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

"Cake without Flour" — Duncan Foley on the Dilemmas of Economic Growth

by Sandwichman (at Econospeak)

“Cake without Flour” — Duncan Foley on the Dilemmas of Economic Growth
The following excerpt is from Duncan Foley’s outgoing Presidential Address to the Eastern Economics Association, “Dilemmas of Economic Growth,” presented March 9, 2012 (Reprinted by permission from Macmillan Publishers Ltd: Eastern Economic Journal (2012) 38, 283–295 published by Palgrave Macmillan). The title is an allusion to Herman Daly’s parody of Cobb-Douglas production function hyperbole “as implying that it is possible to bake a cake without eggs or flour as long as the cook whisks the empty bowl faster and faster.”

CAKE WITHOUT FLOUR

Some growth economists might regard the considerations we have just reviewed as rather quaintly anachronistic in putting so much emphasis on the material nature of economic production. Well-established patterns of economic growth show that as incomes rise, the proportion of output as measured by such indexes as real GDP consisting of material goods steadily declines. The major sources of growth in incomes (and, given the way we measure GDP, in indexes of output) shift to the tertiary sector, particularly services. The chief input to services is human intelligence, and at least in some accounts, intelligence is an unlimited resource. So why couldn’t real GDP, measured to include the use-value of services, continue to grow without limit?
There are some immediate problems with this conception. (below the fold)

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Volatility in the Emerging Markets

by Joseph Joyce

Volatility in the Emerging Markets

Volatility has returned to the financial markets. Stock prices in the U.S. have fallen from their September highs, and the return on 10-year Treasury bonds briefly fell below 2%.  Financial markets in emerging markets have been particularly hard hit,. The Institute for International Finance estimates that $9 billion was withdrawn from equity markets in those countries in October, while the issuance of new bonds fell.

The increased volatility follows a period of rising allocations of portfolio investments by advanced economies to assets in the emerging market economies. The IMF’s latest Global Financial Stability Report reported that equity market allocations increased from 7% of the total stock of advanced economy portfolio investments in 2002 to almost 10% in 2012, which represented $2.4 trillion of emerging market equities. Similarly, bond allocations rose from 4% to almost 10% during the same period, reaching $1.6 trillion of emerging market bonds.

The outflows are due to several factors. The first, according to the IMF, is a decline in growth rates in these countries below their pre-crisis rates. While part of the slowdown reflects global conditions, there are also concerns about slowing productivity increases. China’s performance is one of the reasons for the lower forecast. Its GDP rose at a rate of 7.3% in the third quarter, below the 7.5% that the government wants to achieve.

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By Default or Design: The Demise of the Postal Service

Guest Post by Mark Jamison, retired Postmaster Webster, N.C.

This post originally appeared on Save The Post Office Blog. This is Part 2 of three posts and following Invisible Hands: The Businessman’s Campaign to Dismantle the Post Office.

Default.  It’s an ugly and dangerous word.  It gives the impression that the individual or enterprise attached to it has utterly failed.  It implies defeat and irresponsibility.  

The news media use the word with relish.  Like a car crash, a hurricane, or a murder, it sells newspapers.  Combined with the word “bailout,” it’s also a surefire way to advance a particular political agenda.

On August 1, 2012, the United States Postal Service did not make a payment of $5.5 billion to the United States Treasury.  On September 1st the United States Postal Service will fail to make a second payment to the Treasury of $5.6 billion.  The Postal Service, blare the headlines, is thus guilty of an “historic default.”  But it’s all hot air.  The Postal Service is simply not making payments it should never have been required to make in the first place.

Whose fault is the default?

The two payments behind all the headlines were prescribed by the 2006 Postal Accountability and Enhancement Act (PAEA).  The payments were ostensibly designed to pre-fund the health benefits of future retirees from the Postal Service; but, they were actually nothing more than an accounting place holder used by Congress to mask federal budget deficits and to satisfy an arcane accounting system that exists primarily to deceive and dissemble. 

invisible hand

In 2002, an examination of the postal pension liabilities revealed that the Postal Service was actually overpaying into one of its pension fund by tens of billions of dollars.  But lowering the payments would have added to the federal deficit, so Congress had the Postal Service put the money it was saving from reduced pension payments into an escrow account.

