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

A glitch in the IS-LM model

Many top economists use the IS-LM model to support low interest rates. The LM curve of the IS-LM model is built upon a model of financial markets.


In the graph above, money supply has been pushed far to the right to keep interest rates low. The model implies that the money supply would eventually have to be reduced in order to raise interest rates, but the Fed has other ways to raise interest rates.

But there is a glitch to pushing the money supply so far to the right. Low interest rates help unproductive firms stay in business. And we have had low interest rates for years now.

What is the glitch?

There are more unproductive firms doing business… and the economy has become dependent upon them. Not good…

The Wall Street Journal had an article showing how inequality is growing between identical workers, because productivity differences between firms even in the same industry have widened. (link) So there is evidence that low productive firms have become more prevalent.

Creative destruction is an important part of a proper interest rate cycle. Proper interest rates keep low productive firms at lower levels. These low productive firms drag on productivity, wage growth, investment and potential growth. A higher prevalence of unproductive firms supports the case for low interest rates. But the purpose of low interest rates was not to increase unproductive firms but to keep them from crashing too fast. Now they are not being allowed to crash at all. Thus, the glitch.

An efficient economy where resources are allocated to maximize net social benefits must have a proper interest rate cycle for creative destruction.

The Fed missed the interest rate cycle this business cycle, so the prevalence of low productive firms has increased. It will be very difficult to raise interest rates because the economy now depends on these low productive firms.

A rise in interest rates will push many unproductive firms over the edge and start a cascading downward of the economy. The economy has become more sensitive to interest rate hikes due to an increased prevalence of unproductive firms.

Interest rates will have to go through a properly disciplined cycle to get the benefits of creative destruction. Or the unproductive firms will be pushed out anyway as profit rates decrease at the end of this business cycle. Either way, there will be pain for some.

Comments (9) | |

On the Malleability of Cultural Traits – a Look at Irish-British and German-Americans

Authored by Mike Kimel

The way the immigration process was structured from 1921 to 1965, 70% of immigrants to the US came from Britain, Germany and Ireland.  In a recent post I noted that the proportion of great writers to scientists in Ireland tended to be a lot higher than for Britain and Germany.  I also noted that these cultural traits persisted for a long time, and even survived immigration; the ratio of great Irish-American writers to scientists is higher than the ratio of great British-American or German-American writers to scientists.  I also noted some evidence that the same is true in Argentina among populations descended from Ireland, Britain, and Germany.  

Assume for this post that STEM has been as important to economic growth as it appears.  Then, as a country, we probably would have grown more quickly if there had been fewer immigrants from Ireland and more from the UK and Germany.  Alternatively, as a country, we probably would have grown more quickly if more immigrants arrived in the US with a STEM background, which of course would have required more vetting of the immigrants.  Another way we could have grown more quickly would be if immigrant children, as well as the native born population, grew up with increased likelihood of going into STEM vocations.  

Since the writer to scientist proportion is lower among Irish Americans than among British and German-Americans, the lower hanging fruit, so to speak, probably lies there.  At the margin, German-Americans are already picking STEM over writing, whereas their Irish-American counterparts are more likely to have gone the other way.   Even making an assumption that seems entirely unwarranted to me, namely that there is some intrinsic reason why the descendants of Irish will, on average, do more poorly at STEM vocations than the descendants of British or German people, it is still likely that Irish-Americans constitute the lower hanging fruit when it comes to STEM.  

To put things a different way, growth would have been faster had we, as a population figured out how to reduce the writer to scientist ratio, and doing so among Irish-Americans would have been more beneficial than doing so among British- and German-Americans.   

So what drives more people to do X rather than Y for a living?  Sometimes it just happens, courtesy of progress and technology.  For instance, the American labor force working in agriculture has gone from upwards of 90% around the time of the Revolution to below 2% today.  In turn, the share of American kids who plan to become farmers when they grow up has dropped at roughly the same pace.

