Relevant and even prescient commentary on news, politics and the economy.

Ending the Era of Minority Rule

Obstructionism has been the modus operandi by Republicans in Congress to oppose President Obama with special emphasis in the Senate. Through the use of the filibuster, the Senate Republican minority has been able to block presidential appointments or sway them to less likely candidates, block the appointment of Federal Judges to the bench, and obstruct the enforcement of laws by blocking appointments to the NLRB . To bring about the end of a filibuster through cloture, 60 of the 100 senators had to vote in favor of it under the current Senate rules.  

With the appointment of Mitch McConnell as the Republican Senate minority leader, the number of cloture motions filed to break a filibuster has increased with <a href=”” target=”_blank”>3 of every 10 clotures</a>  filed having occurred since McConnell’s appointment. The numbers are up drastically since Obama became president and McConnell became the Senate Minority leader (redundant alert). Maybe McConnell does not like the president as the current practice is certainly not reminiscence of past practices.




Senator Henry Reid decided to employ the nuclear option:

“a Senate procedure that will allow a majority of the Senate to effectively change its rules to limit widespread obstructionism by the minority. As the trigger for this reform involves seven executive branch nominees being held up by Senate Republican filibusters, the likely consequence of this round of rules reform will be to eliminate the minority’s ability to filibuster nominees.” 

The president will now be able to appoint to the judiciary and to legislative positions with just a majority rule vote. If it appears to be unfair, more nominations by President Obama since he took office have been blocked than all other presidents combined.




Maybe they just do not like Barack Obama the man?



“Huge, huge victory for Political Sanity today,” November 2013,

“Why Senate Democrats Had To Invoke The Nuclear Option,” November 2013,

Everything Yo Need To Know About The ‘Nuclear Option And Harry Reid’s Plan To Fix The Senate,” July 2013,

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“Businesses Hire When They are Swamped with Demand, Not When They Have High Profits”

Mike Sankowski has been banging his spoon on the high chair about this forever. And rightly so.

Repeat after Mike. And keep repeating it to anyone who will listen. The “higher-corporate-profits = jobs” meme is perhaps the most pernicious falsehood in political economics.

How Business Owners Think

For almost ten years I was co-founder and CEO of a rapidly growing seven-figure company: (now sadly defunctified by the folks who bought it in 2000). My partner and I made a very conscious decision early on: Don’t get bigger. Get more profitable. (This was not our genius. The Aha! moment came from one of our employees. Thanks Toby!)

We decided to maintain our current staffing levels (10-12 of us), and throw all our efforts at generating more profit with those same folks — building killer-efficient management and organizational systems, developing world-class direct-marketing and customer-tracking tools and methodologies, etc. (Plus requiring everyone to document all those systems; we all hated that part but we had to do it.)

It worked brilliantly. This meant that 1. Our employees were able to do more creative, thinking work rather than administrative drudgery, and 2. We were able to pay them well. They did well in the buyout as well.

Our biz: we created, owned, and ran high-tech professional conferences around the country. (“Conferences with Content.” Catchy, huh?) The only way we “hired more” was when we sold a lot of seats at our events, so the hotels/trade centers/etc. had to bring on more staff for all the lunches, receptions, and such. More demand, more sales, resulted in more hiring. Our profits had nothing to do with it.*

And no: higher profits didn’t spur us to produce more events. That would have required hiring more staff (who we’d have to manage…). By the end, we were making all the money we wanted or needed, and then some.

A note to “incentive” fetishists: as profits grew, we had less incentive to work more or harder. One day near the end stands out. We had two events running simultaneously — one of them the biggest, best, and most profitable we’d ever run. And…wait for it…my partner and I were lounging on his boat in the middle of Lake Washington, on a glorious summer day. Ask yourself what you’d do in that situation.

As another former CEO, Nick Hanauer, says (1:50): “Everyone who’s ever run a business knows, hiring more people is a course of last resort for capitalists. It’s what we do if and only if rising consumer demand requires it.”

When we generated great profits, yeah we were able to pay our employees more. But mainly, we banked it. We certainly didn’t think, “Oh gee, great! We can hire more employees!” That would be stupid.

Money-grubbing entrepreneurial capitalists like us may be many things, but we’re not stupid.

* We had a joke back then: “You know what we do with empty seats after a conference? We burn them.” Excepting some events that sold out, the “resource constraint” on supply consisted of asking the hotel to put out more chairs. As we sold more seats, the marginal cost of production dropped to laughably low levels, and marginal profit skyrocketed.

For our business, at least, the (neo)classical production function was an absurd parody of reality. Economists will tell you that modern economics is much more sophisticated than that, and it is, but still: most of them are still running the Econ 101 parody version in native mode in their heads.