A few years later, when PAEA was being crafted, Congress created a retiree health care fund, and shifted the money from the escrow account to the new fund.  It also mandated that the Postal Service pay off the balance of its retiree health care liability in ten years.  A forty-year payment schedule would have been totally adequate, since the fund was intended to cover retirees for the next seventy-five years, but the payments would have been too small to balance out what the federal government was losing with the reduced pension payments.

The retiree health care fund now has in excess of $44 billion.  As it grows with interest, the fund will have more than enough to cover the costs of retiree health care for decades to come.  The fund, it’s important to note, is not being used for current retirees.  As with most businesses, that expense is paid for out of current revenues, on a pay-as-you-go basis.   The $5 billion payments to the fund were excessive to begin with.  They are now totally unnecessary.

Yet in spite of all this, the word DEFAULT issues from the lips of Congressmen as a foul epithet.  It reverberates through the media as an example of the failure and profligacy of government.  It is worn as a talisman of triumph by those who insist that government cannot, will not, and must not succeed in a utopian world of free unfettered markets.

invisible hand

The Postal Service has over $320 billion dollars in its pension and health care plans.  These plans are widely recognized to be significantly overfunded.  Claiming that the Postal Service has failed to meet an obligation and has therefore defaulted is a little like saying that a man who fails to add a monthly payment to his multi-million dollar 401K ought to file for bankruptcy. 

Claiming that the Postal Service has defaulted is merely an excuse to further the notion that the Postal Service is an anachronistic dinosaur that ought to be broken up or privatized.  It’s also a means for Congress to avoid and evade its responsibilities to govern effectively.

The reality of the situation is that several groups and forces have combined, through ignorance and cupidity, to dismantle a significant piece of our national infrastructure and to eliminate 500,000 good, solid middle-class jobs. The truth, at this point, is that the fate of the Postal Service is the result of a bad dream, a dream that has us on a runaway train heading for a cliff.  Solving the problem is less a matter of saving the train than simply waking up.

It was a very bad year

I’ve written many times over the past year, on “Save the Post Office”, other websites, and filings with the Postal Regulatory Commission, about the value of the postal infrastructure, the mismanagement of the Postal Service, and steps that could be taken to put things on the right track.

Last August, in post entitled “The Perfect Storm: How everything is coming together to take the Postal Service apart,” I suggested that Patrick Donahoe may go down in history as the last Postmaster General of the United States Postal Service and that he would almost certainly be considered the worst PMG of all time because of his substantial efforts to dismantle and decapitate a cherished national institution.

invisible hand

In “How to Save the Postal Service Before It’s Too Late,” I offered a series of modest, reasonable, and realistic proposals designed to both calm the growing mentality of crisis surrounding the Postal Service and to begin updating the business model of the Postal Service so it could build on its significant assets and retain its relevance into the 21st Century.

Over the past twelve months, the situation has only gotten worse.  It’s been an endless stream of overwrought claims of impending disaster.  The fire has been stoked by the media, which look for conflict and controversy rather than reason and fact.  The crisis mentality has been furthered by a Congress that seems of incapable of discerning the public interest, let along legislating and governing in a responsible manner.  The situation has been exploited by ideologues, who have used it to advance their agenda of privatization, and by many stakeholders in the mailing industry, who have licked their lips over the prospect of a postal system operated for their benefit alone.

There is a great deal of blame to go around — virtually everyone involved in this theater of the absurd has failed in some manner — yet the simple fact of the matter is that we stand today in a situation that can be easily and reasonably resolved to the benefit of the American people.  A great and useful institution has been damaged and demeaned.  Tens of thousands of jobs have been lost, while ill-considered and even idiotic plans have been advanced.  But the damage is all self-inflicted.  Despite the weighted words of “default” and “bailout,” the postal crisis — at least the one grabbing all the headlines — is essentially fictitious and fraudulent.