But such changes can also be engineered.  Through the careful application of petro-dollars, liberally marinated over a few decades, our Saudi allies have gotten a lot of people to live a fundamentalist lifestyle.  They did so, in part, by creating a lot of employment for clerics throughout the Middle East and the rest of the world.  Similarly, the Soviet Union generated a fair amount of demand for political commissars (and at one point, for biologists steeped in the Lysenkoist school).  And in today’s world, when your reservoir of Juche runs low, just head on over to the, ahem, Democratic People’s Republic of Korea.  The DPRK has got plenty of experts who can fill absolutely all your Juche needs, from applied to theoretical. 

There are plenty of levers – money, time, religion, politics, outright decrees – that have been used to change cultures throughout the world.  Any and all of them can be used to change the ratio of writers to scientists among the Irish diaspora or in most any other group of people you can name.

In follow-up posts, I want to look at factors that affect whether a given attempted cultural change of this sort succeeds or fails.  After all, many such attempts have failed, and the consequences are often disastrous.  

Tags: Comments (61) | |

John McCain Says He’s Glad a 5-4 Supreme Court Majority Fabricated a Constitutional Ground to Strike Down Most of the McCain-Feingold Campaign Finance Law as Unconstitutional

Okay, so how many of the 53 percent of voters who say they want a Republican Congress to thwart Clinton’s policy agenda have any idea what that policy agenda IS? Just wonderin’.

But those same polls [suggesting a Clinton lead] don’t suggest doom and gloom for down-ballot Republicans just yet. And in fact, there’s real reason for GOP optimism that Trump won’t ruin their year completely. …

For one, the so-called generic ballot — i.e., whether people prefer a generic Democrat for Congress or a generic Republican — still only favors Democrats by a small margin: 3 points in both the Post-ABC poll and NBC News-Wall Street Journal poll, among likely voters. That same Democratic edge on the generic ballot is actually down from 6 points in last week’s NBC-WSJ poll.

Put plainly, these generic ballots are unremarkable and don’t suggest a big Democratic wave ahead.

Part of the reason Trump’s woes might not have filtered downballot could be that a strong majority of people don’t really associate Republicans with their party’s presidential nominee. And many people also appear to dislike Clinton enough that they like the idea of a Congress that could keep her in check.

The Post-ABC poll includes a question about whether people think Trump represents the “core values” of the Republican Party, and a strong majority of likely voters say he doesn’t — 57 percent overall.

The number includes a whopping 62 percent of independents. Just 27 percent of them think Trump does represent the GOP.

And the NBC-WSJ poll might be even more encouraging for Republicans, because it suggests a path forward for them. The poll asked whether registered voters would be more likely to support a congressional Republican who would be a check and balance on Clinton and Democrats, and 53 percent said they would. Just 40 percent preferred a congressional Democrat who would help Clinton pass her agenda.

And now, some legitimately good news for Republicans, Aaron Blake, Washington Post, this morning

Of all the asinine comments by major political pundits about the presidential campaign during the last one and a half years, one that rates among the silliest is a recent claim by Paul Krugman on his Twitter feed pronouncing himself vindicated for his aggressive defense of Clinton as the only Democrat who could win the general election.

Why the claim of vindication?  Well, because no candidate other than Clinton would have had a campaign team deft enough to recognize that Trump could be baited into a meltdown during the first debate by reciting his awful treatment of 1990s-era Miss Universe Alicia Machado because she gained weight during her reign, a meltdown that spiraled for about a week afterward.  And that was what began the turning of the tide away from what appeared to be momentum for Trump and (apparently) triggered the release of the Access Hollywood Boys-on-the-Bus videotape.  See?

Because the only possible way that a Democratic nominee could defeat—at all, but especially soundly defeat—Donald J. Trump was that.  It couldn’t have happened instead based on, say, on a progressive platform pushed by Bernie Sanders in the primaries, or one that would have been advanced by Elizabeth Warren or Sherrod Brown, one or the other who likely would be the Dem nominee had she or he run. That is, on a progressive agenda that is broadly popular among the dominant swath of the public that wants significant change, and much of it among pretty much everyone else who isn’t in the basket of deplorables.

Or, hell, even a platform chosen by Joe Biden, who currently is far more progressive than he had been at any earlier time in his career, had he been the nominee.

