Tuesday, August 23, 2016

Free Trade and Burpees

I’m bothered that people don’t see trade the same way I do. Despite the fact that trade is highly multidimensional, people still focus on just one part – the trade deficit in goods. The trade deficit in goods is the telling figure to most people. We import more goods than we export. So there must be something wrong with us. Furthermore they equate years of decline in manufacturing employment with this surplus of imports. It sounds simple. We buy stuff from China instead of America and therefore we have a trade deficit and employment contracts in the USA.

But simple things are sometimes not so simple.

First, an analogy. Ashley tells Jason he should exercise more. It’s good for you, she says. So Jason starts a new exercise routine. Hey Ashley he says, my arms and legs hurt. They are killing me. Keep exercising she says, it will help your whole body. You will thank me later.

The pains of free trade are quick and obvious. To those displaced or diminished, their plights are not to be minimized or ignored. They must be assisted. But that is an issue separate from whether or not we should incur the pain. Some people say, no pain no gain. Maybe that is extreme. But ask any Olympic athlete and they can tell you how many hours and Ibuprofen it took to master their sport. Ask any musician how easy it was to learn how to make nice music.

With international trade we see the obvious hardships the nation must incur today. But the benefits are gradual in coming, diffused and much more difficult to see. Exercise does not make you jump 17 feet over a bar today – but it does help you be stronger and more flexible as you age.

Still, you might wonder whether the US benefits from trade. Consider this. Our population is 324 million people. The world’s population is 7.4 billion. There are lot of wants and needs residing outside of the US. And those  needs are growing. World per capital income (according to the World Bank) rose from $500 per person in 1960 to $10,000 in 2015. 

The average American made more than 5 times what the average world citizen made in 2015. World GDP rose by $72 trillion from 1960 to 2015. In comparison, US GDP rose by less than $18 trillion. POINT – the rest of the world has a lot of catching up to reach the US standard of living – and as they do their incomes will rise by huge amounts. They may not be there yet, but we definitely want to position ourselves to take advantage of rising world wealth. Being hostile to foreign business is not a great way to do that.

Finally let’s look at some trade data. Today I focus on the real values of goods exports and imports. This leaves out services because they are in surplus. These measures also eliminate prices and focus on the quantity of goods coming in and out of the country. I looked at the annual data since 1967. The numbers are percentage changes. Data can be found at bea.gov.

·       Of the 48 years between 1967 and 2015, in 22 of those years US exports grew faster than imports. In 26 years imports grew faster exports.

·       Goods imports annual percentage change exceeded goods exports sporadically (1968, 1969, 1971, 1972, 1976, 1977), from 1981 to 1986,  from 1992 to 1994, 1996, and 1998 to 2004, 2010, 2014, 2015.

·       In all the remaining years, exports of goods annual percentage change exceeded import change. More recently exports growth from the US exceeded import growth from 2005 to through 2013.

·       This is not the picture of a uniformly declining competitiveness of the USA because of globalization. In fact 12 of the 26 years when imports were rising faster than exports were before globalization picked up in the early 1990s.

·       In 2004 exports of goods trailed imports – with exports just over 50% of the value of all imports. By 2013 the ratio had increased to about 70%.

It is true that the US has a large goods trade deficit with the rest of world and especially with China. It is also true that this deficit has widened in value terms. But if we focus on real values we see a comeback with exports of goods growing faster than imports. This in no way proves that all is good and fair in international trade. But as the world regains its momentum and the rest of the world stabilizes and begins to catch up with US growth, we should expect them to want even more US goods. Shutting their goods out of US markets will do little to promote their desires to buy from the US.  One more point. 

We should expect that many countries would become stronger competitors to the US once they recovered from World War II damages. We should expect as well that many countries would compete against the US after the massive reforms that occurred worldwide after the collapse of the Soviet Union and dictatorships in South America. We can’t stop any of that and it would silly to try to do so. This tsunami of competition would have occurred with or without free trade agreements. We can argue about unfair trade but the truth is that America is being tested. We can complain about the competitors or we can get busy in figuring out the best way to remain strong in this new world. Withdrawing from the global stage seems counterproductive.

Tuesday, August 16, 2016

The Infrastructure Scam

More Infrastructure is the new hot phrase. Hillary wants it. Trump wants it. Your local asphalt company wants it.  I think maybe even the Pope wants it. All together now – three cheers for more infrastructure.

More infrastructure will cure our ills. More infrastructure will improve productivity, wages, employment, and economic growth. More infrastructure may even shrink your horribly swollen prostate. Sorry kids – this is an adult blog.

From the above words you are ready for the punchline. Surely there can’t be anything wrong with this new focus on more infrastructure. Or can there be?

Notice that more infrastructure spending mostly means spending more on our existing infrastructure. Most discussions mention dilapidated bridges, pot holes in highways, and leaky water systems. We can add sagging power lines and possibly an inefficient network of information technology equipment.  

When we refer to infrastructure we are legitimately singling out another dimension in the list of factors that produce output in a country. We know that how much output we get depends on how much input we use. Labor and capital are the two traditional labels for organizing our thinking about the inputs we use to alter the amount we produce. Now we are emphasizing a third factor – infrastructure.

Imagine a manufacturing company that produces those lovely little outfits worn by female beach volleyball players. That company has sewing machines (capital) and it has workers (labor). But notice that even the tiniest of these garments has to be shipped via truck or airplane. Orders might come in from the Internet. While having capable workers and great sewing machines is important to Tiny Garments, Inc, so is the quality of roads, airports, and computer networks.

The basic theory of infrastructure is not being questioned by me today. It is pretty clear why more and better infrastructure would be better for companies and therefore for their customers. I am not doubting the need for improvements in infrastructure. I am doubting the magnitude of the impacts of the current proposals. 