An infrastructure that builds infrastructure

The Postal Service has been and continues to be an essential infrastructure.  It furthers our democratic ideals and our commercial opportunities.  The postal network — the thousands of facilities and plants, the millions of miles of routes, the machinery and data processing capacity that supports everything, and the human capital that drive the network — the mailhandlers, clerks, carriers, and postmasters — is a useful and important piece of our national infrastructure.

invisible hand

Yes, electronic communication, the Internet, cell phones, and all the other modern means of moving information have challenged the postal system.  But the postal network has adapted to technological change before and remained not only relevant but an important driver in the utility and productivity of new technologies.

Those who think that the postal network is no longer valuable should read the recent report from the USPS OIG, Postal Service Contributions to National Infrastructure.  As the report makes clear, the postal infrastructure has enabled the country to grow, businesses to prosper, and new technologies to evolve.  Even in today’s advanced electronic environment, there is still considerable value and benefit in being able to deliver to every house and business, six days a week. There is still considerable value in having a positive and useful government presence in small towns and communities in every corner of the nation.  There is still considerable value in having a means to distribute the printed word across a neutral and trusted network, as well as a system for handling voting by mail.

In addition to the value of the infrastructure and the ongoing opportunity it offers for business and commercial development, one cannot easily discount the social value of the network.  The Postal Service has offered meaningful and worthwhile employment to millions of Americans, and it has lifted many families into the middle class.  We hear all about how postal workers are paid too much and receive benefits that are too generous, and how this is an unfair burden to taxpayers.  But postal workers do not receive a dime of taxpayer money.  Their salaries and benefits have been fully paid for by reasonable and sustainable postal rates that are among the cheapest in the world.

invisible hand

The postal network has bound the nation together by making the commerce and goods produced in one part of the country available throughout the country.  Thanks to the postal system, a person in a remote region of rural America can shop for the same products as a person in a busy metropolitan area.  Certainly television and the Internet now offer windows into other worlds, bringing the world to our living rooms and now even our phones, but as broadening as those connections are, they lack the unique capacities offered by the physical connections embodied in the postal network.

We have built a tremendous asset in the postal network, yet most of our leaders — our elected representatives in Congress and the executive officers of the Postal Service — seem willing to simply disassemble that asset and consign it to irrelevance or worse.  This cavalier treatment of an asset owned by the American people borders on the criminal.  What is worse, the reasons they offer for what they’re doing are as thin as the paper we claim to no longer need.

The postal network offers unlimited potential.  It could be used to assist local and state governments in their missions.  It could be used to assist federal agencies, the way it helps with the census and elections. The use of the postal network could save millions if not billions of dollars in taxpayer money if we allowed it to be used effectively and efficiently by other governmental bodies.  The network also offers huge potential in data and resource collections through mobile sensors on postal vehicles.  Its vehicle fleet could be used as a proving ground for new technologies.  Its facilities could be early locations for charging stations.

The only thing that stands in the way of a more productive use of this national asset is our lack of imagination, our parochialism, and our ideological inflexibility.  The promise of binding the nation together is an open and ongoing one, providing we are prepared to acknowledge the potential of the postal network.

Instead, that potential is being lost.  Instead of dedicating ourselves to finding value in our national infrastructure, we have donned blinders of self-absorption that limit our vision to only those things that offer immediate return.  The financial crisis was driven by this narrowed vision of immediate gain, and our failure to find a robust recovery is rooted in the same blindness.

Taking the service out of the Postal Service

Once the Kappel Commission of 1968 laid the foundation for the new Postal Service, the agency’s leadership has been fixated on the idea that it must become something other than what the Founding Fathers created it to be.  Rather than performing the essential and necessary work of binding the nation together, the leadership of the Postal Service has been seduced by the idea of privatization. They may not always call it that, but the fact is that when your goal is to jettison every characteristic that makes the postal system a service infrastructure in favor being “more businesslike,” then ultimately the goal is privatization.

invisible hand

Patrick Donahoe and the current Board of Governors represent the culmination of forty years of dishonest thinking.  Their plans spell the destruction of a public postal network.  They would turn the country’s postal system into a private logistics company. The healthcare prepayments mandated under PAEA and much else that Congress has done are part of what’s behind the current crisis, but Mr. Donahoe and the BOG are also part of the problem.  Their actions have served to undermine the stability of a national institution, and thanks to them, there are 400,000 fewer good paying jobs than there were five years ago.  They say the cuts have been made necessary by declining mail volumes, but Mr. Donahoe and the BOG seem congenitally unable to tell the truth about the state of postal affairs.

