal the demand for goods and services to prevent excess inventories. Most republicans really don't get this; those that do, don't really care.
These are the reasons why republicans don't address the economics and policies that are necessary to really increase production and national income in America. The party only protects the rich. Democrats, especially under Obama, simply follow suit and we all do much less well than we could.
America needs to wake up and understand this. If it would, republicans would be turned out of office and America could progress.
Libertarians vs the Rest of Us
05/22/2016, Pago Pago, American Samoa
Imagine living in a world surrounded by people who don't understand freedom and individual liberty or, indeed, basic economics, where those people want to collectively make decisions on how you should run your life? HT/DZ
So Called "Socialist" position:
Imagine living in a heavily populated world where much private action is duplicative, interferes with others and is very inefficient, and where basic economics and the law of large numbers tells us that majoritarian consensus and collective action is the much preferred way to proceed, but a small and noisy group of the population forever objects, claiming their individual liberty and freedom are being compromised, but they refuse to go live in the back woods where they belong and can have all the freedom and liberty they want. HT/KC
Why Paul Ryan Should be Voted Out of Congress
05/21/2016, Pago Pago, American Samoa
Because of a new overtime regulation issued this week by the Labor Department at Obama's urging, over 13 million workers will get a raise. Starting on December 1, most salaried workers earning up to $47,476 a year will receive time-and-a-half overtime pay when they work more than 40 hours during a week. The previous cutoff for overtime pay, set in 2004, was $23,660.
The need for the rule change is clear. Over the last 30 years, corporate profits have doubled from about 6 percent of gross domestic product to about 12 percent, while wages have fallen by almost exactly the same amount.
Overtime was enacted in 1938 to overcome a basic problem in the labor market: The longer and harder people worked for the same wage, the fewer jobs there are for others, the higher unemployment becomes and the more workers weaken their own bargaining power.
Unfortunately, the battle is not over yet.
Republicans and their corporate allies have already begun their effort to overturn the new rules. Paul Ryan has said he is "committed" to passing legislation in Congress to stop Americans from getting this raise. President Obama will veto it. Then Congress will try to override it.
Ryan is also on record as wanting to dismantle Social Security and Medicare. He makes his staff read Ayn Rand.
Vote Ryan out. He wants employers to demand and get free overtime labor from workers earning below median income levels.
Obama Is Making a Big Mistake
05/20/2016, Pago Pago, American Samoa
He is not doing what he should to get Judge Merrick Garland on the Supreme Court and is waiting too far toward the end of his term to act to do that.
He should nominate Garland to the Court and tell the Senate it has until date X or a reasonable time to provide its "advice and consent." If the Senate does not consider Garland on the merits and vote for or against him on time, as it says it won't, Obama should directly appoint Garland to the Court.
The Senate will sue and the matter will proceed from the adjudication of the federal District Court through the court system to a petition for a writ of certiorari to the Supreme Court. The Supreme Court can then elect to hear the case or not, depending on what the Court of Appeals does and whether it wants to try to change that result or leave it be. (A direct appeal by right from the District Court to to the Supreme Court is no longer allowed and virtually all review must now be under a discretionary writ of certiorari grant.)
Either a federal Court of Appeals or the Supreme Court would decide if Obama acted properly.
Obama needs to get off the dime and act. He is just afraid of losing.
Republican Guerrilla Government
05/20/2016, Pago Pago, American Samoa
Republicans are often referred to by their adversaries as know-nothings, largely because of their spectacularly stupid declarations, utterances, and policies (e.g., trickle down and other supply side economics). But as the last year or so proves, the republican congress is also collectively becoming known as a bunch of do-nothings, too. Inaction is their hallmark.
But this is actually not quite right. Because while in fact they do next to nothing legislatively, they are actively guerrillas in attempting to shut down aspects of constitutional government. This occurs when they dislike one or another constitutional or majoritarian action of government, where they lost or will lose out. Their ought to be a law against it. It amounts too a form of treasonous sabotage. Blocking the majority will.
Ted Cruz et al. and his famous government shut down over funding for Obamacare cost the economy and us $25 billion dollars. Should the good Mr. Cruz' salary be garnished to repay it? He and his buddies also caused the country's credit rating to be lowered by one rating agency by threatening to default on the public debt. Financial markets were thrown into turmoil.The agency all but declared the US was incapable of sound self government (with republicans on the loose).