The questions I have are practical. For one thing, we are not talking about Tiny Garments Inc deciding on the best machines to create their very tiny garments. We are instead talking about society ordering improved roads for all the companies of America. Wow. Can you imagine the mess when the studly representatives of Wyoming get into a duel over whether they need the highway improvements more than brainy Connecticut. Or when kindergartners stage rallies demanding an equal share of the new fiber being laid for the purpose of America’s productivity.  There is only so much we can spend on infrastructure though listening to our main candidates suggests that the sky is the limit.

Which brings me to the next point – what is the optimal amount to spend on infrastructure if our goal is to increase America productivity, wages, and employment? Can you imagine Paul Krugman and Rush Limbaugh coming to some consensus about that. Surely we don’t want too much or too little? After all we have a pretty big national debt and infrastructure won't come cheaply, right?

Once we know how much we want, there is this question about whether or not more infrastructure today will really work to raise productivity, employment, and wages. Remember that this is 2016 and not 1956. In 1956 Eisenhower was President, manufacturing was dominant, and I had a full head of black hair with a pompadour. Putting in a new highway system was a lump sum investment and probably was worth every penny we spent on it after 1956. But in 2016 will another $300 billion or more have similar impacts? I know I have a few black hairs among the few hairs that populate my head and I know Eisenhower is no longer President.

I also know that trucks are already very efficient even on crappy roads and that drones are elbowing their way into delivery. Will $300 billion worth of better roads really make today's workers more valuable to companies? How much better will companies be able to compete because of the better roads? How much will they lower prices because of these efficiencies? How much will our spending and employment increase as a result of these price reductions?

And hold on – is it not possible that in today’s globally competitive high technology environment that some firms may react to improvements in infrastructure by using even less labor? Recall that some equipment is called labor-saving equipment. Some machines replace labor. Is it not possible that infrastructure improvements will mean a smaller demand for labor and lower wages? If infrastructure spending switches from roadways to super IT highways, might we need fewer workers?

I know we don’t expect our politicians to actually think about the things they say. But as I see it, this More Infrastructure thing is more complicated than they explain. It is clearly not a slam dunk no matter what they legislate. But that puts the cart before the donkey. What will they really legislate? Is this a serious attempt to improve economic growth or just another backdoor scam that appears to look like they are doing something? Or are we getting agreement from both parties because a new investment in infrastructure is rife with opportunities for rewarding friends and gaining from corruption? 

Tuesday, August 9, 2016

Alan Blinder's Priorities for Raising Wages in the USA

Alan Blinder, Professor of economics and public affairs at Princeton University, wrote a piece in the WSJ last Tuesday, Only One Candidate Can Make Wages Grow Again. As you might guess, this liberal economist is not writing in favor of Donald Trump or Alfred E. Neumann. Blinder apparently wishes he was as famous as Paul Krugman (or perhaps Karl Marx) and therefore has shed any pretense of objectivity or neutrality. He is a full bore Hillary supporter.

But don’t get distracted by my name calling. His piece is nonsense and I wanted to dissect it piece by piece.  The main problem is that Blinder ignores cause and effect. He starts with a liberal passion that says if a person’s wage is not high enough then we should simply raise it. It’s like if there is blood rushing out of a bullet wound then just push it back in. Pushing blood back into the hole totally ignores WHY it is gushing out.

I will get to some of Blinder’s points below. But first let’s discuss the data he quotes with respect to real wages. He prefers to use the buying power of what the workers earn as wages and salary – but he leaves out a very important part of earnings – the benefits. Benefits matter. The more benefits a worker gets, the richer he or she is. As our politicians are fond of reminding us – the more of our wage and salary that we don’t have to spend on healthcare – the more we can spend on other things. The Bureau of Labor Statistics has data on wage & salary, benefits, and the sum of the two, total compensation. They have nice tables showing quarterly data from 2004 to 2015. Here is what I found from the end of 2004 to the end of 2015:

            W&S rose by 28%
            Benefits rose by 43%
            Compensation rose by 33%
            Inflation rose by 24%.

In terms of buying power, real W&S rose by only 4% (28%-24%) over those 12 years. That’s yucky. But notice that benefits rose strikingly so that the buying power of compensation increased 9%. When Blinder uses real W&S he greatly understates the growth of the buying power of what a worker earns. He never even mentions compensation or benefits. I wonder why. No I don't. We know why. It spoils his progressive story. 

The other issue is history. Wages are characterized as a lagging indicator. That means labor is like your Grandpa. You have to call him three or four times before he finally comes to the dinner table. It often takes a few years after a recession before labor market tighten enough for wages to rise faster. Wages have repeated that pattern after our last recession albeit very slowly and so far wages continue to rise at a slow pace. Note that if labor supply begins to improve, this alone won’t help wage change. It will take a stronger bounce in labor demand. Firms, therefore will need to be more optimistic about the future and be convinced they need more capital and labor. But Blinder is silent about any policies that might make business feel more optimistic about the future. He prefers the following Clinton/Marx options.

            Increasing the minimum wage
            Profit-sharing (firms would receive a tax incentive if they profit-share with labor)
            Increased vocational training for non-college bound
            Provide pre-K education for all American children
            More generous Earned Income Tax Credit and expanding it to people without children

That’s his whole list. Thoughts…

While increasing the minimum wage increases the wage for some people, it will probably reduce the wage to zero for others. My friend Chuck T. says this is a full employment act for robots. But worse, what does this do to improve the optimism of the businesses that hire these workers?

What does forced profit-sharing do to improve the outlook of businesses?

We have a healthy industry of folks who provide alternatives to college education. What Blinder really means is FREE vocational training. But you get what you pay for. Right? I wrote about free education a couple of weeks ago.

Blinder implies that we don't work hard enough to move students away from college and into vocational training. I agree. The Germans seem to be very good at it. But why don't we do that? He should ask his liberal friends how we should target people who they might think are potential Einsteins into being plumbers. Who gets targeted? How is this done? Don't counselors already do that? 