That, of course, presumes—surely accurately—that each of these candidates would have run, and run aggressively and constantly, on their progressive platform.  A platform that argues for significant structural change in the power of mega corporations and the very wealthy vis-à-vis everyone whose interests are not the same as those of mega corporations and the very wealthy.

I chuckle every time Krugman or some other big pre-convention Clinton backer angrily notes that Clinton is running on the most progressive party platform ever. As if Clinton has actually campaigned on this, other than to mention it in passing when the last Trump outrage falls from constant view and his poll numbers begin to rise, or hers begin to drop because of some new email-related something-or-other.

I’ve thought countless times since the convention how lucky Clinton is to have a party platform to run on that was largely forced through by Sanders.  But that has presumed that eventually she actually would begin to run on it.  No.  I mean actually campaign on it.  It’s specifics.  Godot may arrive, but he hasn’t really yet.

But if he does, it should be in the form of asking this: What part of Clinton’s agenda is it, exactly, that all those voters want a Republican Congress to halt?  And what part of the Republican Congress’s agenda do those voters want Clinton to comprise on and agree to?

Ah.  It must be re-deregulation of the finance industry that they want.  And immense cuts in taxes for Donald Trump, his heirs, mega corporations, CEOs of mega-corporations, and the insurance that Citizens United will never be overturned, and that the Supreme Court and the lower federal courts will continue to be steady-as-she-goes unapologetic proxies for mega-corporate America; Clinton’s agenda includes some very specific legislation on campaign financing, some of proposals which I did not know of until I read yesterday’s NYT editorial listing them.

Or maybe it’s the stuff about handing federal lands and environmental and energy policy to the likes of the Koch brothers.  And control of the SEC by the Mercers and the Ricketts. The Kochs don’t support Trump, but they sure as hell fund the rest of the Republican Party.  And Harold Hamm, Forrest Lucas, the Mercers and the Ricketts fund Trump—bigly—as well as the Republican Congress.

For starters.  There’s also the healthcare-insurance public option.

Every one of those proposals by Clinton is supported by a majority of the public, some by wide margins.  And every one of the Republican Congress’s proposals are opposed by a majority of the public, most by very wide margins. Yet Clinton’s campaign focuses so little on this that, according to that poll, 53 percent said they want a Republican Congress, to keep Clinton from enacting these policies, and just 40 percent preferred a congressional Democrat who would help Clinton pass her agenda.

I’ve wondered—and wondered, and wondered—for many weeks now why Clinton continues to allow the misconception to persist that Trump’s general election campaign is not funded in part by billionaires and has no ties to the finance industry.  I actually had expected her to mention at one or another of the debates that Trump is funded extensively not only by two oil-and-gas billionaires, Hamm and Lucas, but even more so, apparently, by two finance-industry-titan families: the Mercers and the Ricketts.

When she didn’t, and didn’t mention the Mercers and the Ricketts even when campaigning in Toledo, Ohio, I presumed it was because she was concerned about angering some of her Wall Street donors.  But in light of the leaks of the transcripts of her paid Wall Street speeches, I think there was something more.  I think she knew or suspected that these had been hacked, and she didn’t want to provoke their release.

So now, to borrow from Trump, she’s been unshackled. She can detail to the public the reports that the Mercers in particular, but other billionaire donors as well, including the fossil fuel ones, are directly dictating policy proposals to Trump.

And that the Heritage Foundation—the far-right policy arm of none other than Congressional Republicans, the very ones whom the public wants to write laws, rather than seeing Clinton’s administration do so—in fact has written a fiscal and regulatory policy agenda for Trump that curiously mirrors the policy agenda of Paul Ryan and Mitch McConnell.  Neither of whom is exactly popular.

In my opinion, there isn’t much in Clinton’s paid speeches—at least from the articles I’ve read about them—that are really a problem, other than that she said that Wall Street folks should help craft the laws to reign in Wall Street, since they know better than anyone else how Wall street works.  Well, not better than Warren.  And not better than some other law and business professors. And not better than former Wall Street folk who left in disgust.  But, okay; that was three years ago, in a paid speech.