Then there are the multiple threats to defund programs and budgets passed by a congressional majority, such as planned parenthood, Obamacare or, now, pay for Supreme Court justices if they render decisions republicans don't like. Just more republican guerrilla action. Threatened or actual sabotage, if you will.
The latest guerrilla republican action is to deny the president his right to a considered Supreme Court nominee or appointment -- all by senate leadership fiat, if you will, without even allowing a senate vote on the position to shut down this aspect of government. Sore losers and sour grapes. That is what republicans consist of. Petulant angry children, incapable of much that is good or useful. Government is to be torn down until what is left of it can be drowned in a bathtub, said one republican leader. The republican cry is always for smaller government and, mostly tellingly, not for better government.
Destruction of government (by budget squeezes, outsourcing and privatizing) and impairment of government by guerrilla sabotage in the manners described are cornerstones of the republican party.
Should all or most republicans fall into the sea and drown, the nation would be far better off, as a large and growing number of people can now plainly see.
05/18/2016, Pago Pago, American Samoa
All politicians make promises, usually for hope and change for the better. As was the case with Obama, few deliver on anything close to what they promised. So are they liars, or just naive and inarticulate. The latter, I submit.
Keeping your promises straight and consistent is pleasing to listeners, but it is a fools errand. Trump implicitly understands this and doesn't much try. In fact, not only are his promises inconsistent, he hugely flip flops on issues, depending on with whom he is speaking. So what are we to make of this?
One approach is Hillary's of promising nothing much to the public, but implicitly, everything to her donors, those who have paid her for speaking to them in exchange for big money and others. But I think Trump comes closer to the truth and reality of the matter when he says his public declarations or comments are really only suggestions, he doesn't truly know what he will do on specific matters but he will surround himself with the best people when the time comes and make real and good decisions then, but he can't tell us now what they will be.That is an honest, intelligent approach.
In truth, the intelligent politician should tell us what his propensities and predispositions generally are, what he thinks is important and what he would like to see happen and then stop there, explaining that he cannot know what he will do in the specific instances which are presently unclear and ill-defined. For example, Obama might have liked to see a single payor national health system, but when he confronted the powers that be and what was involved, he learned Obamacare was all he could do and just barely that.
The intelligent politician can also tell us some of the specific people he would like to have around and advising him on various matters. Trump has done this, too. Regrettably, his suggestions for advice on science and tax reform are horrific. But still, that is the intelligent approach and the desirable one. We can then consider who he thinks are important and capable in their areas.
Specific political promises are a joke and the mark of an ill-considered leader. Recall how Obama said he was going to go after and rein in lobbying, and later, in his second term, address the problem of income inequality? In both situations he did nothing of note and both situations are worse now, not better.
But we, as voters, also should have known better. I did and did not vote for Obama, McCain or Romney. Obama and Romney both suffered from promisitus, the mark of a naive and foolish politician.
On the Value of a Good Law School Education
05/17/2016, Pago Pago, American Samoa
The question of can you read is now worldwide almost always answered in the affirmative. But that is seriously misleading because there is reading and then there is reading. Supplemental questions might be, do you read? How much? What type of materials?
Reading is ab initio a decoding exercise. Fluency, speed and comprehension at various levels of material difficulty are factors rarely considered in determining literacy, but they matter hugely. Comprehension itself is a multifaceted consideration which can involve recall, relevancy assessments, displacement, deconstruction and myriad other considerations. Literacy and competence at it is a very complex matter.
Many don't read, because they are not very good at it. That is true for many youth grounded in video culture and many adults who never really got the hang of it and do not read for pleasure, largely because they can't comfortable enough to enjoy what they read. This is indicated by surveys on books read in the last year of adults. Often, the answer is zero or perhaps, one. A sad commentary on reading skill and literacy.
What a good law school education imparts, in very substantial measure, are seriously good and fast reading comprehension and assessment skills. How well students read and their level of literacy is markedly different on entering and leading law school. Law school can be thought of a an intense reading program. Speed, comprehension and assessment skills are markedly increased over the three years of being shoved through large volumes of material and then quizzed on the details and implications of what has just been read.
