Germany Beginning To Accept Need For Economic Stimulus

News from Germany is that the German government has decided they have to do something to have an economic stimulus in the periphery of the Euro zone. Spiegel On Line has some details.

Nothing in the report suggests that the program will be big enough to do much good.

It still looks to me like the Euro has been a bad idea, poorly executed. There is not an adequate mechanism to move funds from prosperous to less prosperous areas. The distress in the periphery was not caused by government spending, but by banks. In many cases, German banks.

This is not going to work, but it may drag out for a long time as the European Central Bank tries a series of what will prove to be inadequate measures.

I could be wrong - but I don't think so.

Robotics, Offshoring And Economics: Another Take

Interesting dialogue in today's New York Times. Worth reading all of the comments. Pay special attention to the cartoon that illustrates the article.

Robotics And Economics, Take Two

A couple of years ago, I posted my thoughts about Robotics and Economics. My concern at that time was that economists, as they have historically done, were discounting the possibility that future technology might replace many human jobs with machines.

The conventional answer to that concern is that, since the Luddites, human workers have resisted being replaced by machines, but other jobs have always arisen to replace those taken by machines. But it seemed to me possible that this might not continue to be true.

Not long after my post, even Paul Krugman began to think such thoughts.

Now Kevin Drum takes the argument a step further and explains why the digital revolution won't be a replay of the industrial revolution. This is serious stuff.

I strongly believe that in the short to medium run we can put many people back to work using economic stimulus to generate aggregate demand. But this may not be enough to rebuild the hollowed out loss of jobs in the middle and even upper part of the income scale. We could try to rebuild unions, change the tax structure to correct the recent redistribution of income from workers to the wealthy. But if we hope to have jobs and income for most people and general prosperity for all, now is the time (if it is not already too late) to think through the problem.

In another article, Kevin Drum offers more detail about the coming robot revolution. The article raises Lenin's old question: "who - whom." In other words, who will be in charge - humans or robots? That question has interested science fiction writers since Czech writer Karel Capek raised it in his drama, "Rossum's Universal Robots." Similar questions were raised in his novel, "War With The Newts." It is time to take a serious look at the problem.

Economist Karl Smith, writing in Forbes Magazine, takes a look at inequality in the robotic future.

A thought that comes to mind is that while we think about robots, we might seriously examine population control. "Zero Growth" is too modest a goal.

To The Fed: Go For Employment!

Economist Gavyn Davis has some good advice for the Fed: don't look at unemployment; look at employment! Maximize that.

From economist Mark Thoma's blog:

"Gavyn Davies argues the Fed is targeting the wrong thing (unemployment instead of employment):

...the Fed has a headache. Its forward guidance on unemployment is in danger of giving misleading signals about the need for tightening, and it probably needs to be changed. ...

The difficulty is that unemployment is declining towards the announced threshold in part because large numbers of people have left the labour force altogether as the recession has dragged on, and this probably means that the official unemployment rate is no longer acting as a consistent measuring rod for the amount of slack in the labour market.

The upshot is that the Fed will probably want to keep short rates at zero until unemployment has dropped a long way below 6.5 per cent...

[I]t is a distortion which the Fed cannot afford to ignore. Its mandate requires that it should aim for “maximum employment”, not “minimum unemployment on the official statistics”, which is what it risks doing under its current forward guidance. ...

If the Fed is going to make a mistake -- ease too long or tighten too soon -- you can probably guess which mistake I think is worse."

Why Did The Soviet Union Fall Apart?

Over the past two decades, several inaccurate narratives have dominated public discourse about the former Soviet Union's demise.

The first narrative is that President Reagan ordered Mikhail Gorbachov to "tear down this wall" and the Berlin Wall came down. Kind of like Joshua's trumpet.

The second narrative is that the Soviet Union fell apart because of the failure of Central Planning, also known as the "Command Economy."

Both narratives appeal to widespread prejudices rather than objective evaluation of both the accomplishments and the failures of the Soviet system. Contributing to both successes and failures was the complexity of the "nationality question" during both the Soviet period and during the preexisting Russian Empire.

Following the Russian Civil War and the Polish invasion of Russia, Lenin introduced his "New Economic Policy" (NEP). NEP allowed a considerable amount of free enterprise, including farming. It apparently worked pretty well. But the leadership became rightfully concerned about increasing turmoil in Europe and began the collectivization campaign at least in part to support the Soviet Union's ability to mobilize its natural resources for war. Any examination of Soviet economic policy during that period has to address such questions as whether NEP could plausibly have prepared for war with Germany.

As for the larger issue of the Command Economy, economic historian Brad DeLong recently posted an essay of his from seventeen years ago, examining the corporation as a command economy. This is a good corrective to analyses that draw large distinctions between Western industry and Soviet Central Planning.

Many years ago, I attended a lecture by Alexander Kerensky, the second Prime Minister of the Russian Provisional Government of 1917, which was overthrown by the Bolshevik Revolution of October. Kerensky contended that the Soviet Union's economy was not a Socialist one, but an example of what he called "State Capitalism." He autographed a copy of his book, which is still in my library. It may be worth rereading.