One need only look at the Postal Service’s offerings in the Nature of Service Cases before the Postal Regulatory Commission.  In the five-day case, the Postal Service sought to cut 17% of service for about a 3% savings.  In the network rationalization case, they withheld research that showed huge revenue losses as a result of the proposed changes in service standards.  In PostPlan, they propose to reduce service to 13,000 communities for virtually no cost savings. Worse, the plan is little more than a political sop to disguise office closings.

The sum total of their plans has been nothing short of massive reductions in service with the goal of abdicating their responsibilities to provide universal service.  The plans are poorly conceived and poorly presented.  More often than not, they have been revised on the fly, as expedience and publicity requires.  That’s because the plans lack any fundamental basis in preserving our postal system.

invisible hand

The BOG and Mr. Donahoe have not acted as managers entrusted with a national asset. They have acted more like vulture capitalists stripping the organization of its assets so that what’s left can be sold to the highest bidder.

If the Postal Service stands in dire straits today, it’s because those charged with running the service have done everything in their power to gin up a crisis.  Each month, Mr. Donahoe and his senior managers offer up another prediction of doom.  We’re told there’s a cash flow crisis, but somehow there are billions of dollars available to spend on unproven and still unproductive systems like the FSS machines.  We’re told that volumes are falling precipitously due to the Internet, but instead of showing all the ways it’s adapting to the new environment, the leaders of the Postal Service make ever more hyperbolic predictions of doom.  What prudent business that uses the Postal Service wouldn’t be making alternative plans right now?

invisible hand

The management culture of the Postal Service is rotten and bankrupt.  For years we have heard reports of managerial bullying.  Just the other day, an arbitrator took the unprecedented step of requiring a District Manager to apologize for the ongoing atmosphere of bullying in offices in the Los Angeles area.  Many have heard the story of Jerry Lane, the former Cap-Metro Area Vice-President who left the Postal Service after assaulting an employee.  How does someone like that reach such a senior position anyway? The behavior that resulted in his “separation” was neither unique to him or others in the organization.

Whether it’s fudging numbers to make a plan more palatable or looking the other way at abusive managers, the senior management of the Postal Service has lost the capacity to be self-critical.  The problems of the Postal Service can be attributed, at least in part, to a management culture and a senior management that have become hopelessly dysfunctional.  No solution to the postal crisis that does not include a restructuring of the senior management and a thorough housecleaning at L’Enfant Plaza will be effective.

Where’s a Congress when you need one?

While senior postal management bears the lion’s share of the blame for our current circumstances, Congress owns the problem.  As the day of the faux default approached, we saw senators screaming that their colleagues in the House were letting the American public down by not acting on a bill to resolve the situation.  But in doing so, they unnecessarily amped up the already overheated rhetoric with misleading talk of “$25 million a day” losses and the impending default.

invisible hand

The leadership in the House has run from its responsibilities.  Darryl Issa, chairman of the committee with oversight responsibility for the Postal Service, has offered prescriptions that would immediately destroy the Postal Service.  At least Mr. Issa is ideologically consistent.  He stands for a view of America and the American economy that leaves most of our citizens behind and actively denigrates government.  His offerings on postal matters reflect that.  It’s no wonder that his colleagues do not support his bill. It’s easy to argue that Mr. Issa may be the biggest beneficiary of the current situation. When words like “default” and “bailout” start getting thrown around, his radical solutions don’t seem so radical.

The problem is that if the House were to act tomorrow on the bill already passed by the Senate, we would simply be taking bad legislation and making it worse.  Tom Carper, the Democrat from Delaware, plays the point man in postal legislation.  His prescriptions are, for the most part, endorsements of the course Mr. Donahoe and the BOG have set.  They dismantle the institution and the postal network and harm hundreds of thousands of postal employees and thousands of American communities.  Mr. Carper’s proposals seem designed to satisfy the direct mailers, which is no surprise since they are major contributors to Mr. Carper’s campaigns.