Pre-K education might take 30 years. That’s a real winner. Please note sarcasm. What happens if we give more kids a great Pre-K experience without moving them out of a culture of poverty, drugs, and violence?

Giving the EITC to everyone seems like a big increase in spending. This is widely regarded as a good poverty program. So does Blinder advocate ending dead-end poverty programs and shifting the money to EITC? He doesn’t say. Piling more and more money onto already failing poverty programs does not make sense to me. I like EITC. But let's have it replace those programs that don't work. 

In fact he is totally silent about the implications of his suggestions for the national debt. Is there no end to how big our national debt can become without negative ramifications for business firms?

Business firms are the ones we want to hire people and then give them increases in wages and benefits. I would think that any balanced program to improve incomes in the USA might offer a few constructive ways to make firms optimistic about the future. Or is this just a backdoor way to increase the extent of government and reduce the scope of private enterprise in our economy? Mr Blinder, what is the truth here?

Tuesday, August 2, 2016

Lesson 13 Free Trade

I thought I knew the meaning of the words free trade. But listening to political dialogue these days I am more confused than Charlie Sheen at a lesbian AA meeting. I am mostly confused because some candidates say they are for free trade and then they explain why they oppose actual attempts to make trade freer. It is like you saying that you are for motherhood, but you think that women should not be allowed to fertilize their eggs. Wow – this is supposed to be a family blog and I used the word fertilize. I apologize.

You don’t have to have a PhD in meteorology to know that free trade is a desirable outcome. Can you imagine people protesting with big signs in favor of Not-Free Trade? It sounds pretty weird. We like things that start with Free. Like Free Love. What could be wrong with that? Then there is Free Enterprise. Free is the first four letters of the word freedom.

When I was a little economist with long pants and an Adam Smith tie I learned that free trade was a really good thing. Imagine free trade within your borders. Free trade means that Charlie can produce rose hip wine for Pete and Pete can sew doilies for Charlie. Both Pete and Charlie are made better off because Pete is lousy at making wine (he drinks more than he makes) and Charlie couldn’t sew his way out of a Goldman Sacks bag. Letting these two lovely fellows trade makes them both happier and richer.

The same basic idea can be applied to Paco and Juergen. Paco lives in Barcelona and Juergen lives in Germany when he is not globetrotting. Paco can make wonderful paella and Sangria and Juergen can produce machines and large spears of white asparagus (in the spring). They trade and both are made better off.

All that seems pretty clear. But economists can’t stand it when easy ideas don’t have complicated names and mathematical formulas – so they call this process comparative advantage. You could read a chapter in an economics book called comparative advantage and then want to kill yourself. But believe me, it is easy stuff. It explains why you don’t make your own t-shirts and why you’d prefer to buy one from the local t-shirt shop or maybe one made in China. The cool idea is that whether you buy the t-shirt (that says I sat by the window at the Mucky Duck) from Bloomington or China, you are not making the shirt yourself! Someone who knows how to make a really good shirt is making it for you. Apparently you are pretty good at making something else.

So what’s the problem? The problem is that in the real world there are three parties. Genevieve has been making t-shirts for three years. Along comes Nolan and he decides to make t-shirts too. Nolan's t-shirts glow in the dark. Brendan quits buying Jen's shirts and buys Nolan's shirts. Jen's business is threatened. Jen’s class erupts into chaos at their scheduled kickball time and begins chanting down with Nolan slogans.

The problem with free trade is that it advances mankind. You read that right. Free trade is all about free choice – freedom to replace one thing with another. We replaced the horse with the auto and the tractor. We quit eating fatty ribeye steaks and replaced them with corn on the cob and Brussel Sprouts. We threw away our wonderful phonographs and now use Spotify. Enough? Every one of those choices has a plus and a minus, but most of the choices make us all better. Proof? I don’t see many of you wanting to replace your new electric vehicle with a horse named Nathan.

Society does not like it when some people suffer. Society especially doesn’t like it when the person hurting seems to be suffering because we made a choice for a foreign-made product. There will always be a constituency that wants to help neighbors who lose jobs and income and careers because of either domestic or foreign competition. But don't forget. Helping these people means you restrain the benefits of trade and are hurting others. 

So that gets me to free trade agreements. FTAs are ways to promote free trade. That means removing or reducing tariffs or other obstacles that discourage trade across borders. FTAs encourage those positive results I wrote about above. My Google search says that the US has FTAs with 20 countries. Among the 20 are Australia, Canada, Israel, Korea, Mexico, and Singapore. We are contemplating more FTAs with Pacific countries and Atlantic countries. And while our candidates say they are proponents of free trade, they are also saying these new agreements are not good and Mr Trump says he might want to rip up some of those 20 we already have.

How do we get the benefits of free trade without FTAs? The answer is that that we don’t. Keep in mind that when countries negotiate a new FTA they require each country to do something to improve access to their markets. They might reduce a tariff or eliminate a quota. They might change a regulation that purportedly changes food safety or labels or names of products. There are many ways that countries protect themselves from the benefits of trade. Thus there are many ways to reduce those protections and encourage freer trade.

Our candidates are stepping back from these FTAs and are saying that we opened our economy more than our partners did. And thus our partners got more of the benefits of trade than we did. But keep in mind these points. First and foremost – all parties benefited from freer trade. Second, it is impossible given the diversity among the partners and the multitude of ways trade impacts a nation to insure that each country gets exactly the same benefits. Third, as in my examples above, all countries create losers in the process of opening up trade.

Free trade helps us. FTAs are the best way to keep expanding these benefits. Some politicians will point out the imperfections of these FTAs but any move away from free trade is going to hurt us. If I had my equations with me I could prove this with math. 

Tuesday, July 26, 2016

Can We Agree on a Way to Stimulate Economic Growth?