It is time to take another look at the issues presented by seventy-five years of Soviet history.

Soak The Poor - Enrich The Rich

Who benefits - who pays?

North Carolina's Republican legislature thinks the poor aren't poor enough and the rich aren't rich enough.

If you aren't in the top 10%, Republicans don't know anyone like you and certainly don't care about anyone like you. And it isn't just taxes.

But their tax plan is bad enough.

Economist Jared Bernstein spent today in North Carolina trying to talk sense about taxes and expenditures.

Lowering taxes on the rich and raising taxes on the poor - which is what a shift from income taxes to sales taxes will do, is just a very bad idea. As bad an idea as the sequester.

But it helps the rich, to whom Republicans pander.

Here is a graph of the share of income spent on taxes by income group:



Remember the old song about the rich getting richer and the poor getting poorer?

Here's Bernstein's summary of the problem. Increasing sales taxes will take a proportionately bigger bite out of the lowest three quintiles than of the top 20%. Decreasing income tax will have almost no benefit for the bottom 20% but the top 1% will rake in the dough.

Wisdom From The Great Depression

Next year, the University of California Press is bringing out a new edition of the late economist Charles Kindleberger's influential and illuminating book analyzing the great depression.

In World in Depression, 1929-1939, published in 1973, Kindleberger examined the history of international trade, finance and macroeconomics during the heart of the Great Depression. Anyone with an interest in such matters should welcome the new edition.

Kindleberger would doubtless, were he alive today, notice the alarming parallels between the decade about which he wrote and our own times. The similarities are not reassuring.

Economic historians Brad DeLong and Barry Eichengreen have written a new preface to the book. DeLong has posted the it on his blog here. The new introduction is well worth reading in its own right. Anyone reading the it who also follows international events cannot help but be concerned.

As one might expect of economists, the new preface focuses on economic processes.

I could not help but reflect, however, on the interaction between the political world of 1929-1939 and the economic world. Kindleberger focuses on the lack of international economic leadership. There was at least an equal failure of leadership in the sphere of international political relations.

I hope we are not in for a rerun.

Read the new preface!

Wage Stagnation And The Sequester: It Would Help To Be Noticed

Economist Mark Thoma has an interesting observation about the relative weight of impacts of the sequester: "If wage stagnation and growing inequality," he says,  "somehow caused flight delays and other inconveniences for those who are doing okay -- the people with the most political power -- maybe we'd put more effort into doing something about it."

Here's what economist Jared Bernstein has to say about the issue.

Krugman Is Right - But It May Not Make A Difference

Business Insider has a well-written article summarizing the intellectual triumph of those economists like Paul Krugman and Brad DeLong who advocated more economic stimulus instead of more austerity.

Readers of my blog know I have agreed with that assessment all along. But I have to take issue with part of the BI article. "Over the course of this debate," the article emphasized, "evidence has gradually piled up that, however well-intentioned they might be, the "Austerians" were wrong." 

I don't buy into the "well-intentioned" argument. Many of the "Austerians" were simply pandering to the preferences of the wealthy and powerful. Yesterday economist Jared Bernstein posted an article about "The Preferences Of The Wealthy And Their Role In American Politics." None of what he says will come as a surprise to anyone who has paid attention. Nor is it new in our history. But from around 1935 until around 1975, it was under control. 

Things began to change while working Americans were paying attention to something (or somethings) else.

Now it will take a sustained effort to undo the work of the wealthy and powerful over the past four decades.

It is not accidental that wages of working Americans have stagnated for the past four decades while income and wealth of the wealthy has soared. And it was not due to efforts I would call "well-intentioned."

Krugman himself doubts that the thorough discrediting of studies by Reinhart/Rogoff and Alesina will make a difference. Our Congress continues applying discredited medicine. Currently the sequester. What destructive economic leeches will they apply next?

More On The Sequester Disaster

Here's an analysis of the sequester published by the Center for Economic and Policy Research.

The Sequester Is A Really, Really Bad Idea

I don't care who thought it up. The sequester was a bad idea. The obsession with debt instead of joblessness that led to the sequester was foolishness of a high order.

Unless the Congress comes to its senses, the damage that is being done will persist.

The only good thing we can say is that the US isn't acting as foolishly as Europe.

Paul Krugman explains. He shouldn't have to.

For at least four years, the U.S. political class has failed in economic leadership. In steering the ship of state, they persist in putting the rudder over in the wrong direction.

The problem is jobs, not debt.

At least the United States hasn't entered another dip in the recession.

Yet.

Who Benefits - Who Pays?

As I have said before, this is the central question of politics. It is also a central question of economics. The issue is not "is the system fair?" it is "does the system work for the prosperity of everyone?"

The answer right now is "no."

In fact, that has been the answer for about four decades.

Economist Joe Stiglitz has some ideas about how to make it better.