What is seriously problematic, in my opinion, though, is the hacked email discussion about how to go about trying to persuade an angry, adamant Hillary Clinton that Bill Clinton should cancel his paid speech to Morgan Stanley scheduled for a few days after Hillary Clinton was scheduled to announce her candidacy.

The hero in that incident, as in several others, was campaign manager Robby Mook, who appears to be the only actual modern-era progressive in Clinton’s entire inner circle. He’s a millennial, but so are a (precious) few others.  But only Mook appears to be a circa 2016-style progressive.

Trump likes to say that if it weren’t for the conspiratorial news media, he would be beating Clinton by 15%.  But that misses, well, a few points, but this one in particular: that the news media and the Clinton campaign seem to have conspired to keep from the public the most critical fact of all.  Which is that Clinton’s progressive policy agenda is the agenda that a majority of the public wants.

And that the Republican Party’s, so much of it actually adopted by Trump, with a steroid cocktail thrown in, is precisely the opposite of what that very majority wants.

Krugman’s Times column today is largely about the striking similarities between Trump’s depiction of the current state of this country and Ryan’s warnings in a speech last week about this country’s future if Clinton wins.  But the similarities are more in style than in substance. Krugman writes:

But for what it’s worth, consider the portrait of America Mr. Ryan painted last week, in a speech to the College Republicans. For it was, in its own way, as out of touch with reality as the ranting of Donald Trump (whom Mr. Ryan never mentioned).

Now, to be fair, Mr. Ryan claimed to be describing the future — what will happen if Hillary Clinton wins — rather than the present. But Mrs. Clinton is essentially proposing a center-­left agenda, an extension of the policies President Obama was able to implement in his first two years, and it’s pretty clear that Mr. Ryan’s remarks were intended as a picture of what all such policies do.

According to him, it’s very grim. There will, he said, be “a gloom and grayness to things,” ruled by a “cold and unfeeling bureaucracy.” We will become a place “where passion — the very stuff of life itself — is extinguished.” And this is the kind of America Mrs. Clinton “will stop at nothing to have.”

So, DSCC and DCCC, why not take this ball and run with it?  Why not take that little clip and juxtapose it with parts of the Dem Party platform and pieces of Clinton’s proposals, such as those on campaign finance reform?  And follow that with a summary of, say, Ryan’s budget’s Greatest Hits?

Clinton, of course, could do this, too.  Robby Mook, can you try to persuade the candidate to start campaigning on this, now that the sexual assault and voyeurism admissions and allegations are becoming old news?

I said here after the second debate that I myself believe that Clinton is very much a changed person now in her support of genuinely progressive structural-power changes.  I still believe that.  But she already has my vote.

Tags: , , , , , , , Comments (15) | |

How Punctuality Affects Production

authored by Mike Kimel

Earlier this month, I wrote a post noting that countries where punctuality is more highly prized in the year 1999 tend to have higher GDP per capita in both the year 2000 and in 2015.   I would like to follow up with a bit about how that happens, which I had I intended to post in the comments to that piece.

My sister is currently in Northeastern Brazil, which is not unusual.  By my reckoning, she has spent between twenty and twenty-five years in the country and has a condo in Natal.  She loves the country and the people.  (As do I, I might add.)  At the moment, she is helping a Brazilian friend rebuild/expand a small hotel he owns close to the beach.  

I get periodic updates via “WhatsApp,” including videos of geese and pictures of monkeys.  A lot of her stories being told would surprise the average American.  To a Brazilian, or anyone with experience in South America for that matter; it is the usual litany:

1. Almost nothing happens on time.  Most of the crew is late every day.  Sometimes hours late. 

2. Less periodic events (e.g., delivery of materials) are also usually late.  Sometimes by more than 24 hours.
3. The result is there are always people standing around, which results in wasted capacity and resource.  You need the crew there in case the cement mixer rolls in; but in reality, it might not actually arrive until the day after it was scheduled.  Or maybe, it may arrive the day after that.  Of course you plan around it or have contingencies; but no matter what, the result could be less wasted time, energy, and resource if everything happened as planned.  Put another way, the lack of punctuality reduces the amount of work being done and production produced.    

