Gas Mileage

I read that the Ford Focus in the US gets avg. 30 mpg - the one sold in the UK gets an avg. of 48 mpg. If this is true, the government should require them to import or produce these cars in the US as a condition for the bail out.

Mosler's Law

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.

This makes sense to me.

Fed Creates Money

My suggestion that the Federal Reserve Bank create money for public use without incurring an obligation to pay interest (Zero interest public debt) is now being used.
“Instead of having the Treasury borrow the cash to fund these programmes through the Tarp, we’re just going to crank up the magical printing presses and expand the Fed’s balance sheet,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “For those not connecting the dots, the Treasury has essentially just outsourced the purchase of troubled assets to the Fed, with lots of leverage.”
Financial Times, Nov. 25, 2008

Now if they would just extend it to credits for General Motors and the like.

Financing Bail-Outs and Other Job Creating Projects

In my blog of Sept 22, I suggested that the Federal reserve Bank and Treasury simply write checks on themselves rather than borrowing and paying interest. Since then, I read where the Fed is now paying banks interest on their deposits at the Fed. I wrote to the Fed and asked how this was financed. They replied that they would credit the banks' accounts at the Fed. That sounds like direct money creation by the Fed. If they can do it for paying the bank's interest on their deposits, they can do it for paying banks and Freddie Mac for their bad loans or General Motors or individuals whose unemployment checks are stopping.
The question that I frequently receive from those who I tell about zero interest public debt is "Wouldn't that be inflationary?" My answer is that it could be, but no more so if the money is created by any other process, including buying government bonds from banks, which they now do as part of their open market monetary policy. The Federal Reserve has the job of deciding if the economy has unused capacity. That is the judgment they make when they use monetary policy to stimulate the economy. They could continue to be responsible for this estimate and provide a limit for any Congressional job creating appropriations.

Greenspan and self-regulation

Those who understand the fragility of the capitalist system (such as the late Hyman Minsky) based on human tendency to follow the leader (even if it leads over a cliff, were not surprised at the current financial collapse. But I do not think anyone understands psychology well enough to predict the exact tipping point (or the exact point of eventual recovery of investor and business confidence).
If Greenspan had had a little behavioral economics in his background, he would have known that if is impossible for the financial sector to police itself. Any financial manager who had seen these new pieces of paper for the casino that it was would have lost customers. They would have been right, but out of a job. Both school districts and so-called sophisticated investors like Swiss Banks can not afford individually to opt out while others are seen as making out like bandits. That is why we have collective institutions like government so that we can be ruled by our cool moments of macro vision and not our emotions in the rough and tumble of the daily market.

Economic Crisis & the War

The economy has pushed the Iraq war off the front pages of our newspapers. But, they are connected. We cannot waste billions in Iraq and expect to have the resources to invest in growing our economy.

Krugman, Institutional Economist

Congratulations to Paul Krugman, another institutional economist to win the Nobel Prize. Why do I say he is an institutionalist? Because his theory is built around economies of scale, that is a key concept in institutional economics.
Standard theory is not comfortable with economies of scale as it conflicts with equilibrium concepts so cherished by the old school. The advantages of countries with econ of scale over smaller economies has no equilibrium, but just evolves.
The information for the public sent out by the Nobel committee tries to soft-pedal the lack of equilibrium by referring to "the basic mechanism specified by Krugman ..." The mechanical metaphor is not apt. At one point the notice states, "Real wages and the supply of goods will then continue to increase even more in that country (the one with econ. of scale), thereby giving rise to further migration, and so on." "and so on" is not an equilibrium concept. You need an evolutionary theory, and that is what institutional economics provides.
Thank you, Paul, there is hope for economics.

Too Liberal?

Since when has the word "liberal" been a take-out label that stops substantive debate? Probably since Reagan and now paraded by McCain. The words "liberal" and "conservative" have become meaningless except in name-calling debate. The present Bush regime is anything but conserving--they would abolish Social Security for example--that is hardly conservative. They have spent and not taxed, raising the national debt beyond recognition--hardly conservative!
I suggest we go "progressive" and "reactionary." Or, maybe, "Real World" and "Imaginary/Mythical."

Financial Crisis Policy & Iraq

There is a connection between the depressed economy and the Iraq War. The best economic policy for the financial crisis is to get out of Iraq as soon as possible. The economy can't recover while we are throwing billions down the bottomless pit of Iraq. The bailouts can't do the job alone. Just think of all the research and development on energy we could be doing with this money. For just one thing, We could build a modern national train system like the Europeans already have.
For those who are still thinking of nothing less than victory in Iraq, my advice is to get over it. It is vainglory at this point. Victory in the usual sense is impossible and even if possible in x years, we can't afford it. Redirecting our economy from war to development is our best road to National Security.