Last week I tried to make a simple point. Our government needs to prioritize and focus. My preference is to focus on economic growth and security. My assumption is that either candidate once elected with an earnest goal of promoting growth could find enough support to make progress. My second assumption is that a truly positive outcome would take a lot of focus wherein other issues would have to be put on a back burner. I got lots of responses and advice from you. So let me deal with some of that here.

First, even if I am wrong, I am not going to move to another planet. So forget it.

Second, some of you believe that neither party is capable of focusing on economic growth to the exclusion of other policies. And I agree with you. I can’t see them jumping on the growth wagon either. Whatever party wins and wins enough clout in Congress will begin by immediately jabbing its collective finger into the eye of the other party. If Democrats win the first thing they will do is to make abortion available to women who are not even pregnant. And Republicans in their first 24 hours in power will make it legal for kindergarten kids to carry loaded military weapons to class. Okay I jest, but you get the point. I doubt either party is capable of taking over without at least a few na na nas. This will not put anyone in the mood to join hands in even a few off-key gumbayas for economic growth.

But it is worth talking about. Why can’t one side just stick to making us all a little richer?

Third, even without the predictable eye jabbing, can both parties find a way to agree on an economic growth plan? Again, I am not sure they can do that. What is the best way to promote stronger economic growth that will lift most boats? Fuzzy seems to have a very large boat and I don’t even have a boat. So it sounds pretty challenging.

Okay forget boats for a moment. Here is a wild and crazy suggestion for thinking about a solution. Step 1. Recognize that no party in the discussion will get everything they want. It’s called compromise. If you are like Mr Cruz and won’t play unless you can use your own Tom Brady-signed under-inflated legal pad, then go home and don’t participate. Step 2. Write down all the credible policies that could conceivably improve economic growth in the US in the next few years. Yes, write them all down. Step 3. Prioritize all these possibilities in terms of a realistic appraisal of their impacts on economic growth. To do this step each side could pick a few economists who they believe are not wing-nuts and who could actually sit in a room for more than 7 minutes with economists on the other side of the aisle. Step 4. Put these economists in a locked room with only kimchi, soju, a photo of Margaret Thatcher, and only one week’s supply of Charmin. Step 5. Watch the magic happen and make sure that government legislates anything that a majority of these economists agree to. Step 6. If all that doesn't work go back to step 1. 

It sounds crazy but let’s face it, crazy is about all we have today. If any process was to lead to an even half-way intelligent set of economic policies, we would benefit. So as to totally not cop-out on some details of policies let me end by offering some suggestions.

·       Evaluate the full set of government regulations that negatively impact productivity and labor supply. Those that create the largest detriments should be eliminated for a period of three years.
·       Cut some fat out of every government program. Use that fat to fry some really nice pork chops. Or use it for infrastructure.
·       Do something about spending on Social Security and Medicare. Use those cuts to give some targeted tax cuts and/or subsidies that would directly enhance the replacement of worn out machines, software, and so on.
·       Create tax cuts or subsidies that would make it easier for poor people to work and safely provide for their children. More spending on training and retraining would fit here too. 
·       If any of the above leads to short-term increases in the government deficit or national debt, then permit deficits as high as 5% of GDP for two years. If the growth policies work, the deficit will automatically go back to tolerable levels.

I probably missed something so let me know. That list is provided to show that there are ways to get this done. It is not meant to be exhaustive. Notice that I have attempted to be flexible. If you have read some of my past musings you know that I harp consistently about deficits and debt. In the above I am acknowledging that a compromise might involve a temporary increase in the latter. Wow – I may need a visit to my JD bottle once that gets out. But compromise is compromise. I want to see people seriously ponder economic growth. If we stick to “my way or the highway” I can’t see us making any progress. What do you think? 

Tuesday, July 19, 2016

National Priorities: A New Candidate's Pledge

Mike Pence was quoted describing himself as "a Christian, a conservative, and a Republican, in that order.”

I think that is laudable. Many people say he is a fine man. Others might describe themselves differently. That’s what life is all about…different strokes for different folks. It is nice that we tolerate each other’s personal penchants.

But when it comes to national priorities, we realize that our own personal desires may have to take a back seat to the national interest. When young people are drafted into the military they often serve proudly because their national duty comes before their personal goals. Some of us are dragged kicking and screaming or at least complaining. Maybe we even threaten to move to Canada. I might hate to pay a higher tax rate on my income or have to pay more for my Medicare benefits because I am richer than someone else. But I also realize that being part of the USA I win some and I lose some. Sometimes national priorities do not exactly coincide with my own.

It is in that spirit that I offer a suggestion with respect to the coming election. I am asking Hillary, the Donald, and Alfred E. Neuman (if he decides to run) to consider taking on the following candidate's pledge. Hopefully the pledge would be accompanied by shots of JD but that's optional.

I promise that I will fix the US economy. Fixing the US economy will be my main passion for the country for four years. I realize that sensible economic policies could take all four years of my term and therefore I pledge and promise that in four years the US economy will be humming like never before. If not, then I will forego a second term.  I also promise to do whatever it takes to make Americans safe and secure from terrorism. So as to not take my eye off those two balls I promise to veto all and every legislation that is not directly involved with these two goals. Included in this list of important but secondary goals is anything relating to religious rights, gun rights, abortion, illegal immigration, and income equality. Yes, these and other unmentioned issues are important. And therefore once we have fixed the economy and our security I promise to spend my second term as President restoring the proper importance of these other issues. But for now, we have to provide more and better jobs for Americans and we have to keep our people safe.

Ok I admit that Ruth Bader Ginsberg and I may have been drinking out of the same JD decanter. But come on folks – is it not obvious that we have stuck the proverbial cart before the horse? Are we now dissipating our remaining political energy on things that are preventing us from making any real progress? I think the answer is clearly yes.