As I noted last month, my wife is in a similar line of business . . . she buys, rehabs, and rents-out residential rental properties in Northeast Ohio.  She also deals with crews and the schedules she builds always have contingencies and room for such events as painters not showing up or electricians arriving stumbling drunk and belligerent.  The reason tor the contingencies is because it happens.  (In the post describing that, I contrasted with my own white collar world, where in twenty years I never once had to plan around whether someone was going to show up drunk, and my failure to plan for that eventuality has never mattered.)   

And yet, my wife alternates between horrified and humored by my sister’s stories.  For my wife, a person or delivery showing up late enough or material being defective enough to affect the workflow usually happens once per job. (As an FYI, it takes between two to six weeks to rehab a single family home in Northeastern Ohio, depending on the state of the house when we buy it.  I cannot imagine a similar timeline happening in Northeastern Brazil.)   

In my sister’s world, that’s how things are all the time.   It is the difference between standing on the pier and being a fish.

Tags: Comments (43) | |

Trump Says the Establishment and the News Media Deemed Bernie Sanders a Sexist, a Racist, a Xenophobe and Morally Deformed

“The establishment and their media neighbors wield control over this nation through means that are very well known,” Mr. Trump told a crowd in West Palm Beach, Fla., on Thursday. “Anyone who challenges their control is deemed a sexist, a racist, a xenophobe and morally deformed. They will attack you. They will slander you. They will seek to destroy your career and your family. They will seek to destroy everything about you including your reputation. They will lie, lie, lie, and then again, they will do worse than that. They will do whatever’s necessary.”

Partisan Crowds at Trump Rallies Menace and Frighten News Media, Nick Corasaniti, New York Times, yesterday

If I’d read, say, the New York Times and the Washington Post during the primary season, I never would have supported Bernie all those many months. Unless, of course, I’d figured out that they were just making it all up and that Bernie isn’t a sexist, a racist, a xenophobe and morally deformed.

Either that or ….

Tags: , , Comments (22) | |

Capital Flows and Financial Crises

by Joseph Joyce

Capital Flows and Financial Crises
The impact of capital flows on the incidence of financial crises has been recognized since the Asian crisis of 1997-98. Inflows before the crisis contributed to the expansion of domestic credit and asset booms, while the liabilities they created escalated in value once central banks abandoned their exchange rate pegs and their currencies depreciated. More recently, evidence that foreign direct investment lowers the probability of financial crises has been reported. A new paper by Atish R. Ghosh and Mahvash S. Qureshi of the IMF investigates how the different types of capital flows affect financial stability.

The authors point out that capital inflows can be problematic when they lead to appreciations of real exchange rates and increases in domestic spending. The empirical evidence they report from a sample of 53 emerging market economies over the period of 1980-2013 does show linkages between capital inflows on the one hand and both GDP growth and overvaluation of the real exchange rate. But when the authors distinguish among the different types of capital inflows, they find that FDI, which has the largest impact on GDP growth and the output gap, is not significantly associated with overvaluation. Net portfolio and other investment flows, on the other hand, do lead to currency overvaluation as well as output expansion.

Comments (0) | |

New study casts more doubt on data center subsidies

A new report by Good Jobs First confirms what has been long-suspected: Data center megadeals of over $50 million in subsidies create very few jobs at a cost per job that easily exceeds $1 million. Indeed, the average for 11 megadeals going to tech giants like Google, Apple, Facebook, and Microsoft came to $1.8 million ($2.1 billion/1174) nominal cost per job.

As I have discussed before, such a figure far exceeds what a typical automobile assembly plant will receive, even though the latter creates far more, and better-paying, jobs than server farms do. An auto facility will receive something around $150-200,000 per job, and it will bring along suppliers to boot (though, unfortunately, sometimes the suppliers will also receive incentives).

The new study finds that by far the most important site location consideration is the cost of electricity and, increasingly, whether the electricity is generated by renewable sources like wind or solar. Thus, many of the biggest data centers are located in states like North Carolina (cheap coal-fired plants), Oregon and Washington (cheap hydropower). States with cheap electricity do not need massive subsidies, but they provide them, anyway.