Saving The Fincancial System from Meltdown

There is another way to finance the $700 billion needed to save the country from financial instability. It need not increase the Federal debt that is already astronomical. When our economy is not using all of its resources, it makes no sense to have the government extract capital from the economy and switch it to buy bad mortgages. The Federal Reserve and the Treasury could simply write checks on themselves. They could create new money just as the banking system does when it makes a loan. The problem is that banks don’t want to make new loans in these troubled times, so the government needs to be its own banker and fill in. If banks are empowered to create money, why can’t the government’s own bank do it too?

Tax cuts & other incantations

Political campaigns are like ancient military campaigns. The magic words must be spoken before the battle begins. Once they were words like "Ish-ca-bib-el," but today they are "cut taxes and government waste." No campaign can start without them. Neither the ancient nor the modern incantations have any reference to reality. You do not hear politicians say what specific public services will be cut after cutting taxes This is because you don't hear citizens demanding less highway maintenance, larger class sizes, less medical care for the elderly, and a smaller army. All hail Ish-ca-bib-el" and the Tooth Fairy that brings us good things for free.

Fannie & Fredie

The Secretary of the Treasury is advocating Federal loans at low interest rates to the mortgage firms known as Fannie and Freddie. This proposal while laudable in purpose further increases the Federal debt. Why do we do it that way? Is money in short supply such that there is a real opportunity costs if diverted? I do not think so. There is plenty of unused capacity in the real economy. There is no reason for taxpayers to consume less so that these mortgages can be extended. Why does not the Federal Reserve and the Treasury simply write a check to Fannie and Freddie? We do it the old way only because we are locked in to old customs and obsolete institutions. It is time for modernization of fiscal policy. I call it zero interest public debt.

Inflation

Inflation is in the news and blamed on the rise in oil and food prices. But, inflation is defined as a rise in the general price level, not the rise in the price of particular items. The only way that the rise in oil prices can cause inflation is if the banking system accommodates it by an increase in the money supply. If the money supply is constant, then a price rise for oil means a price drop for other things depending on their relative demand elasticities. The popular misconception of inflation causes us to look at the wrong policy options.

Big Oil Defends Profits

Recently top executives of the five largest oil companies said they were helpless to reduce profits even when Exxon's annual profit increased from $11.5 billion to 40.6 billion in the past five years. Executives claim that it is simply impersonal supply and demand. They are only partly right. High profits in theory should increase supply, but these oligopolies have no incentive to build new refineries, which they have not done for 40 years. The industry points to things like terrorists destroying oil installations in Nigeria. I wonder why? Perhaps if the oil companies would share a bit of their wealth with the local people, they would help protect the installations rather than destroying them.
When Stephen Simon, vice of Exxon was asked how much his salary was, he claimed he did not know. This is unbelievable, it must be nice to make so much money you can't remember how much!

EPA Raises Ozone Standards

The Environmental Protection Agency recently lowered the level of allowable amount of ozone in the air from the present standard of 84parts per million to 75. The EPA's independent science advisory panel unanimously recommended a standard of 60 to 70 parts.
John M. Balbus, a physician and the chief health scientist at the Environmental Defense Fund, said, “Clearly at some point you get to a level where additional benefits just aren’t worth it, but I don’t think we’re there at 75.” “The E.P.A.’s own risk estimates show that between 75 and 70, there will be hundreds more deaths and thousands more visits to emergency rooms, and hundreds of thousands of more lost school days,” he said. Tens of millions of people live in counties that do not meet the current standard of 84. And the timetable for meeting the new one could be decades. In practice, standards are ceremonial to a major extent.
Oil and chemical companies lobbied intensely against the new standard claiming it would trigger layoffs and erode U.S. economic competitiveness. Must we damage our health to have a healthy economy?
Regulation does not create costs where there were none before. It is a matter of who bears the costs. Medical treatment is a cost of making chemicals as much as labor or raw materials. Raising the price of a product is a signal for consumers to buy less of some products and more of others (depending on the elasticity of demand). The same business interests that usually claim the economy is self-regulating and will respond to changes in relative prices seem to ignore their preaching in the case of polluting products. A price increase and lower demand for chemicals may decrease the use of resources in their production and increase demand for other goods. Inputs can't move to new uses that consumers prefer without some transaction costs. Perhaps we should admit it and share some of the transition costs of resources trapped in chemical production, rather than let the prospects of these costs paralyze us and prevent the healthy environment that many prefer to having more plastics, etc.
I have some sympathy for Sen. George Voinovich from economically stressed Ohio, but the answer is not to damage our health to maintain the status quo.