Whatever his motivations or reasons, Mr. Carper has increasingly portrayed himself as the savior of the Postal Service.  It is a role similar to the one Mrs. Collins of Maine played during the debate on PAEA, and the results are likely to be the same.

invisible hand

Many news outlets have opined that Congress ought to get out of the way and let postal management and the BOG run the Postal Service, the more businesslike the better.  Others have simply said the Postal Service is irrelevant and should be privatized.  My response to both of those views is that no government is not good government and it certainly isn’t better government.

While Congress has clearly failed to function as a thoughtful body in governing the Postal Service, that’s not reason for removing the postal system from Congressional control.  We, as citizens, ought to demand that Congress fulfill its role in overseeing the Postal Service in a professional and effective manner.  Those who think no government is a good idea or that the Founders had no faith in government are delusional.  Without a strong government based on democratic principles, the end result will be either anarchy or plutocracy.

The default of leadership

The issue is not large or small government.  The fact is that many of those who argue for small government actually support the expansion of government, so long as that government favors their interests.  The largest expansion of government in our history has occurred under two Republican presidents.  

The issue ought to be effective government.  Clearly those who designed our political system understood the need for infrastructure.  They understood the need for and value of postal services.

invisible hand

One of the greatest challenges our country faces today is rebuilding our infrastructure. We have done best economically when we focused on investing in foundational infrastructure.  Good infrastructure expands economic opportunity and allows more people to participate more fully in the economy.  Growth built on broad economic participation is growth that is both sustainable and growth that is broadly beneficial.  The postal network has played a major role in providing that kind of growth, and it can continue to do that.

The Postal Service does not have a fiscal crisis.  There are billions of excess contributions in retirement accounts.  Those accounts, including the ones designed to fund retiree benefits, are well funded. The crisis facing the Postal Service is one of management and governance.

The management of the Postal Service has no credibility. It has offered plans that do not protect or utilize a great American asset.  Instead, their plans transfer the assets and revenues of the Postal Service into the hands of a small segment of the mailing industry and serve to dismantle the postal network, a useful and essential infrastructure.

The Congress of the United States has abdicated its responsibility with respect to postal matters. It is not simply about the failure of the House of Representatives to act on a bill.  It goes much deeper than that.  When the legislature of the United States is no longer able to see the value in an infrastructure that sustains not only our commerce but our democratic values, when they are willing to sacrifice services that thousands of American communities rely on, when they are willing to undermine the useful, effective, and economically efficient employment of nearly half a million Americans, when our legislators are willing to do these things casually and cavalierly, then they have failed the country, miserably.

There is no Postal Service default. The Postmaster General and the Congress of the United States have defaulted on their responsibilities to the American public.  Shame.

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Alison Lundergan Grimes vs. The Kentucky Newspaper Editorial Boards That Endorsed Her Today

Two major Kentucky newspapers have endorsed Alison Lundergan Grimes for Senate over incumbent Senate Minority Leader Mitch McConnell (R).

The Courier-Journal and the Lexington Herald-Leader both ran editorials Sunday in support of the Democrat, who currently serves as Kentucky’s Secretary of State.

In its endorsement, the Courier-Journal’s editorial board praised Grimes’ stance on issues like the minimum wage and early childhood education, while accusing McConnell of “lacking a vision for Kentucky.”

“[McConnell] lost his way to the point where he now is identified largely as the master of obstruction and gridlock in Washington,” reads the endorsement. “Kentucky needs a U.S. senator who sees a higher calling than personal ambition and a greater goal than self-aggrandizement.” …

The Lexington Herald-Leader‘s endorsement strongly rebukes McConnell, who the editorial board says has “repeatedly hurt the country to advance his political strategy.”

“The Senate may never recover from the bitter paralysis McConnell has inflicted through record filibusters that allow his minority to rule by obstruction,” reads the editorial. “He poses as a champion of the right to criticize the government, but it’s really his rich buddies’ right to buy the government that he champions.”

Kentucky Newspapers Endorse Alison Lundergan Grimes, Mollie Reilly, Huffington Post, this morning

Two weeks ago, the big political story out of Kentucky was that Grimes refused to answer when a televised-debate monitor asked her whether she had voted for Obama in 2008 and 2012.  So important was this, politically, that Chuck Todd reacted to it by saying (in)famously that Grimes had disqualified herself, and McConnell immediately began featuring Todd’s comment in an ad, and the Democratic Senate Campaign Committee ended its ad buys in the state.

