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Eleven richest Americans have all received government subsidies

A new report by Good Jobs First shows how the very wealthy in America have benefited from government subsidies as one element in building their fortunes. According to the study, the 11 richest Americans, and 23 of the 25 richest, all have significant ownership in companies that have received at least $1 million in investment incentives.

The study compares the most recent Forbes 400 ranking of wealthiest Americans with the Good Jobs First Subsidy Tracker database. Not only do Bill Gates, Warren Buffett, Larry Ellison, the Koch Brothers, the Waltons, Michael Bloomberg, and Mark Zuckerberg own companies that have received millions or even billions in taxpayer funds, 99 of the 258 companies connected with the Forbes 400 have such subsidies.

As I argued theoretically in Competing for Capital, the new report points out that subsidies for investment increase inequality as average taxpayers subsidize wealthy corporate owners. Location incentives directly put money into their pockets, which then has to be offset by higher taxes on others, reduced government services, or higher levels of government debt. Moreover, as the study notes, despite the huge amount of these subsidies given in the name of economic development, there has not been enough payback to raise real wages even back to their 1970s peak. In other words, if economic development has created so many new jobs, why haven’t wages risen?

Of course, subsidies don’t account for the biggest part of inequality. Read Thomas Piketty for the big picture on the subject. But the new report shows that large numbers of America’s wealthiest (or not so wealthy, like Mitt Romney) have benefited handily from government subsidies.

Cross-posted from Middle Class Political Economist.

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Current Edge of Adair Turner’s Thinking

This video was published on Youtube a week ago and has only had 27 views. The video is of a talk Adair Turner gave in November at the Bristol Festival of Economics. It reflects his current insights.

He gives explanations for 4 big patterns developing in the global economy.

  1. Increased Inequality
  2. Rising ratio of wealth to income
  3. Rising leverage (rising debt to GDP)
  4. Falling interest rates over decades

His ideas are good. For example, one main idea is that the increased values of real estate are making our economies unstable. Most leverage is created for real estate and not capital investment. Confidence in property values then goes through intensely more volatile cycles.

His explanations of falling interest rates is based on… ex-ante savings being more than ex-ante investment plans. He explains why investment needs are going down. The result is lower interest rates which make it easier for people to compete for real estate ownership, which brings him back to his main point.

He does make mention that in the past 3 years, monetary policy should have dropped money from helicopters instead of what it did. Helicopter drops of money is actually fiscal policy. I agree with his “radical” view as he calls it, because using the IS-LM model, I see the same idea… that we should have had less monetary policy and more fiscal type policies. (Link to my post)


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30 minutes to Fed Statement

The markets wait for the Fed’s statement in 30 minutes. Some thoughts beyond low inflation and an active labor market…

  • Fed must give forward guidance to normalizing the Fed rate.
  • Yet, any sense of disciplining the markets will be met with lower stock values.
  • The markets need discipline which is part of the normal process of a normalized Fed rate.
  • Yet, the markets and the Fed have fallen into a pattern of slack discipline.
  • Will the Fed give a sense of discipline during the Christmas shopping season? They have to be careful, because capital income is a big consumer at the moment.

Update: Dow quickly jumped 100 points on Fed statement keeping tone of considerable time in the new wording of “patient”.

“…the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. ”

“This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” From Fed statement via WSJ.

No sense of discipline in the statement.

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Monetary Reflections… more to come in 2015

I reflected in a post last week that we should have had less accommodative monetary policy and more fiscal policy since the crisis… Thoughts on Investment, IS-LM & Effective Demand.

Today Paul Krugman also had what appears to be a moment of reflection upon monetary perspectives… The Limits of Purely Monetary Policies. He recognizes the limitations of monetary policy after the crisis in that they cannot just produce inflation when they want to.

He recognizes the need for more fiscal policy… He mentions the idea of just giving money to households, but that is really fiscal policy.