As a tool for proceeding through life, a good law school education is more valuable than people think, many times better than some PhD programs which often entail a lengthy and belabored effort at gathering and manipulating data in some tiny esoteric niche for a year or two. Not that such efforts are not useful or needed, only that they often do not do that much for the student compared to a good law school education. Law school does much at a more general and useful level. This is why we find people trained in law in so many different and high levels of endeavor in this country.
A good law school education is comparatively underrated because reading is a more complex endeavor than most people realize.
The Longer Term Multifaceted Vice Faced by the Republicans and Their Oligarchical Patrons
05/15/2016, Pago Pago, American Samoa
Rather than weave them into a narrative, a list with comments seems like the better approach.
1. Robotics will preclude lower top marginal tax rates and force higher such taxes and income redistribution in time as more and more workers are displaced. 48.5% of our working age population is now unemployed, up from about 35% in 2000. Robotics is slowly and just getting started.
2.Republicans and their patrons have alienated too many voter blocks: single women, pro choice women, Blacks, Hispanics, LGBT's, progressives,and many independents, all of which comprise a huge chuck of the voting population.
3. The republican red state base, terrified for years by republicans claiming Democrats will steal their guns, religion and family values, and make them live next door to blacks and LGBT's, is waking up for multiple reasons and beginning to realize republican economic policies are killing them and they are mad.
4. Republicans have no program except to fight on behalf of their patrons for lower taxes, against welfare payments and income redistribution, infrastructure spending, deficit spending, large government and to pitch their base the social card against abortions, women's rights, LGBT's and in favor of guns.
5. Republican economic policy is trickle down economics, destructive of government (privatizing its functions), against the New Deal programs of Social Security and Medicare and in favor of crony capitalism, corruption money in politics and supply side economics while deficient aggregate demand from our skewed distribution of income is our problem, not inadequate production on the supply side. Production or supply is constrained by deficient aggregate demand; otherwise inventories would grow.
6. Republican policies initiated during the financial crash on Wall Street in 2007 took care of the Oligarchs on Wall Street and their banks instead of taking care of homeowners after the housing crash which would have saved both homeowners and the banks.
The republican party is a gross failure in most regards and America is waking up to that fact and moving away from establishment politics and toward a different more socialistic mix of capitalism and socialism. For now, institutional legacies block, but they will come down like the Berlin Wall. Time favors progressivism and the republicans are in truth all but done in.
America's Real Crisis with Capitalism
05/13/2016, Pago Pago, American Samoa
Capitalism in the US is a rousing success at production and a dismal failure at distribution and social justice. A better system is capitalism for production and a healthy dose of socialism in regard to distribution and collective action (e.g., infrastructure).
Sanders and the northern European countries have figured this out, but the oligarchs in the US, as represented by the republicans and many democrats, fight to block such a system and, worse, rig the economy to work in their favor and against the middle and lower classes.who are being gutted by the result.
The problem, writ large, is exactly that. It is political problem, primarily, but also a problem of economic ignorance, a problem of willful greed and a profound unwillingness for our oligarchs and republicans, as well as some democrats, to seriously consider the successes of the northern European and especially the Scandinavian countries in regard to how they use capitalism for production, much socialism for distribution, and have relatively clean and uncorrupt government to implement and coordinate the mixes. Infrastructure and other collective action is well done and cared for. Not so in the US.
Money in politics, with our corrupt congress, and voter ignorance and apathy are core problems, but Sanders has been waking America up. Americans under 55 understand what I am saying now and the political establishments of both parties are under siege. There is momentum for change, especially from millennials and from the decimated middle and lower classes. All that is needed is capable and powerful leadership, which for now is lacking.
We are at a crossroads. Revise our tax system and move distribution more toward socialism, or knuckle under to the oligarchs and republicans and continue to suffer the rigged economy, lousy growth and an impaired economy. Sooner or later robotics is going to force the issue or there will be social upheaval. Politicians like Ryan, McConnell, Obama and Hillary will look like dinosaurs with the change that is likely coming, especially if good leadership can emerge from America. A young, power and more persuasive Bernie Sanders, well trained in economics, is what we need to bring real hope and change to America and voters to the polls.
The Truth Is . . .