At the same debate, though, McConnell said that Kynect, Kentucky’s ACA-funded healthcare insurance exchange—through which Kentuckians can purchase independent-market policies that comply with the statute and apply the statute’s tax credits toward premium payments—actually is just a website that lists healthcare policies and allows sign-ups but has no financial benefit to purchasers of the insurance plans.  This, too, was reported nationally and highlighted, apparently, in local news recaps of the debate, but it was presumed, I guess, that it wouldn’t matter.  Although McConnell had made a vaguer but substantively similar statement earlier in the campaign, and although it was reported by national and Kentucky newspapers, its significance apparently hadn’t penetrated to much of the electorate, mainly because Grimes was perfectly happy to have Kentuckians think that the popular Kynect had nothing to do with the hated Obamacare—much less with Obama himself.

And, although by then consistently down by several points in the polls, and appearing to lose ground as the election neared, she didn’t blink in this.  Asked about McConnell’s brazenly false claim about the nature and effect of Kynect, a spokeswoman for Grimes’ campaign responded with something like, “Alison Grimes will always choose Kentucky over Washington.”  That’s right; Alison Grimes will vote to remove federal financial support for the website and, especially, end the federal tax subsidies for purchase of the policies.

It was a day or two later that the DSCC announces its removal of financial support for Grimes’ campaign.  But then something apparently completely unexpected happened: A Bluegrass Poll showed Grimes suddenly trailing McConnell by a single point.  And then last week Grimes, who dismayingly had failed to highlight in ads or appearances a video that surfaced a couple of weeks earlier showing McConnell outlining to a Koch brothers’ group his exciting plans as Senate Majority Leader, suddenly began running an ad showing a clip of the video.  A day or two later, the DSCC restored its financial ad-buy support for Grimes’ campaign.  Asked why, a spokesperson for the DSCC said that polls were showing that undecideds were moving toward Grimes.

And so they must be, because a day or two ago it as reported that McConnell had just committed $1.8 million of his own money for the campaign.

The problem with Grimes’ campaign—and with candidates like Grimes herself—can be seen in a  nutshell in an article by Richard Eskow published on Huffington Post on Friday, discussing the specifics of McConnell’s comments to that Koch brothers crowd in August, captured on that video.  McConnell promises not only to defund Obamacare but also the Consumer Financial Protection Bureau, and to force a repeal not only of the CFPB but of the entire Dodd-Frank law that created that agency and that includes the financial-industry regulations enacted in the wake of 2008 economic collapse. But, of course, no one knows of the existence of the CFPC and no one knows that the Senate Republicans and candidates are pledging to repeal the post-2008 financial-industry regulations.  Just as no one knows, or at least no one remembers—because the Democratic candidates apparently won’t be caught dead mentioning it—that among the new regulations enacted by the Democratic-controlled Congress during the first two years of the Obama presidency (and pushed entirely by Democrats such as Dick Durbin)—are ones ending the banking-industry practice of exorbitant overdraft fees for small, sometimes-momentary checking-account overdrafts, and the so-called “Durbin Amendment” that prohibits disproportionately high payments by retailers (including small ones) to Visa and Mastercard for customer purchases using those cards.

Look.  If you want to run a Washington-vs.-our-state campaign as a Democrat, you need to make that campaign about the issue of who it is that determines specific Washington policy—in other words, about whether it’s the Kochs who effectively write legislation and dictate what legislation is filibustered or never brought to a vote, or instead small-business owners or ordinary individuals who play some meaningful role in this process.  A campaign for Congress by a Democrat that amounts to a generic ideological “Washington vs. our state” is a campaign that is incoherent. Grimes’ campaign is Exhibit A, but it’s certainly not the only current Exhibit.