War Profiteering

"KRB, the largest private contractor for the Pentagon in Iraq, has two shell companies in the Caymans.... Because the companies are offshore, neither KBR nor the workers must pay Social Security and Medicare taxes ... according to (the Boston Globe)." "When KBR set up the second of its two shells in the Caymans, it was still owned by Halliburton. Halliburtons's chief executive then was Mr Cheney."
Source: Toledo Blade, March 14, 2008.
Why do we put up with this? Is it because any criticism of the administration's Iraqi policy is subject to the charge of being unpatriotic?

Iraq Policy Failures

Bush supposedly attacked Iraq to improve life of Iraqi citizens.
But, what is the evidence?
1. American soldiers dead—4,000.
2. Iraqi citizens dead—180,000 as reported by Iraqi Ministry of Health (other estimates are considerably higher.
3. Internal citizen displacement—2 million.
4. Refugees fled to other countries—2 million more.
5. Dollar cost to date-- $3 trillion. (And electricity and water are problematic.)
We have done much more harm than good, and staying only makes it worse.

Exxon Valdez Oil Spill

The Supreme Court is reviewing a lower court ruling awarding $2.5 billion in punitive damages for a 1989 oil spill occurring in Prince William Sound, Alaska. Exxon argues that it should not be liable for the negligence of the oil tanker’s skipper. The award would be peanuts for Exxon who saw a $39.5 billion profit in 2007. It would mean a lot to thousands of commercial fishermen, seafood processors, and native Alaskans whose livelihood has been damaged. Why should a rich corporation be able to tie up the case for 19 years? Where is justice?

Land Use & Development Rights

Under the banner of protecting property rights, a number of states have passed laws requiring compensation if land use regulations lower owners' property value. This slogan ignores the fact that regulation of one person's property often increases the value of neighboring property including public interests in the environment. For example, a regulation restricting building on coastal shorelines may prevent some owner from putting up an intensive development and thereby make his parcel less valuable, but it may protect the shoreline from erosion and losses to other owners. The issue is which owners count.
The voters of Oregon passed a 2004 law allowing owners to seek compensation if state and local regulations reduced their property values. Voters probably had in mind individuals who wanted to build a house on their property, but it was widely used for large housing projects, strip malls, and landfills.
The voters thought again, and in Novemeber, 2007, approved a law preserving a landowner's right to build homes, but curbs large commercial and industrial development. A coalition of farmers, business groups, and conservation groups such as the Nature Conservancy spent $4.5 million to support the new law. These coalitions are hard to put together as many are tempted to be free riders, as the results of the campaign are available to all whether or not they have contributed (a high exclusion cost good).
Source: Nature Conservancy, Spring, 2008.

CEO Remuneration: Too Much

The pattern of CEO failures being rewarded with huge severance packages is repeated over and over again. The latest is insurance broker Marsh & McLennan who fired its CEO after the company shares lost over a fifth of their value last year. Still he received $7.15 million in severance. The evidence is contrary to the argument that executive talent is so rare that it must be promised a golden parachute to accept new employment.
Yahoo’s CEO received $429 million in stock option profits over his first four years at the helm and a $71 million paycheck in his fifth year. In 2007 he was fired for poor performance.
These absurd rewards for failure are in sharp contrast to the payouts to workers left behind. Mitt Romney’s Bain Capital bought a Tiffin, Ohio, plant and closed it last December denying workers any severance or medical coverage. Bain on the other hand, made $51 million on the deal. The cooperation of the CEO no doubt earned him a tidy sum.
Gardner and Means years ago noted the separation of ownership and management in the modern corporation. They would be shocked to see how it has turned out as boards of directors (many of which are corporate CEOs in other companies) take care of their own at stockholders and employees expense.
Source: Too Much: A Commentary on Excess & Inequality--http://www.cipa-apex.org/toomuch/index.html

Ceremonial Protection Against Terrorism

Amtrak announced that it will begin random inspection of passenger baggage. This does not make me feel safer. Why do officials think that future acts of terrorism will take the same form as in the past--namely related to transportation? There are innumerable places where terrorists can place explosives,and even an army could not cover them all. Let us admit that since the invention of the gun, we are all conditionally safe, and we all exist on the good will of our fellows. We should invest in creating good will rather than putting all of our resources into surveillance. Much of so-called Homeland Security is just ceremonialism and no more effective than any other fetish.