I know some people think we need to address income inequality BEFORE economic growth. They do not believe that all boats rise equally. I too doubt they rise equally. But surely you want boats to rise and so far there is little evidence that anything is better for the poor than a rapidly growing economy. As long as we argue about social programs our poor remain the same or they get worse.

If all our energy was producing some progress on the social program side then I would say fine. But all it really has done is create a hunker down mentality among the nation’s extremes on left and right. Apparently standing in the street, singing Bob Dylan songs and lobbing bombs and bullets at each other is more fun than actually talking with someone about real and effective policies. Of course those people who sit in their homes thinking there are no social problems do not help matters either. 

I love all the promises being made this week to heal differences among police and minorities. They swear it is time to talk to each other. You just watch. This will be yet another opportunity for extremists to hijack an important issue and use the occasion to scream at each other even louder repeating oft-heard mantras. If  that is talking to each other then I would rather take a pledge of silence.

Finally, what do we really give up if we put progress on these social policies on hold? What do you really expect to accomplish through more of the same? Despite all the attention given to it, how much did the needle move on abortion in the last four years? How much progress did we make in race relations or illegal immigration? 

So that’s my point. It sounds crazy to some of you to put some vital issues on the back burner for a while. But wouldn’t it be refreshing to have a timeout wherein we all worked together to get economic growth going again? And do that without the din of hatred playing in the background.  Accomplishing that maybe we could move on to learning how to work together on ways to eliminate the rest of our problems!

Tuesday, July 12, 2016

Free College Tuition

Let’s suppose for a minute that you are not a fiery participant in any wing. That is, you are not easily swayed by slogans and finger-pointing. You are from Missouri the so-called “show me” state. Let’s suppose that no matter what a candidate or a member of government proposes you would at least try to look at all sides of the proposal. Wow. This is already sounding crazy. Where is my JD?  Is there anyone left who thinks that way? Just in case the answer is yes, let’s move on.

Why does Hillary Clinton want to propose free college tuition? In fact, why free anything? Recall that economics teaches that us that stuff usually costs something to make. A My Pillow is the best pillow ever invented. If you watch TV ads you know why.  You don’t expect to get such a pillow for free. Why?  Because its inventor had to make it and all that activity costs money. It seems fair to give Mr. Pillow some money in exchange for his My Pillow. It seems fair too since your life will be totally changed by having a My Pillow (or two of them for the price of one). Imagine how sexy you will look and all the attention you will receive after sleeping on your My Pillow. Clearly it must be worth the asking price.

Why doesn’t Hillary Clinton want to make My Pillows free? I can’t answer that question but let’s now flip over to things the government loves to give away for free. Highways are usually free. You just jump on good old Interstate 5 and go anywhere from San Diego to Seattle. What a deal! No wagon ruts there. I won’t go into a long list of other free items because some of you might get inflamed. But the point is made. The government provides things to us free.

You are scowling. Highways are not free. It costs money to design, build and operate them. Tax payers send checks to local, state, and federal governments to pay for all so-called free stuff, whether it is for highways, schools, or for free drug needles to addicted persons.

Okay, since nothing is really free the main question here is whether you want to pay for stuff directly to a capitalist or to a government. Do you want business people to provide all these things through a market economy or do you want government making the decisions? And now all you Wingers are getting your guns loaded. You lefties don’t trust business people to give us a fair shake. You righties think government is equivalent to robbery. But since we are trying to be non-wingers for a little while today, let’s keep exploring this fascinating topic –more fascinating than a Matt Lauer and Al Roker wrestling match. 

Market economists believe that in some situations markets fail and it is possible that governments should intervene. Any microeconomics text book has a chapter called market failures. You don’t have to be Paul Krugman or Bernie Sanders to believe in market failure. All of us believe! I won’t rewrite the chapter here because a vivid example of market failures comes when two parties transact (you and the makers of Tide) and somehow you pollute other people (who live down the stream where your dirty water flows). Those other people are not represented when you buy Tide, wash your clothes, and dump the water into the stream. Thus those other people have to incur costs to undo the harm you did to them. Those costs escape the economic system unless the government intervenes and makes you and Tide pay for them.

Make sense? It does to me. A similar story relates to highways. Joe’s Highway Company comes to you and asks if you will pay $10 for a nice highway between Bloomington and Lake Lemon. You are a smart cookie and you say no. That’s because you know that Peter and Charles will say yes and then pay. And when they pay, you get to ride the highway for free. This is called the free-rider problem and it can result in not enough highways being built unless government decides that lots of people will benefit and taxes them. Thus more money is raised and more highways gets built.

Enough you say! Okay – government gets to do a few things. But what about free education? Free education satisfies the free rider issue. We all benefit from an educated population. We want our kids to be educated and we want people to pay for it through taxes. While most of us would agree that K-12 gives citizens the basic skills necessary to be good citizens, there is more debate about higher education advancing our kiddies beyond the the necessary levels of reading, writing, and arithmetic. States have subsidized advanced education for their citizens but the question remains as to how much more society benefits from courses and degrees after high school graduation.

College education might simply advance the skills of the person who encounters a degree—and not so much his or her neighbor’s welfare. In that case it makes sense for only the individual to pay for the education.

But what about people who can’t afford a college education? That’s a stickier wicket. We help people with low incomes in many ways. We reduce or eliminate their income taxes and we give them subsidies. We make them eligible for food and housing and heat and medicine and so on. But we don't buy diamond rings or even entry level Fords Fiestas for poor people. Free stuff to the poor has limits. Where exactly does a free college education fit in to that? Is it more like a diamond ring or a chicken in a pot?

Finally, a few more words about unintended effects. Prices are about value. When you say something is free – it is bound to reduce its value.  I worry that free college education will harm one of the strongest industries in the USA – higher education. Free higher education may attract some of the wrong people. Already higher education spends a lot of money and time on things unrelated to education. I fear that making it easier for people to attend will exacerbate those trends. We hear people complaining that college is more about having fun and socialization than about gaining knowledge and skills. Do we really want to spend the people’s money on fun and socialization?