Cross-posted at Asymptosis.


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Pictures of the Trans Pacific Partnership and to Giroux’s biggest lie: Capitalism is Democracy

HENRY GIROUX: Oh, I mean, I think that’s the biggest lie of all actually. The biggest lie of all is that capitalism is democracy. We have no way of understanding democracy outside of the market, just as we have no understanding of how to understand freedom outside of market values.

I learned about two maps that show the connection of corporations.  I found copies of them at Occupy Educated.   The first one “Corporate Connections” was created in 2003.  You can read about it here.

corporateconnection World



The second one is a condensed update looking at just 10 corporations and the brands which they control.

Corporate connections by brand


These two maps make me think of all sorts of things.  Like, do we have choice in the market place?  Do we have choice in the market place of ideas?  Choice of  ideas are professed to be necessary for a healthy capitalistic system.  It is ideas that compete not products as they only represent an idea.

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The natural rate of interest depends on where you set natural real GDP

What if an economist expects the natural level of real output to be higher? How would the natural rate of interest change by expecting a lower natural rate of output?

First, I personally expect a lower natural limit upon real GDP. I see that real GDP is trending on a new normal level below the trend seen before the crisis. This graph presents my model for the interest rate as real GDP approaches the natural level of output. (The natural rate of interest is the equilibrium interest rate to keep output with stable inflation at the natural limit of real GDP.)

Update to fed rate path 5%

I see the natural level of output where capacity utilization multiplied by the employment rate is 73%. The violet and yellow lines are alternate paths that bound a zone for the Fed rate as real GDP is reaching this 73% natural level. The zone is positive at this point seen with the red dot getting close to this natural level of output (LRAS). A positive Fed rate would be prescribed. The down-sloping green line shows little spare capacity. However, the blue dot shows that the Fed rate is still on the ZLB (zero lower bound) implying that the Fed thinks the true zone is below 0%.

Now all I do in the above model is raise the demand constraint on the utilization of labor and capital (the demand constraint is the effective labor share anchor in the model). It seems many economists do not formally recognize a demand constraint. Be that as it may, I will change one variable, the demand constraint, from 73% to 78%, which would imply an unemployment rate of 5% and a capacity utilization rate of 82%. These are common enough expectations according to past data. (note: the z coefficient changes due to a change in the demand constraint.)

Update to fed rate path higher lras

All that is happening here is that the monetary framework shifted right from a lower natural level of real GDP to a higher one.

The new vertical curve is based on expectations of a higher natural level of real output, like the one seen before the crisis. But what happens to the prescribed Fed rate? The violet and yellow lines, which bound a zone for the Fed rate, have both gone negative for the current level of utilized labor and capital, -0.5% and -3.0% respectively. And on balance, they would stay negative for some time yet. The green line now shows much more spare capacity, over 8%.

So if you are an economist who says there is lots of spare capacity and expects real GDP to return to the level seen before the crisis, you would recommend “pedal to the metal” aggressive monetary policy, as Paul Krugman did yesterday. You want the Fed rate to be at the ZLB for a long time, at least until unemployment sits around 5.5%, which would correspond to roughly 76% on the x-axis.

If you are like me and expect real GDP to settle into a lower natural level of output, you would recommend a tighter monetary policy. It is a safer policy to raise the interest rate when nearing the natural real GDP vertical curve.

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Pushing on a wall… Note on Natural rate of interest

Economists are thinking that the natural real interest rate might be negative… one factor that would lead them to think that way is that the economy is growing so slow. The principle behind that is this… if the real Fed rate is above the natural rate, the effect is contractionary upon real GDP. So if real GDP is growing slow, the conclusion is that the natural rate must be more negative than the real Fed rate which is below -1%.

But economists are expecting real GDP to trend back to where it was before the crisis. They are expecting real GDP to grow faster for that reason. Yet, they do not realize that real GDP is growing normally within this business cycle. Real GDP is growing towards its natural level and will arrive within the year. The natural level of real GDP is simply lower than it used to be.

The economy is growing with anxiety, uneasiness and concern. But it is still growing.

So if the natural rate were positive now, the effect of a negative real Fed rate would still be stimulative. The economy is being stimulated within its business cycle constraints.  The constraint upon real GDP is tighter than people want to think. But you can only push against a wall and go so fast and so far. Thus real GDP grows slower than expected.

The real problem will appear when the wall of increasing utilization of labor and capital stops and we keep pushing hard expecting it to move to where we think it should go.