05/12/2016, Pago Pago, American Samoa
Trump is a disaster. Hillary is a bought off money grubber, and Bernie is too old and eccentric. Bernie has the best program but one still in need of some significant adjustments, Hillary is the status quo personified with no real adjustments (just as Obama continued with Bush's plans) -- unless, as some drunkards claim, she is a closet progressive who has been listening to Sanders, and then Trump's program is wholly incoherent, as he variously listens to all the wrong people and babbles nonsense.
So where does this leave us? Up the creek with a stick for a paddle?Pretty much so, I am afraid.
Can we reasonably expect more? How? Any progressive platform is lame, halt and blind -- the oligarchy hates social progress -- as the parties scramble to reestablish their locks on their establishments and more than a few in Trump's base wait to see if he is defeated, who to assassinate, maybe Hillary -- that would also keep a pussy . . .cat out of the white house. And they thought a black was bad enough. Hey, but were they wrong? Think of the "hope and change" promised and compare it to what we got: hopelessness and change for the worse are better descriptors.Think here of more income inequality, a falling median income, the waste land that is congress and the increase in corruption in all US governments for starters.
Things are a bit loose at the seams in political America.
One slim how or hope is if the FBI report to be issued some day sinks Hillary then Bernie gets a resurrection, but there is no resurrection for Trump who would likely lose against Sanders. But again, Bernie is old and a bit off, so where does this sizable improbability leave us?
What an American mess.
Note on Debt and the Fed
05/11/2016, Pago Pago, American Samoa
In the view of one tabulator, global debt increased by $57 trillion in the seven years ending 2014. At 9.3% growth, government debt swelled to $58 trillion from a starting point of $33 trillion. Corporations saw their debt levels rise by 5.9% to $56 trillion from $38 trillion. Household debt saw no comparable grow because there has actually been some deleveraging in that quarter. The IMF, a fount of neo-classical economics, is sounding a warning on these debt levels, claiming they are too high and threatening, except of course for household debt. So what are we to make of this debt? We need to consider first what debt is and how it is used.
Debt arises when one firm, person or government wants to borrow cash that someone else has and is willing to lend. Making interest payment (servicing) and timely payback are the issues. Others, less considered, are how is the borrowed money used, for investment which generates a cash return, or for consumption, which does not. Next, who is the borrower, a firm or household, each of which has a budget restraint within which serving and loan repayment need to be made, or a government with its own sovereign fiat currency which has no budget restraint and can rollover debt and print more money within allowable bounds. (EU countries, it should be noted share a common currency and each lack a sovereign fiat currency of their own so each must live within a budget restraint and must consider where to get the money to pay interest and loans back or face a mess like Greece has.)
Two extremes arise generally arise: money borrowed to invest which generates more money thereby making servicing and payback easier and money borrowed for foolish consumption which spends now with no realistic notion or thought given to interest and payback (e.g., Greece). From here, it is but an easy step to realize how low interest rates and easy money for loans, trap the unwary and induced excessive borrowing. That due diligence is normally practiced by lenders makes it clear that lenders too are at fault when the borrower defaults and they have not done that due diligence properly, a point often raised by bankruptcy attorneys for debtors.
In light of this analysis, it can be seen that our Fed has screwed up royally and put the nation at risk with excessive corporate debt in an era of declining corporate profits. The precursor of all major depressions and major recessions is a financial crash where there are loan defaults of many firms and/or households involving large total sums of money. The Fed does not understand any of this.
Nor does it understand the charge that it has enriched the wealthy and seriously worsened the distribution of income 1) by using QE and open market operations to purchase the dicey financial assets of the wealthy and push much extra cash into the economy (a form of monetarism), and 2) by inducing lower interest rates and consequently lower discount rates to increase the valuations of financial assets (read stocks and bonds) held by the rich and wealthy.
The Fed genuinely does not know what the hell it has been doing in its naive effort to "increase investment." The problem is much worse than pushing a string. Using interest rates to regulate real economic activity is proving to be as big a failure as monetarists at the Fed were using monetary aggregates to try to do the same thing. The Fed simply has not realized it yet.
As long as nations can service and repay (and rollover) their public debt, that debt will not be a serious problem. Servicing and payback can become problems even for nations with sovereign fiat currencies where they are ravaged by high inflation, their productive capability or tax system collapses, their main export markets collapse and for a few other reasons, most all involving bad management and misjudgments.