Larry, you don’t give a fig about those young people who are dying to get a college education but can’t afford it. But that is exactly who I do care about. I want them all to attend college. They will be willing to put some skin into the game. Show me how Hillary’s proposal will differentiate between those who will be truly helped and those who will go along for a nice free ride.  Imagine how much more we could devote to those who really want/need the help if we make that distinction. Hillary's proposal includes any household with incomes below $125,000. I wouldn't call a family that makes $125,000 per year poor. Would you? Or is this just about doing something to get Bernie’s supporters to vote for her? Or maybe a backdoor means for government to control costs of higher education?

Tuesday, July 5, 2016

Fiscal Rock and Hard Place

The rock and the hard place has finally arrived. For those of you not familiar with this terminology, when you are between a rock and a hard place there are no easy or good options to solve your problem. Basically you have let things fester so long that all the reasonable solutions no longer exist. You have procrastinated so long that every solution left is painful.

We see this all the time. It is easy to put off a diet or an exercise program. A diet or exercise program is easy but also so easy to put off until later. But then when you get too heavy or too out of shape, even a small movement in the right direction is much tougher. Geez, do I really have to lose 100 pounds? Yikes. No way. If this seems silly then just read the most current news coming out of Brazil, Argentina, and Venezuela. The past governments spent all the money. Now they have only horrible options.

I wrote two weeks ago about monetary policy and how the Fed still continues to procrastinate about returning to a normal policy. Today’s post turns to fiscal policy. It focuses on how we deal with the fiscal rock and hard place. Basically it is to make believe – make believe that the rock and hard place does not exist.

How can I say that? Easy. I read the latest policy advice coming out of the OECD (Organization for Economic Cooperation and Development). The OECD is a world organization with 34 country members. The OECD studies and writes about the world economy and routinely makes forecasts and gives policy advice.

The latest words from the OECD are titled “Policymakers: Act now to keep promises” can be found at http://www.oecd.org/eco/economicoutlook.htp

I summarize but the main advice given by the OECD is (1) since interest rates are so low countries should enlarge fiscal deficits so as to increase aggregate demand, (2) structural policies should be used to increase productivity growth. Such policies include shifting fiscal policies to increase investment, encourage firm market entry, reform labor and product markets, and improve functioning of financial markets. (3) Avoid further monetary policies since they risk less effectiveness and more harmful side effects.

This advice is totally useless. The OECD must be doing this work on another planet. It flies in the face of what we know and basically proves that we are between a rock and a hard place.

     First, while we all know that monetary policy is now doing nothing but causing imbalances, most countries are fully engaged in almost exclusively relying on monetary policy. The OECD's monetary advice is correct but will fall on deaf ears. They know that so why give it?
     Second, as for using low and negative interest rates to finance further fiscal expansions this advice totally ignores the increased national debt loads in most countries. Sure it is nice to take advantage of low interest rates to borrow. But there are limits to prudent borrowing. Most countries have no room to borrow. This is horrible advice. 
     Finally, the most disingenuous of the policy advice given above has to do with structural reform. Most countries have totally rejected structural reforms because they are too political in nature. Take Paris right now. What self-respecting union is not on strike right now? The current government of France wanted a tiny little bit of labor market reform. Non merci. The best most of us can do is to argue that infrastructure spending is good structural reform. But please – this is just a flimsy excuse to increase debt. As we learned recently from shovel-ready projects  -- infrastructure spending might impact our national economic policies when your grandson becomes eligible for Social Security.

The OECD and others are correct to worry about but short- and medium term productivity and economic growth. But what they don’t want to tell us is that we have procrastinated so long that even sensible policy suggestions seem ludicrous. It won’t take anything creative or fancy to solve problems in most countries. But the politics are too ripe for any of that boring stuff to be supported. Now seems to be the time for impassioned speeches and exaggerated emotion. Make mashed potatoes illegal but never preach the virtues of simple everyday vegetables and modest portions! Get monetary policy back to normal. Get debt back to normal. Don’t throw  business under the bus. But alas, those policies will cause major and painful adjustments. On to snake oil.  

Tuesday, June 28, 2016

What Else? Brexit

Everyone is talking about Brexit. It reminds me of the conversation I overheard after the NBA Championship. One person remarked about how he was very sure that the Cavaliers would win despite being down in the beginning of the series. His curious friend asked why. He said it was the uniforms. He really loved the uniforms.

When an event gets elevated to infinite coverage in the media we all think we need to have strong opinions despite not knowing a thing about it. That’s how I feel about Brexit. EVERYONE is part of the national obsession to have an opinion about it. I cannot believe how much has been written or spoken about it since the results of the referendum were known. What are we to think?

As in the NBA example above, a beginning step would be to know answers to some basic questions. What is the NBA? What are the rules of basketball? Why do players constantly touch each other and then get irritated when the little men in the striped uniforms blow whistles?

There are a lot of similar questions we might ask pertaining to Brexit before we start having opinions about its impacts on us. What is the EU and why would any self-respecting country ever join it when national sovereignty is at stake? What is the UK? Is it in Kentucky?

Today’s post has two objectives. First and foremost I want to provide some background and write about the EU and the UK. The upshot is that while national sovereignty is at issue, the loss portrayed by the LEAVE group was highly exaggerated. The LEAVE group has as much to fear from its own government's ideological tendencies than it had from some centralizing devil called Europe.Second I want to make the point that compared to other crises suffered in the near-past, this one is almost totally psychological.