The Louisville Courier-Journal, in its endorsement editorial, points out that Grimes supports such policies as a raise in the federal minimum wage and federally sponsored universal access to preschool.  But these are federal programs; she’s running for the United States Senate, not the Kentucky Senate. “Washington vs. our state” as a generic ideological precept precludes these. If Grimes’ ideology is really the same as Joni Ernst’s, then she should switch parties.  If it’s not, then she should make that clear, and make clear why it’s not.

And if Grimes wins, it will be precisely because of why it’s not—and because McConnell, not Grimes, finally made that clear to Kentucky’s voters.

And next time someone like Ashley Judd wants to run for Senate in a state like Kentucky, the Democratic Establishment should not insist that she not run because, after all, a “centrist” would have a better chance.  Judd would win this election comfortably, I’d bet.

Finally, though, the spot-on eloquence of the Courier-Journal’s and (especially) the Herald-Leader’s editorials should be noted for their courage, their emphatic directness and their specificity.

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So why not use easy money all the time?

http://cdn.atmdepot.com/wp-content/uploads/2012/07/Free-Money.jpg

Paul Krugman writes about QE and easy money as being beneficial for the bulk of Americans. But he gives reasons that could justify using easy money all the time, even in healthy business cycles.

He says…

“The bottom three-quarters of the wealth distribution basically has no investment income.”

This fact applies all the time in the economy… So why not use easy money all the time? We should just make easy money the accepted monetary policy.

Krugman will not see this issue as I see it because he sees the Fed rate stuck at the ZLB due to a large spare capacity. Even if he does not see large spare capacity, he wants to try to push monetary policy past the natural full employment level to generate some wage and price inflation.

But I see very little spare capacity left. In that sense, the capital markets should have been disciplined more. Keynes recognized that keeping interest rates low could sustain a boom, but he also warned that higher rates would be more socially beneficial after all was said and done in a business cycle…

“… it is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom by a rate of interest high enough to deter even the most misguided optimists. The disappointment of expectation, characteristic of the slump, may lead to so much loss and waste that the average level of useful investment might be higher if a deterrent is applied.” Keynes

We could say that easy money makes everyone’s life better, so why not use it all the time? Well, the real issue is creating an environment for a higher level of productive investment. Brad DeLong is writing about this now… He wants to know to what extent profits are being enjoyed as rents as opposed to productive investment that benefits workers too.

“What I would like to see Emmanuel and Gabriel guess is the share of wealth that is productive–that boosts the productivity of the working class and that shares those productivity benefits with workers–and the share of wealth that is extractive–that are pure claims on income rather than useful instruments of production, and thus that erode rather than boost the incomes of others.” Brad DeLong

If easy money is encouraging an environment that raises the share of wealth that is extractive, then easy money is not beneficial to the working class.

Monetary policy must discipline the capitalists with a policy tight enough to raise the “level of useful investment” as Keynes puts it. In this light, easy money may not be helping the working class.

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Low flush fallacies

David writes a short and ‘meant to encourage discussion’on retail level water use and campaigns to ‘save’ water. In short, the question/answer involves taking a look at what the whole cycle is for your watershed, which many of us are only vaguely aware. The comments that follow at Aguanomics are helpful in considering responses.

by David Zetland (from Aguanomics)

Low flush fallacies

VZ asks:

You say that low flush toilets are not that useful, but what about all the other usage of water in the household (shower, dishwasher, laundry…)? Does that water also get filtered in the same way (and hence it doesn’t matter if you use less of it) or that’s a different system and it makes sense to use less? Well, it makes sense to use less anyway (financially), since that’s the ways incentives are setup, but just wondering about the environmental benefits.

First of all, it makes sense to use less water if you have a water meter and the cost of additional water ($) is not worth the benefit (happiness).

But, second, the entire concept of charging for water use needs to be put into the context of the water system, i.e., will water that goes down the toilet and drains be available, after treatment, in the environment (or as recycled water returned to customers for landscape irrigation or for drinking)? If that’s true, then “efficiency” in terms of less water per shower, flush or wash will not really translate into any saved water.

Third, the real target for water savings should be outdoor use — mostly landscaping  — since that water tends to evaporate and/or sink into the ground, from where it cannot be reused.

That’s why I think that outdoor watering should attract a higher charge (scarcity) or ban (shortage). Water budgets, by the same logic, do not make sense if they “lock in” a certain allowance of water for landscaping. That’s why they are a bad idea in water-scarce areas and a waste of time in water-abundant areas.