Sub-Prime Mortgage Crisis Spreads

The Michigan Higher Education Student Loan Authority has suspended MI-LOAN after collapse of its auction-rate securities. These securities were used to obtain a lower interest rate for long term loans. Unfortunately, the securities contained a penalty clause that if the auction fails, the interest rate jumps. The auctions were not supposed to fail, but because of contagion in financial markets caused by failures in the sub-prime mortgage market, the auction-rate securities market has collapsed. According to Paul Krugman of the New York Times, The Port Authority of New York using the same kind of auction-rate securities “saw the interest rate it pays leap from 4.3 percent to 20 percent.”

Catch-22

The US Supreme Court refused to review a case brought by the ACLU concerning warrantless surveillance. A U.S. appeals court based in Cincinnati earlier had dismissed the case because the plaintiffs could not state with certainty they had been wiretapped by the government's National Security Agency. Of course, the list of those under surveillance is secret!

Crisis of Faith in Financial System

The Michigan Higher Education Student Loan Authority has suspeneded a major student-loan-program after collapse of its auction-rate securities. These securities were used to obtain a lower interest rate for long term loans. Unfortunately, the securities contained a penalty clause that if the auction fails, the interest rate jumps. The auctions were not supposed to fail, but because of contagion in financial markets caused by failures in the sub-prime mortgage market, the auction-rate securities market has collapsed. According to Paul Krugman of the New York Times, The Port Authority of New York "saw the interest rate it pays leap from 4.3 percent to 20 percent."

Disaster Capitalism

In the 19 months following Hurricane Katrina, New Orleans’ public schools had been replaced with privately run charter schools paid for with public vouchers. The union contracts of teachers were canceled. In her book entitled, Shock Doctrine, Naomi Klein details the “orchestrated raids on the public sphere in the wake of catastrophic events,” thus her term “disaster capitalism.” She sees a pattern in how the Bush administration used 9/11 as an excuse to bomb Iraq. She might have added the attempt to create an impression of a crisis of the Social Security system to replace it with a private alternative, and the weak economy to promote extension of tax cuts for the rich. These people can no longer be called “conservatives,” they are radicals.

Fiscal Stimulus

A fiscal stimulus to the present weak economy is a good idea. To finance it with a projected $168 billion addition to the deficit over two years is not. Interest on the public debt is already consuming a huge portion of the Federal budget. There is an alternative. When an economy is not performing anywhere close to its capacity, there is no need to have part of the economy save (and make loans/buy government bonds) in order to put other parts of the economy to work. If our banking laws enable banks to create money by making loans, the government can enable the U.S. Treasury to do the same. When private business is discouraged by inadequate aggregate demand, they do not want to borrow to make new investments, leaving many human and plant resources unused. Government loans to citizens without any interest or repayment obligation can replace bank loans to business to sustain aggregate demand.

False Corporate Accounting

“High Court limits investors suits against 3rd parties,” Chicago Tribune, Jan. 16. Scientific-Atlanta and Motorola were vendors for cable company, Charter Communications. Charter misrepresented its revenue to pump up its stock prices. When the accounting errors were revealed, their stock price plummeted. Investors sued
S-A and Motorola arguing that they were part of the scheme. The Supreme Court in a 5-3 decision limited the liability of third parties to the company committing the fraud. The Court’s revolutionaries Kennedy, Scalia, Thomas, Alito and Roberts argued (imagined) that a contrary decision would result in an explosion of securities litigation. Well, if there is a ton of wrong-doing, that is exactly what should happen. The same argument was used by the administration in opposing holding CEO’s liable for fraud, ignoring the advise of then Secretary of the Treasury O’Neil and Alan Greenspan chair of the Council of economic advisors.
The progressives Stevens, Souter and Ginsberg argued that Charter could not have committed the fraud without the vendor’s help. Motorola supplied cable boxes at inflated prices to Charter and used the windfall to buy advertising on the cable. The higher prices were booked as a capital expense while the advertising purchases were noted as revenue. The decision is expected to have a major impact on class-action lawsuits arising from the implosions of Enron and HealthSouth. (It did.) The administration ignored the advice of the Securities and Exchange Commission that pleaded to be allowed to file a brief in the case, and instead followed the advice of the Justice Department. The SEC clearly has the authority to bring such suits on its own behalf, instead of being brought by private investors in class action suits. Obviously, if they can’t file a brief, they are not going to bring their own suit. The decision was applauded by the U.S Chamber of Commerce and the National Association of Manufacturers. This is the payoff to generous campaign contributions from big business.
This is a clear example of how the average guy gets screwed. But, how can the average citizen understand what is going on? I had to read the story in the NYT to get the whole picture. The Tribune just said two vendors were involved, but did not explain the fraudulent accounting that obviously could not have happened without Motorola’s knowledgeable participation. Maybe they did not directly tell the public how wonderful investment in Charter would be, but they clearly understood how their cooperation would be used. But what the hell, they owe it to their own stockholders to make as much profit as possible and sell as many boxes as possible and get free advertising. Greed is good, or so we are told! John Edwards is running for President as the champion of the little guy. His examples are not as complicated as the above. He paints a picture of big, bad health insurance companies not paying the claims of those unfortunately suffering from unusual diseases. That is easy to understand, but nevertheless Edwards is not getting much support from voters.