Let’s start with the second objective. Nothing has happened except to announce that a referendum declared that Brits want out of something called the European Union. While the UK government will probably go along with the popular will, it will take a while. So let’s be clear. For a while nothing has happened. Stocks of dotcom companies did not find reality. The load of bad subprime mortgages did not become impossible to bear. No government raised taxes or reduced pension spending.
Nothing bad happened in the way of the usual macro suspects. What happened is that a country decided to not be in the European Union. So the first point is that nothing happened to directly cause crashing stock and foreign exchange markets not to mention the price of a gallon of gasoline.  Okay -- the British government has become less functional. Is that a plus or a minus? Really! 

Aha you say – but markets did crash and babies cried. And that’s my point. It is mostly psychological. It is all expectations! What happened is that a bunch of soccer rowdies decided to quit the EU club sometime in the near future. And that set off a lot of concern. I am not making fun of the concerns. They have some basis. But keep in mind that Brexit will be gradual and it will be in the best interest of most parties involved to make it work smoothly and to try to minimize the many impacts that will arise as the divorce takes place. Recall that President Obama advising Brits to stay in the EU said some threatening things. But now that the decision has been made he is already promising to find ways to make the transition work.

I am not forecasting the future but what I am saying is that the alarm bells may be a little too shrill for the reality. Brexit is not the end of the world and Brexit will unfold with many impacts in many places and we will deal with them. Let the markets take a big breath.

Now for the background. A basketball is a round thing that you bounce on the floor and then shoot through a little hoop. 

Now for the United Kingdom. Straight from Wikipedia (https://en.wikipedia.org/wiki/United_Kingdom )
The United Kingdom is a constitutional monarchy with a parliamentary system of governance.[12] …The UK consists of four countries: England, Scotland, Wales, and Northern Ireland.[15] The latter three have devolved administrations,[16] each with varying powers,[17][18] based in their capitals, Edinburgh, Cardiff, and Belfast, respectively. The nearby Isle of Man, Bailiwick of Guernsey and Bailiwick of Jersey are not part of the United Kingdom, being Crown dependencies with the British Government responsible for defence and international representation.[19]

Most relevant is that the UK (often called Britain or Great Britain) is a sovereign state in Europe and is mostly composed of England, Wales, Scotland, and Northern Ireland but not Ireland or Puerto Rico or Texas. The UK joined something called the European Economic Community (EEC) in January of 1973 and then in June 1975 another vote solidified its membership in Europe. As of last week Britain will be the first country to reverse a decision to join the EU. Apparently the English wanted Brexit but not so clearly in the other countries in the UK. So that brings up a possible change in the make-up of the UK itself.

Moving along, what is the EU? The EU was a club of 28 sovereign nations. In the future it will have 27 members. The beginnings of European integration came after WWII when Belgium, the Netherlands, and Luxembourg joined France, and Germany, and Italy in something called the European Coal and Steel Community. The basic idea was that maybe if they cooperated on economics they would quit starting world wars. It worked pretty well and a very quick history is that they moved on from coal and steel to the idea of a single largely unimpeded market across Europe.

Until last week more and more countries embraced the idea of a free market in Europe. And they joined the EU. Sure Germany was the economic heavy weight. But like most free trade areas, the rest joined because of the expected benefits arising from fewer trade barriers and the removal of tariffs. Not all was tea and crumpets – with the single market came incursions into national sovereignty. Then came the euro currency that was adopted by 19 of the 28 countries (and not by Britain). Some thought a single currency made sense in a single marketplace. Others see it as too much togetherness. Now some want a single fiscal policy. So far no cigar on that one.

So you see the story, right? A free single market makes a lot of sense. That is the glue of the EU. Giving up too much power to Europe is not always popular in any given country or countries. But keep this one fact in mind. The institutional design of the EU is to protect national sovereignty. As in any club you join you win some decisions and you lose others. So long as the benefits of club membership are great enough then you stay in the club.

Quit snoring. I am almost finished. Like the US, the EU has executive, legislative, and judicial branches. All the institutions are run by representatives of the sovereign states. For example, the Council of Ministers is literally a group that consists of the government ministers of each EU country. The EU Parliament members are voted for in each country by the citizens of that country. The point is that EU legislation and rules are legislated and approved in each country before they can become EU law. 
Most rules must have unanimous support from all 28 states. In the very relevant situation of immigration, a country has the right to opt out of any or all EU agreements. This link lists all the area of EU governance that require all 28 states to have unanimous support 

Whew. Where is my bottle of scotch? Er I mean JD. 

Tuesday, June 21, 2016


Larry, would you please take out the trash? Sure honey, I will as soon as I’m finished writing this blog.
I noticed the trash is still there and the truck will be here in the morning. No probs babe, I will get to it as soon as I finish my nachos.
It is almost bed time and guess what – trash still here. I know, it ain’t no big thing. As soon as Two Broke Girls is over I will jump on it.
It is now 6 am and the truck will be here any minute. Groovy, as soon as I stop watching Two Broke Girls reruns, I will jump on it.
Honey, the truck just left. Well, there wasn’t that much trash anyway, I promise to get on it next week.

Sound familiar? I am referring to the Fed. When will Ms Yellen and her gang of procrastinators realize that you cannot postpone the inevitable forever? Yup, they did it again. This time the excuse is Brexit. Or was it a one-month earth-shaking slowdown in employment? Or was it George Bush?

Come on Fed-dudes. Can you for a minute distance yourself from your super-hero selves and get real? Think about what you are doing to exacerbate serious and harmful imbalances in this country.

Imbalances? Um ask anyone who wants to save for the future how they are doing? They either get a negative interest rate or they have to take ridiculous risk just to be a prudent saver. Seriously, do you not see the harm in this? And then there is the promotion of all sorts of borrowing  at historically miniscule costs. Didn’t we just have a financial crisis? And you want to promote more risky borrowing? Wow. With a Fed like this who needs corrupt bankers?

Inflation? I know the Fed has been quite generous with money and yet no inflation. But do we really expect that to last forever? Are there not signs that wage growth is picking up? Will inflation never return as the Fed continues to float the US economy?