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The Kosher Butcher Who Was Not a Person Until He Incorporated Himself*

Religious liberty, [Tenth Circuit Court of Appeals] Judge Tymkovich wrote, cannot turn on whether money changes hands. “Would an incorporated kosher butcher really have no claim to challenge a regulation mandating non-kosher butchering practices?” he asked.

Court Confronts Religious Rights of Corporations, Adam Liptak, New York Times, today

Why, yes, Judge Tymkovich, of course an incorporated kosher butcher really would have a claim to challenge a regulation mandating non-kosher butchering practices.  But that’s because the kosher butcher also is an actual human and was one even before he incorporated himself, er, his butcher shop.

The butcher would have a claim as, um, the butcher–Ira Greenberg, human being, exercising his religious right to use kosher-butchering practices to kill his own food, and his religious right to obtain kosher meat in order to limit his meat eating to kosher.  He also would have a due process right to practice his trade and make a living, unencumbered by an utterly arbitrary and irrational prohibition (or, to use legal formality, a prohibition that has no legitimate governmental interest). And Ira Greenberg Kosher Meats, Inc., would have a similar due process claim, a constitutional claim that, unlike campaign-contribution claims or free-exercise-of-religion claims, could be invoked legitimately by a corporation, because it, unlike political contributions and religious practice, actually would concern the right to operate as the sort of business that it is.

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A negative natural interest rate? … No

The economy is nearing the natural level of real GDP and economists are saying that the natural rate of interest is negative. Now the natural rate of interest is the equilibrium interest rate when real GDP reaches its natural level. It is absolutely crazy to think that the natural rate would be negative… absolutely crazy.

The best source to understand the natural interest rate is this paper by John Williams, President of the Federal Reserve Bank of San Francisco.

“In this Letter, the natural rate is defined to be the real fed funds rate consistent with real GDP equaling its potential level (potential GDP) in the absence of transitory shocks to demand. Potential GDP, in turn, is defined to be the level of output consistent with stable price inflation, absent transitory shocks to supply. Thus, the natural rate of interest is the real fed funds rate consistent with stable inflation absent shocks to demand and supply.

“…so the natural rate refers not to the real funds rate expected over the next year or two, but rather to the rate that is expected to prevail once the recovery is complete and the economy is expanding at its potential growth rate.

“At the intersection of the IS curve and the potential GDP line, real GDP equals potential, and the real interest rate is the natural rate of interest.”

John Williams gives this diagram…

natural rate

Potential GDP is the natural level of real GDP at the LRAS curve. At the LRAS curve, production slows down to its natural level. Increases in demand will not show up as increased production, but as increased prices. So there is a natural rate to keep the increased demand in line with production, so that inflation does not rise.

A negative natural rate would imply the need for a negative rate to “make” people consume more in order to be able to produce at the natural level of real GDP. (I guess raising wages isn’t an option.) Anyway, a negative natural rate makes people consume and makes them push the inflation rate to a stable level at what might be considered an “unsustainable” level of output.

This is just crazy…

If the natural rate were negative at the natural level, and the Fed rate was stuck at the zero lower bound (ZLB), you would have an economy in decline. That is not the US economy. There is still some inflation and there is still economic growth even with the ZLB. We are heading toward the natural level of real GDP.

When real GDP reaches its natural level, the Fed funds rate should be prepared to be at least 2% in my opinion… in line with the inflation target. The real Fed funds rate would be 0% with 2% inflation and 0% real GDP growth, which still makes it stimulative with a real natural interest rate even above 1%. If the Fed rate is at the ZLB and stuck in the mud of QE, it will have a hard time playing catch up if the economy starts to show signs of price inflation in assets or household items.

This is how I see the minimum monetary policy…

Update to fed rate path 5%

The violet and yellow lines cross at the natural level of real GDP.. and they should cross equal to or more than the inflation target of 2%. I have them crossing just a bit above 2% here. The red dot shows that we are currently quite close to the natural level. The red dot is rising up a line of balance toward the minimum natural rate. If the Fed rate rises along this line, the economy can make balanced adjustments along the way. The red dot would imply a Fed rate of at least 1.5% now.

Yet, the blue dot shows that the Fed rate is still at the ZLB. If the Fed rate has to respond to price inflation at the natural level of real GDP (LRAS curve), it will have to respond drastically by moving vertically fast. This is not a balanced response. Better to have moved steadily upward over time.

The natural rate of real GDP (LRAS curve) is going to sneak up on the economy. We are going to see inflation rise within the year… not in household goods… but in asset prices. The stock market is already hitting new highs and climbing. Just wait a few months when the natural level of real GDP kicks in more. Loose money which is frustrated by constrained production will find its way into asset prices. We will need a tighter monetary policy to control the instabilities from too much liquidity among owners of capital.