Bottom Line: Flushed water does not disappear, worthless. It has value because it can be used again.

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Brad DeLong is Soooo right about Labor Share & Effective Demand… YEAH!

Brad DeLong responds to Paul Krugman’s post on The Profits-Investment Disconnect. Why are profits high, but investment low?

Brad DeLong says…

“Profits are not high now because demand is high, throughput is high, and capacity is being fully used. Profits are high now because the labor share is unusually low. Firms almost surely, given the collapse in the labor share over the past fifteen years, operating with too much capital and too little labor along the isoquant to be profit maximizing.”

Did the Fed caused inequality? No… Like I wrote two days ago… (link)

“The real change that led to increased inequality is the conspicuous drop in labor share after the crisis. Record profits by firms were not being transmitted to labor. That was not the fault of the Fed.”

Paul Krugman does not see the impact of this drop in labor share, Brad DeLong does. Yeah for Brad DeLong!

Why are productive investments low? Like Keynes said with an insufficiency of effective demand… (link)

“… The propensity to consume and the rate of new investment determine between them the volume of employment, and the volume of employment is uniquely related to a given level of real wagesnot the other way round. If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available at the existing real wage, and the equilibrium real wage will be greater than the marginal disutility of the equilibrium level of employment.

“This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached.”

As for why Brad DeLong included a graph of the real GDP shortfall, Keynes says this about insufficient effective demand… (same link as above)

“Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production… a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members.”

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Two little comments on Matt O’Brien

The main point (if any) is that wonkblog without Ezra Klein is still excellent. Matt O’Brien wrote an excellent post on what’s wrong with Europe. It includes an excellent intro to Krugmanian macro and a description of the problem.

I had two tiny comments. O’Brien discusses “structural reform” well, but accepts the German view that they lead in the field without question. Also he notes that Germany might threaten to leave the Euro.

My comments

2 things. Italy and Spain had “structural reforms” making it easier to fire long before Germany (Italy in 1997). This matters a lot because all 3 reforms grandfathered those who had job security. Germany hadn’t had time to build up a large number of people with insecure jobs. The tardiness of the Schroeder reform does more to explain the difference in employment performance than its existence. I am quite sure that Germans don’t know about the Treu, Suarez and Gonzalez reforms.

2. Why would a German discussion of leaving the Euro be a threat ? Why wouldn’t the remaining Euro block say good buy*, good luck, and good riddance & don’t let the door hit you where das Herrgott split you ? The resurrected Deutschmark would appreciate, so Germany would import more, which is exactly what the rest of Europe needs.

*this was an honest typo, but it actually is the whole point. Right now good buys in Germany are attracting Israeli immigrants (yes really http://www.haaretz.com/weekend/weekend-opinions/.premium-1.622536). If Germany leaves the Euro, exchange rates will adjust until prices aren’t absurdly low in Germany.

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SEASIDE SOCIALISM

Back in 2007 the state of Florida changed the way to insure beach properties and is mentioned at Angry Bear here.

Reuters reports here here and Waters edge crisis.

SEASIDE SOCIALISM

Breakneck development at the shore has trapped Florida in a costly Sisyphean effort to maintain its perpetually eroding beaches. More than a tourist attraction, the beaches protect all those buildings from the waves. Nearly half of Florida’s beachfront is designated under state law as “critically eroding.”

But that designation doesn’t limit further development; instead, it triggers taxpayer subsidies that support the status quo. Since 1990, government “beach renourishment” programs have dumped more than 135 million cubic yards of sand on Florida shores.

The state accounts for about a quarter of the roughly $7 billion spent on sand projects nationwide, in current dollars, according to Andy Coburn, associate director of the Program for the Study of Developed Shorelines at Western Carolina University in Cullowhee, North Carolina. Federal taxes covered about three quarters of the cost; state and local government paid the rest, minus a small share contributed by private landowners.

Congress this session approved five new sand projects that will require an estimated $400 million in federal help. Among them: Replenishment of the 19-mile stretch of beach that passes Huckabee’s vacation house, with $43 million in federal subsidies.

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