“But, asks Evans-Pritchard, what if the central bank simply gives households money? Well, that is, as he notes, really fiscal policy — it’s a massive transfer program rather than a conventional monetary operation.”

Putting money into the hands or people is a good fiscal idea that would have moved the IS curve to the right, which would have given the Fed rate a better chance to lift-off earlier, and thus normalize better. We could have generated more “grassroots” inflation pressures. My view is that the best way to put money in the hands of people is to raise labor share of income, but firms do not have an incentive to do that. Nor does labor have the power to negotiate that.

I foresee that 2015 will be the year for massive reflections and soul-searching about monetary policies. The Fed says that it is planning to lift-off the Fed rate, but others do not think that can happen (I am one) because they are behind the curve and there is too much global weakness.

2015 will surely be an interesting year…

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Peso Problems, Ruble Problems, Euro Problems and all Bhat

The Ruble is collapsing. This will do dramatic damage to the Russian economy, because many Russian firms have dollar denominated debts. This is a familiar story. Something similar happened in East Asian countries in 1997 and Russia in 1998. There is no good policy response, because defense of the Ruble based on extremely high interest rates (last I heard 17%) will also cause extreme distress.

I think that it is in Russia’s interests to impose capital controls, which will amount to allowing and forcing Russian firms to default but leave foreign creditors with no legal recourse. Imposing capital controls worked rather well for Malaysia in 1997 and Russia in 1998.

In this post, my interest is in why creditors lent dollars given the fact that Russian debtors would default if the Ruble depreciated. As used by economists, the phrase “peso problem” doesn’t just refer to the Peso. It is the argument that sample averages in available data can be very misleading indicators of expected values if there are rare large events. The example was devaluation of the Mexican Peso. This was back in olden days, when Mexican borrowers borrowed in Pesos and the Peso was pegged to the dollar. Peso interest rates were, nonetheless, higher producing what appeared to be a riskless profit opportunity. Then the Peso devalued. Milton Friedman is given credit for arguing, before the devaluation, that the apparent riskless profit opportunity was no such thing.

The bottom line is that rare extreme events can make it seem that riskless profits have been earned. I use “the bottom line” literally to refer to the profit or loss stated in a profit and loss statement.

It has been argued that people who manage other people’s money, have excellent reason to seek out (or if necessary create) peso problems. Until the extreme event occurs, there are high returns and low measured variance of returns (that is low sample variance in the sample of stuff that has already happened). Such a pattern is highly rewarded. If disaster comes later, it is too late to claw back bonuses. Bankers allegedly sometimes say “IBGYBG” that is “I’ll be gone, you’ll be gone.”

Dollar denominated loans to firms with revenues denominated in another currency are a way to recreate the Peso problem without pegged exchange rates. The knowledge that there is a risk of widespread default implies high interest rates on such loans. The fact that widespread default hasn’t occured implies high performance compared to ex post measured risk. Big bonuses.

Another example is a larger than optimal currency area, that is, the Euro block. The introduction of the Euro caused a huge increase in the flow of loans from Germany to Spain. The Peseta could not realign compared to the Deutschemark. But there could be widespread insolvency instead.

Default is often (typically ?) worse for creditors than devaluation. But fear of possible default in the distant future has not prevented massive foolish lending.
I think this could be the usual problem that people who manage other people’s money who are rewarded based on short run performance have strong incentives to push risk into the lower tail of the distribution. Rare huge disasters aren’t costly enough to them.

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Waiting & Watching… What response to Russia?

These are tense moments… At 1 am in the morning, Russia made a dramatic announcement to raise its base interest rate from 10.5% to 17%. Their ruble was falling fast yesterday. There is capital flight out of Russia. So the rate rise was meant to attract money back into their country. They even raised their deposit rates to 16%. They want money to stay in their banking system.

Since the announcement, the Ruble has stabilized against the dollar.


I tweeted last night that it is almost tempting to invest in Russian bonds. How many investors will actually put their money into Russia now?