The central purpose of our national economy should not be to make the already wealthy wealthier or to replicate Downton Abbey.

The Anecdote Gap

Brad DeLong posts a comment by economist Evan Soltas from this week's conference of economic bloggers.

Soltas bemoans the fact that politicians extol anecdotes, often untrue anecdotes, in preference to data. He is right, but there may be no way to fix the problem.

Humans seem favorably disposed to storytelling. In every sense of the word. Many, if not most, on the other hand, have difficulty getting their head around statistics. Even when the statistics are graphically displayed.

Not even Presidential Candidate Ross Perot succeeded in combining the two skills.

Unfortunately, skill with anecdote leads to bad policy.

As we used to say in the Pentagon: "figures don't lie, but liars figure." Even worse, if a problem can't be described by anecdote, it all too often isn't addressed at all.

News from Goldman Sachs: Federal Deficit Rapidly Shrinking

It turns out that on a twelve-month average basis, federal outlays in nominal (constant) dollars have fallen for the first time since rapid demobilization after the Korean War. Here's the story.

Bottom line: there is no federal debt crisis. There is still a jobs crisis.

Our political leadership continues to worry about the wrong thing.

By the way, putting people back to work will bring the deficit down even further and faster.

Who Are The Tyrants?

Churchill saw Tyranny as the foe.

So who were the tyrants?

Economic historian Brad DeLong has a very interesting blog post today on the history of Tyrants, especially twentieth century tyrants.

His essay is worth reading. Just as worthy of attention are the many well-argued comments others have posted taking exception to or modifying many of the points DeLong makes.

Seventy Years Ago: Wartime Rationing

I have written before about rationing. It pervaded our lives during World War II and it involved an enormous organization to plan and control the economy to insure a successful war effort. The "magic of the marketplace" wasn't up to the task.

Economist Brad DeLong provides a link to a detailed explanation of how it worked. World War II truly mobilized all of our national assets.

Was this trip necessary? Yes it was.

On a personal note, I was ten years old before I learned to ride a bicycle. They weren't available during the war. When bicycles came back on the market in 1947, my grandfather bought one and drove 125 miles from Tulsa to Oklahoma City to deliver it on my tenth birthday.

Bank Heist In Cyprus Threatens Eurozone

Over the weekend, IMF, ECB and Cyprus banking officials agreed to a plan to swipe depositor's funds to pay for a bailout. Small depositors rush to get their funds out of banks. The mattress looks safer. Will this trigger a run on banks in other European countries?

More evidence that the Eurozone is a flawed monetary union.

What can they be thinking.

Germany remains confident in austerity.

One view of the decision:

Europe - Not Looking Good

Mario Draghi, president of the European Central Bank, has brought the Eurozone back from the brink. He accomplished this by measures not unlike quantitative easing. Countries with troubled economies are at least not under so much pressure right now over sovereign debt.

But levels of unemployment in Spain, Italy, Greece and Portugal are much too high (on the order of 25%) and the economies of other Eurozone countries, including the Netherlands aren't much better. The economic distress is leading to a rise of extremist political parties.

Brussels Eurocrats and German bankers seem oblivious to the consequences of their obsession with financial austerity. To date, the result of all this austerity is larger deficits. Which leads to predictable calls by the masters of the system for even more austerity. Which will lead to even larger deficits.

I fear we know where this story leads. It all depends on whether Europe makes good use of the time Draghi won for them. Right now, that doesn't appear likely.

Meanwhile, next door in Hungary, an authoritarian government is grabbing even more power.

Employment Report - Better But Not Yet Good

Today's employment report showed more new jobs in February than many observers expected. But don't break out the champagne and confetti just yet. There are drags on the economy - continued decline in government employment at all levels, for example. Economic decline in Europe.

A new high in the Dow Jones doesn't put money in the pockets of people who work for a living, no matter what color collar they may wear. The unemployment rate is down to its lowest level in years. But that measure can be really misleading. It doesn't count workers who are too discouraged to seek employment as in the labor force.

And the sequester won't help.

By the way, we don't have a fiscal problem. We have a jobs problem. Put citizens back to work and the deficit mostly (but not entirely) goes away.

I prefer the broader measure of percentage of working-age citizens who are employed. Here is that measure:

Wealth Distribution In America

A friend recently shared a link to a video exploring how wealth is distributed in America. There are a lot of different ways of presenting the same information or related information. We can look at income inequality. Over time, income inequality becomes wealth inequality.

Just this week, the stock market reached a new high. That has increased the wealth of some Americans at the top of the economic scale. Meanwhile, middle-class income has stagnated for forty years.

Here is a video examining wealth.

I will look for one that reveals income inequality and post the best one I find.

Then there is the issue of economic mobility.

We're number one, right?

As it turns out, countries in Western Europe and Northern Europe have more equal distribution of wealth, greater economic mobility and even higher levels of creation of small business than does the U.S.

Not to mention less expensive health care with better outcomes.

Americans need to get out more. Visit other countries. Keep an open mind. Might learn something.