And for what? Hi honey I just decided to do the healthy thing and lose some unwanted blubber. I plan to lose a quarter of a pound a month this year. Nice going dear. Why would the markets go wild after such an announcement? The Fed is not jacking rates to 22.0%. They are talking about 0.25%. All together now… 0.25%... 0.25%...0.25%. Try it to the tune of Gloria. Chords – E, D, A.

And then there is the question of when. If not now, when? I know you might have forgotten that there is an election coming but if they are not going to raise the rate today, then surely raising it in September is much too close to the election. And don’t forget the opening of football season. No way Nolan. You cannot raise rates right before IU plays the FIU Golden Panthers on September 1. And then there is Groundhog Day. 

This last idiotic non-move by the Fed proves that our leadership needs to be replaced. Some of my reactionary friends want to replace the Fed with a gold standard. But gold standards notoriously fail when governments fail. So long as we have a government that has abdicated its financial role we are stuck with a miserable but finely coordinated policy of financial neglect. Way to go government. Give me a G! Give me an O. Nevermind. 

This gets me back to my wail of last week. We don’t need gold. We need some common sense. We need a government that has watched one bankruptcy after the next. Aren’t you glad you don’t hold Puerto Rican bonds? Why does not our government learn? Both the government and the Fed are putting us in a situation of financial jeopardy. Maybe they want another crisis? Then they can once again don their super hero costumes, point the finger of blame at banks and greedy capitalists, and continue on their confident but destructive ways.

Moderates, it is time to reclaim our country. (If you don’t know what that means, see my post from last week or send money.)

Tuesday, June 14, 2016

Better Than a Stick in the Eye

“Better than a stick in the eye” means an outcome is not very good but it is better than getting something much worse. No one wants to get a stick in the eye. Logic dictates that we try to do better than the stick but right now it appears that we’d rather have the stick. 

No I have not emptied another bottle of JD. I am thinking about economic policy and the coming presidential election. Now that Hillary Clinton seems even more likely to be the Democratic candidate the barbs are flying between her and Donald Trump. He is dangerous and incoherent; she is immoral and corrupt. Your mother wears combat boots. Your father is dumber than Papa Q. Bear (of the Berenstain Bears).  

I am hoping that somewhere down the line these two candidates will actually talk about policy but I am also hoping that the JD genie delivers a case to my front door. The question is not why these two people prefer to shout at each other. The question is why we voters put up with it.

Why are we so entertained or enamored by rude, colorful language in the people who say they want to be President of the USA? Will they continue this when in office? Will Hillary decry that her pecs are bigger than Putin’s? Will the Donald say his hands are larger than Dolly Parton’s?

The last time I looked US economic growth was lackluster, capital spending is literally falling, and the Fed decided to put off returning to a normal policy regime because the economy appears too fragile to withstand a 0.15 increase in the federal funds rate. You would think that these candidates would be seriously debating what to do about falling labor productivity, workers leaving the labor force, soaring national debt, and Jason’s new addiction to smoking meats.

Doing all that hard work would be better than a stick in the eye yet we prefer the stick. Why? I guess because we have gotten to the point where answering the real questions is either boring or just too hard. What to do about productivity? Wow, talk about a sleeper. Go down Main Street of your town and ask 50 people what they would do about declining US productivity. Then ask those same people to name 7 types of weed or all the members of the SF Warriors including the names of the managers. I think you see what I mean.

But I think there are enough of us who really care enough to want some real debate. I am going to get in trouble with just about everyone I know for saying the following but I think it is true.

·      Monetary policy might be much too expansionary right now but that policy will always be used by politicians to stimulate a weak economy. Can't we find something in between?
·       Fiscal policy is leading to unsustainable national debts but again, deficit spending is ingrained in national thinking for a weak economy. Is there no middle ground? 
·       Legal abortion is here to stay. We might argue about making it a little easier or harder to get. But it is not going away.
·       China might not abide by all agreed trade rules but it cannot be ignored.
·       Immigrants – legal are not – who have been in this country for decades might deserve a sympathetic ear even as we realize that a country has to protect its borders.
I could go on and on but you get the drift. We have serious policy issues and they are not going to be resolved by sticking things in our adversary’s eyes.   We have had enough of that already. For two years the Democrats held a majority and used it. Ever since Republicans have tried to counter everything Democrats did. There is much shouting and accusing and little in the way of governing. If we keep that up for another 8 years, what is going  to happen with all our issues?

Some Democrats say that when they are restored to power they are going to ram all their stuff down our throats. Some Republicans say the same. Finally back in power we Republicans are going to undo everything Obama did.

Really? Is that what governing is supposed to be all about? I don’t think so. I think there are enough of us who think that way so we need to be heard. We can begin by stuffing a bunch of $100 bills in a pillow case and mailing them to me. Okay nevermind that one. But for a start we should stop supporting candidates who won’t debate real issues. We should stop supporting candidates who continue to call each other names. Having real debates about issues is not a lot of fun but it is definitely better than a stick in the eye. 

Perhaps we should threaten a voter's strike. If our current crop of candidates knows that they are going to lose votes from moderates, perhaps they will moderate. Let them fight for moderates by explaining what they are going to do to solve our current economic mess. If they won't and they continue to feed the polar frenzy, then we should make it very clear that we won't vote for the jerks.  Don't they have something to gain by retaining and attracting moderates?  What happens if the moderates organize a revolt?  

Do you have a better idea? Naw. You Ds fear Trump so much that you'll stick with candidates who appear more reasonable yet haven't said one sensible thing about solving our economic problems. You Rs will let Trump say anything because you think Hillary will name the wrong people to the Supreme Court or will be pushed to support liberal causes. And while you do all that people drop out of the labor force, banks and firms sit on their resources, and productivity gets lower than a limbo stick in Nassau. If we don't demand sensible policies then the polar extremes will continue to destroy this country. Whew, I need a large ice cube and a cold glass.