At least, they usually do. As I have related before, American Express in 2010 announced a $400 million data center in North Carolina, without incentives. But fear not, Amex had not forgotten about using the site selection process as a rent-seeking opportunity. The reason it did not seek incentives, as far as anyone can tell (don’t forget about the inherent information asymmetry here), is that the company knew it was going to close a 1900-job call center in Greensboro, which would trigger clawbacks on the data center if it received subsidies for it. So in that case North Carolina gave no incentives for the server farm.

Not only that, Google knows how to build and expand data centers without incentives. Of course, that’s in Europe. The Netherlands Foreign Investment Agency confirmed for me that it gave no subsidies to Google for a $773 million, 150-job center opening in Groningen province next year. I was unable to get affirmative confirmation on projects in Ireland, Finland, and Belgium, but none of them show up in the EU’s Competition Directorate case database, so presumably they did not receive incentives either.

The study concludes with sensible recommendations: Transparency where it doesn’t exist, capping incentives at $50,000 per job, and knowing when to get out of subsidy auctions for these projects. Maybe simpler still, I would suggest that economic development officials just say no.

Cross-posted from Middle Class Political Economist.

Tags: , Comments (4) | |

“Why would you want to be associated with a party that’s so awful?”

This morning I overheard a part of a conversation between two 30-ish old high school friends, both from career-military families; their high school was on a military base.  One is a disabled Marine veteran, having lost his right leg below the knee, significant muscle in his left leg, a good part of the movement in his right hand (he’s right-handed), and enough of his colon to wear a colostomy bag, when he stepped on an explosive during deployment in Afghanistan, ending his plan to be career Marine.  During an earlier deployment in Iraq he watched as a friend of his was blown up by a suicide bomb in a car.

His friend was in the Navy for two years and then in a National Guard unit for several more.

Neither is a college graduate, although both of their wives are.  At least one, the Navy vet, is a comedy-talk-radio devotee, which I think means right-leaning.  Both of their families are decades-long Republicans.

Their conversation was about junk mail.  The Navy vet, one of my neighbors (I live in a college town, but one that has a good number of military vets and a major veterans’ hospital, which makes for a nice mix, in my opinion), made some off-hand comment about it, which I didn’t hear.  The disabled Marine vet responded, “Oh, yeah.  It’s all that campaign stuff.  I said to [I think he said, his mother, but I’m not sure], ‘Why would you want to be associated with a party that’s so awful?”  His friend said, “Yeah.”

What struck me was the indictment of the party, not merely of Trump.

I was so glad to read this morning about Obama’s speech last night in Ohio, in which he indicted the Republican Party itself for Trumpism—a change from the tack he took in his convention speech in July.  The purpose is to–finally–force Clinton to make a serious effort to swing control of the Senate and the House.

I also was struck by Paul Krugman’s column this morning, the purpose of which–notwithstanding its title, “The Clinton Agenda”—is to try to shift the discussion from the Clinton-Trump contest, whose outcome no longer is in doubt, but to which party controls Congress.  Because which party controls Congress will determine whether or not federal policy shifts to what a large majority of Americans want—especially on climate-change-related law, but also on so much else on which there is broad public consensus.

The WikiLeaks-released emails from John Podesta seem to be largely-irrelevant history.  They show the dismaying extent to which Clinton and her aides, other than Podesta, failed so completely, for so very long, to grasp the nature of this election cycle.  But they continue to matter unless Clinton finally does recognize that most of the policies that progressives so care about—foremost, I believe, the policies (a.k.a., law) that the Supreme Court and the lower federal courts and federal agency heads will determine—are supported by the moderates she so fears reminding that she’s a Democrat, and who may decide to vote Democratic for Senate and House precisely on that basis.

Obama talked yesterday only about the Trumpian awfulness of the Republican Party itself—a subject that certainly deserved a speech all its own.  But Clinton should pick up the fiscal and regulatory mantle from her biggest cheerleader pundit and campaign for a Democratic-controlled Congress.  He says she’s done enough on that, but then belies that in the rest of his column.

Tags: , , , Comments (28) | |