Private debt is the issue and the Fed is too much asleep at the wheel and does not realize what it has been doing.
Trump Ultimately Fails
05/11/2016, Pago Pago, American Samoa
I understood his effort to sound out and reach for his base. Much foolishness was involved but his base is largely foolish. However, he has reached the point we expected where he has to be moderated, sensible and offer plausible solutions to problems.
Unfortunately he fails to make this turn. For example, his solution to the alleged problem of the public debt is to force creditors to take less. A disaster if you want to roll over most of your public debt and sell more.
Trump simply knows too little and faces too steep a learning curve in too many directions. This advisers are of no real help either. He is too far behind to catch up.
That leaves Hillary.
The choice is do I shoot or hang myself. Ha.
On Economic Equilibria
05/11/2016, Pago Pago, American Samoa
Practically there anti no such things. Equilibria don't exist. They are theoretical niceties that simply don't happen. Even single markets don't timely clear and find an equilibrium. They need market makers to buy any excesses and provide product to make up for any demand unmet at the price. Only computed trial and error dutch auctions will full clear without market makers. A Dutch auction is a single market in which the price is set after taking in all bids and determining the highest price at which the total offering can be sold. In this type of auction, investors place a bid for the amount they are willing to buy in terms of quantity and price. That is a lot of fussing.
On their own markets won't clear and find equilibria except by coincidence. Now that is theoretically. Practically, continuous adjustments in market demand and supply for millions of reasons also prevent an equilibrium from happening. If we can forget an equilibrium for any single market for these reasons, we can easily totally forget a macro aggregated equilibrium for an entire economy. Yet for many neoclassical economists this is a cornerstone, a requirement or condition of macro economics generally.
Worse, it is central to the dynamic stochastic general equilibrium models of the entire economy some economists like to play with. Tinkerer toys for grown men. I say. Oh, occasionally a thing or two might be learned from such models, but forget seriously using them and call most of the money that goes into developing them as simply cash wasted. An economists Full Employment Act, only slightly better than digging holes in the ground and filling them again.
Forget equilibria. One is at best a slippery central tendency. Markets live out of equilibria and are forever readjusting as best they can with whatever help or not they get. For economists it is only a theoretically point to quickly back away from if you want to understand real markets. Not a few good economists think so.
The Economic Illiterati
05/10/2016, Pago Pago, American Samoa
There is a school of commentators in both social media and in the financial media that looks to every economic bump, regardless of relative magnitude, in either the US economy, foreign economies or both, and decries it as a precursor of economic crisis and collapse.
The usual howl starts with the public debt is too high and about to crash the US economy. Doom and gloomers, to a person, believe some variant of this thesis. They can't get past it. They can't be persuaded that the size of US public debt largely doesn't matter, by economic argument, nor evidence. In truth, only the interest burden might have a bearing or inflation, if deficit spending from it is so high as to cause it. Their thinking is stuck. Private debt, of course is subject to budget restraints and can be a concern. They voice that concern, whether it is currently a real one or not.
The illiterati narrative then migrates to sound the alarm for every glitch that can be found in the world economy. The conclusion is always imminent collapse and crisis. But that position and approach become untenable when the doom and gloom result never comes.
The problem presently is neither excessive public or private debt, as the economic illiterati claim. The real serious problems are only income inequality and the percentage of working age population unemployed and those are problems only for the bottom half and as a result consumption levels are lower than they would otherwise be and we therefore sit in a new relatively lower low with a large output gap. A result of the inequality is much hoarding and a high demand for liquidity and debt instruments in which to hold cash with developed secondary markets to afford that liquidity. A liquidity trap if you will, in Keynesian terms, where savings to include hoarding hugely out paces real investment. Over investment is impossible.
The low interest rates mistakenly induced by the Fed do reduce debt costs and can wrongfully encourages private borrowers to take on more debt than they should which can be a problem if large amounts of such debt cannot be timely serviced, say, because of changed economic circumstances (e.g., reduced household income or badly impaired profits). But no serious such changes are presently at hand which are not already being adjusted for, the doomsday crowd notwithstanding.
It must be noted that wolf cannot be cried so often or for so long before the speaker's credibility is blown and they are to be deemed to be among the economic illiterati.