Paul Krugman wants wages to rise before monetary policy is tightened.

“So it makes no sense at all to tighten until we see wage inflation rise, not just from its current level, but several points higher.”

The problem with his view is that wages will not rise, even at the natural level of real GDP. The excess liquidity will go into asset prices, not wages. Unemployment is too high for labor to bargain for higher wages, or firms to offer higher wages to desired workers. He has his site set on the wrong target.

Household goods will not rise in price because there isn’t liquidity among its purchasers. Labor share of output is down. Labor has relatively weaker purchasing power for household items. Yet, the purchasers of assets have liquidity directly from the low interest rates and low labor share. A negative natural real interest rate would imply an economy pledged to feeding asset bubbles as its modus operandi… an economy pledged to low wages and high corporate profits.

If an economist makes a case for a negative natural rate, they make a mistake with the vertical line of potential GDP in the graph above. They have to realize that the potential GDP curve has shifted to the left… due to low labor share. If they see the vertical line pushed far to the right, then they will see a negative natural rate. But the vertical line is actually farther to the left indicating a positive natural rate.

Here is a recent graph of mine to show that the utilization of labor and capital is going to be constrained at a lower level due to the lower labor share.

tfur w els

The blue line which represents utilization of labor and capital is going to be constrained at a lower level. Economists are thinking that unemployment will decline to 5% with a capacity utilization of 80%. The resulting value of 76% would be above its constraint of labor share relative liquidity (orange line). Even Dean Baker and Jared Bernstein think the unemployment rate will go down to 4%. They are definitely seeing the vertical LRAS curve way too far to the right.

I am showing that the vertical line of the natural level of real GDP is actually more to the left than economists think.

The truth is that the economy has a positive natural interest rate, but thinking that it is negative will cause lots of financial instability, because loose monetary policy at the vertical LRAS curve creates inflation where the liquidity is building up over supply… namely asset prices.

Economics is in a mess… mostly due to not understanding the constraint of labor share and effective demand. Keynes told us about effective demand, but it was never understood well. The key is to see labor share as the constraint upon the utilization of labor and capital.

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“Supply” and “Demand” for Financial Assets

Okay, once again I’m going to sacrifice my body here, risk looking stupid by asking what seems to me to be a vexatious question. Here’s the setup:

When you exchange some of your money (bank deposits) for some shares of Apple stock, those shares aren’t removed from the supply of Apple shares. (Likewise your “money”; it still exists.) The stock-supply, at least, is unchanged.

When you buy some apples for consumption, they are removed from the supply — both stock and flow.

Can we model or think about these two markets in the same way? One is a circular flow in which supply is never consumed (that is the sine qua non of financial assets: they embody exchange value that can’t be consumed to derive human utility). The other is a conveyor belt, where the supply falls off the end and disappears (or magically transforms into “utility” via consumption), with real production/resource constraints at the beginning.

Related: Clower/Burshaw on the difference between “stock supply” and “flow supply.” Or peruse the literature here.

I’ve wrestled with this before, as have my thoughtful commenters therein.

But nobody has ever come back to me with thoughtful discussion of stock supply and flow supply, or satisfactorily answered the question at the end of that post (accompanied by a Holy Grail clip that is a propos). The question posed above leaves me even more perplexed.

Am I foolish to suggest that the central concepts of economics, supply and demand, are embarassingly un(der)theorized?

Theres’ a great example in this Felix Salmon post, discussing difference between the global “supply” and “demand” for bonds — which here seems to mean “bonds issued” and “bonds purchased” (designated in dollars). Mustn’t these values as implicitly defined here be identical — at least when viewed ex-post — making a discussion of their difference conceptually problematic?

Cross-posted at Asymptosis.


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Fix the Debt

Via Digsby

Oh, my goodness. Can it be that Fix the Debt is using patented right wing astroturf tactics?Say it ain’t so!

Our friend Jon Romano, press secretary for the inside-the-beltway PR campaign “Fix the Debt” and its pet youth group, The Can Kicks Back, have been caught writing op-eds for college students and placing the identical op-eds in papers across the country.
This is the latest slip-up in Fix the Debt’s efforts to portray itself as representing America’s youth. Previously, they were caught paying dancers to participate in a pro-austerity flash mob and paying to gather online petition signers for them.
The newspapers involved in the scam were not amused.
Gainesville Sun to Fix the Debt: “Lay Off the Astroturf and Outright Plagiarism”

The identical op-eds were discovered by Florida’sGainesville Sun. The paper’s scathing editorial on the topic makes for an entertaining read.
Via Campaign for America’s Future

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