The Public Services-Tax Disconnect

A New Hampshire exchange between Mitt Romney and Mike Huckabee dramatizes the disconnect in many peoples’ minds between public services and taxes.

Romney asked Huckabee (paraphrasing), “Did you or did you not raise taxes while governor of Arkansas?” Huckabee replied, “I invested in public infrastructure and the state’s future.” Romney, “You are not answering my question.” After twenty seven years starting with Reagan we have been bombarded with the message that taxes are bad and simply not related to government services. Thus, Huckabee deemed it prudent not to use the tax word. He apparently feels that he cannot simply say that he raised taxes to invest in the state.

The Republicans have succeeded in the war of words and symbolic politics. They get applause for supporting wars and a strong military while cutting taxes. The Republicans label the Democrats as the “tax and spend party,” while they have become the “spend and increase the debt party.” I guess that many Americans believe in the tooth fairy.

Black Identity & Black Power

In his conversation with Bill Moyers on his JOURNAL, Jan. 11, scholar Shelby Steele said the following:

“I am black and happy to be so, but my identity is not my master. I’m my master. And I resent this civil rights leadership telling me what I should think and what issues I should support this way or that way. And that’s where, in black America, identity has become almost totalitarian... You [must] subscribe to the idea that the essence of blackness is grounded in grievance, and if you vary from that you are letting whites off the hook. And we’re gonna call you a sell out. We’re gonna call you an ‘Uncle Tom’... I was gonna have a life or I was just going to be a kind of surrogate for blackness... but you enter an exile where the group identifies you as someone who is a threat, and part of being black is despising or having contempt for people like me.”

Steele contrasts the approaches taken by Blacks in race relations. One is the “bargainer” approach that says, I will not assume you whites are racists if you will regard me as an equal individual. This is the approach of Obama and Oprah, and they are popular among whites. The “challenger” approach says, All whites are assumed to be racists, and you must give me advantages. This is the approach of Sharpton. Steele regards the essence of “Blackness” as grievance, which is the foundation of Black Power creating anxiety among whites. The challenger approach keeps alive white obligation to Blacks.

Free Market: What Can It Mean?

The New York Times editorial (Dec 30, 07) entitled “Free Market: A False Idol After all,” contains the following quote:
“Every regulation reduces people’s freedom,” said David R. Henderson, a libertarian economist at Stanford University’s Hoover Institution. “The more regulation we get, the worse we do.” Who is the “we” referred to here?
Pitting the free market vs. the non-free market is a misleading conception. All markets begin with a distribution of property rights to be exchanged. Regulations are simply somebody’s property right and opportunity, and somebody else’s exposure to that opportunity. For example, a workplace safety regulation simply says that workers own the right to be free of certain hazards. Henderson uses an undifferentiated “we” that ignores the fact that freedoms of people with different interests conflict. Or as Isaiah Berlin put it, “Freedom for the pike is death for the minnow.”
A safety regulation functions no differently than a land owner’s property right. It is an asset for a worker just as is his human capital made valuable by regulation of slavery. It is part of what is antecedent to market trading. It says who has what to trade. If you do not want to live in a world that is the outcome a particular set of property rights, change the rights and a different outcome will be forthcoming. The market is not the culprit— it is the fact that some people have all of the rights. You need not oppose free markets, rather oppose the particular rights that account for the performance you want to change. Rights get changed by legislation and by court rulings.

By the way, slave owners argued against the abolition of slavery as an offense against freedom. To be honest, they should have said that regulation of slavery reduced plantation owners’ freedom and enlarged the freedom of former slaves. It draws attention away from the real issues of the distribution of property rights to cast the choice as free market vs. regulation. The false idol is not the market, but the particular market rules that produce a particular performance of the economy.