US stocks started lower in the morning, then returned to yesterday’s close. The Dow sits at 17,200, where I believe it is in a stable orbit. Yesterday I expected the Dow to stay around that level for a while. And it is still there as of this moment, but the market is waiting and watching what response their will be from the financial authorities.

Update: Stocks are beginning to rise 30 minutes after publishing the above. Is the opinion forming that the Fed will not be able to raise the Fed rate? How would US companies benefit from the troubles in Russia and emerging markets? Is money flowing into the US markets? Would US stocks absorb funds first, then back down afterward?

Update: Ruble is rising since post above written about an hour ago.

ruble 2

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House exempt from ethics education, lets change that.

So, I just got an email from my congressman letting me know that he has submitted a bill that would no longer exempt the House membership from annual ethics training.  Their staff is required to have such education, the Senate is required, but not the house.   He is also trying to get it into the rules for now.

How timely considering what has just gone down in the congress.

Needless to say, the leadership is not wanting it.

The Republican Chairman of the House Rules Committee has already rejected the idea and said that it wouldn’t be “proper” for House members to required to take annual ethics training…

It would not be proper?  I guess it is beneath them?  What professional group exists that does not have a requirement for some type of annual education which often includes ethics?  My mistake, I guess they are not professionals!

Anyway, please sign the petition and share this.  I know, ethics education won’t solve it all, but at least the ability to say “I made a mistake” will be limited.


Thank you.


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US investment, discounted profits and irrational exuberance

As promised below, I have written something about investment (warning google document)

In the note, I calculate some variables related to discounted future profits. Here is a snip from the paper in which I define them.


Standard micro founded models of investment are based on shareholder value maximization and assume that there are adjustment costs, so investment decisions must be forward looking. They imply high investment when the expected discounted stream of profits per unit of capital is high. If expectations are rational, expected discounted profits should be correlated with actually achieved discounted profits.

The interesting part of the note is just a graph of time series. For this graph I assume depreciation of 1.25% per quarter. I use Moody’s BAA index for the interest rate and look at non residentical fixed capital investment.



prret10 is prret defined in the equation divided by 10. prprfgdp20 is prprfgdp divided by 20.

The pattern is the opposite of that predicted by standard macroeconomic theory — the variables which should be positively correlated are negatively correlated.

In particular, graph shows two episodes of high non residential fixed capital investment and low discounted profits. First there was extremely high investment during the Carter years. Low profits and high interest rates during the Reagan years make this investment seem to have been a mistake. I note in passing that the events which are clearly there in the official data, contradict the generally accepted story about what happened in the US economy back then. Second, as is more widely recognised, there was a huge amount of investment in the late 90s followed by painful disappointment in the 00s.

In any case, the pattern in the data is very clear and is dramatically the opposite of the pattern predicted by standard macroeconomic models.

update:typo corrected.

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Paid or not? What is part of your job?

by Nancy O

You’d think that the Supreme Court would have better things to do than write decisions constituting rehashes of old law. But, nooo! In its recent decision in Integrity Staffing Solutions v. Busk, 13-433, a decision released this week, the Court sagely decided that waiting in line is not compensable work related activity.
You may spend half an hour at the end of a 12 hour shift waiting to shuffle through a metal detector, but it’s not work. And, your employer doesn’t owe you a nickle for your time. And, no you don’t get to leave if you don’t want to wait. And, no you can’t slip out the back because you’re in a warehouse the size of 7 football fields. And, yes, you gotta do it because your boss tells you to. But, no pay for you even though your employer’s security process is a regular part of your daily activities.

This case is a classic “portal to portal” case of the type litigated and relitigated in the 30’s and 40’s after passage of the Fair Labor Standards Act. For decades, the FLSA helped to improve the compensation and working conditions of millions of American workers by insuring fair compensation for longer hours of work required by some employers on an irregular basis. That overtime pay went straight into the economies of the local communities where hourly employees worked. Result–everyone benefited.

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