Wednesday, October 8, 2014

Jay Barnes—a case study in practiced uselessness No. 000079

Jay Barnes, a Missouri State Representative, Republican from Cole County whines that, “The proper role of the legislature … is limited to state law and policy,” when asked about the General Assembly inquiring into Ferguson.

Regrettably, he doesn’t even listen to himself. A few days ago he offered on his blog his lack of wisdom on bank regulation and the 2008 Financial Crisis which lead to the Lesser Depression. Why he doesn’t limit himself to state law and policy isn’t explained.

Long story short, Barnes is a “know nothing” who believes he knows more about bank failures and their damage to the economy than everyone from Milton Friedman, on the right, to moderates like Keynes, to people to the left like Paul Krugman.

We will make it simple Jay. Where is your estimate of the damage that would have been done to the American economy in 2008 had AIG been allowed to fail?

Oh, you don’t have one?

There are people who do this work. For one, the Dallas Federal Reserve did a study entitled "How Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis."

So how bad was it? Really, really bad: The economists say a "conservative" estimate of the damage is $14 trillion, or roughly one year's U.S. gross domestic product. This is based on how much output was lost during the crisis and Great Recession, along with all the damage done to potential future economic growth.

As a consequence, after 6 years of rebuilding, we are still a long way from a safe shore. Today, the IMF reported:

Banks need a new fitness regime

Banks hold significantly more capital than before the crisis, but many institutions do not have a sustainable business model that can support the recovery.

The report analyzed 300 large banks in advanced economies—which comprise the bulk of their banking system—and found that banks representing almost 40 percent of total assets are not strong enough to supply adequate credit in support of the recovery. In the euro area, this proportion rises to about 70 percent.

These banks will need a more fundamental overhaul of their business models, including a combination of repricing existing business lines, reallocating capital across activities, consolidation, or retrenchment. In Europe, the comprehensive review of bank balance sheets by the European Central Bank provides a strong starting point for these much-needed changes in bank business models.

Here is a link to the complete report.

Having read Barnes one is pressed to ask, if we don’t have a government what will keep banks from getting even bigger and taking even more risk.  Naturally, Barnes has no serious discussion of such a point. He is what he i: a tired campaigner seeking only to feed off the jealously of people who envy Hank Greenberg. 

Saturday, September 20, 2014

A St. Louis based economist to disregard: Stephen Williamson No. 000077

Macro economics is politics masked as science through which runs a deep political divide. As Michael Pettis well explained recently:
There is as you know a political divide between economists. One group focuses primarily on managing demand to prevent the under-utilization of labor and capital (often called Keynesians). The other insist that it is only by increasing savings, which usually means increasing wealth inequality and allowing the benefits of growth to “trickle down”, that we can generate the increases in investment that drive long-term economic growth (often called supply-siders, or Austrians, although for some reason true Austrians seem to loathe supply-siders).
The point to remember is that rising inequality or, especially in countries like China, a declining household share of GDP, tends to force up the savings rate and to reduce consumption, which sometimes even lowers the investment rate, as we saw in Germany during this century. But because globally savings and investment must always balance (another accounting identity often forgotten in the debate), the tendency to force up the savings rate in any country must automatically be balanced by an increase in investment, an increase in consumption elsewhere, or an increase in unemployment. This is just a matter of logic.
To fortify their political arguments the Supply Siders/Austrians offer "benign view of economic fluctuations in output and employment." Olivier Blanchard, Where Danger Lurks.

According to this view, called either the rational expectations or efficient market hypothesis of the 1970s, “people and firms did the best they could in assessing the future.”

Thus, by 1980 Supplysider/Austrian Robert J. Barro would attack Keynes because Keynes rejected "well functioning private markets."
One reason that Keynes may not have been troubled by this "deficiency" is that he viewed the private economy as inherently unstable. It did not take large (and presumably objectively observable) shocks to triger a recesion, because even a smal shock-when -interacting with the multiplier (and, in some models, also the investment acelerator)-could generate a significant and sustained drop in output and employment.

Keynes had to be rejected for political reasons for, “The [Keynesian] model stressed the failure of private enterprise economies to ensure full employment and production, and the consequent role for active macro policies as instruments to improve outcomes.” Id.


A second facet of rational expectations is its assumption of linearity, of regularity:
These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations.
Thinking about macroeconomics was largely shaped by those assumptions. We in the field did think of the economy as roughly linear, constantly subject to different shocks, constantly fluctuating, but naturally returning to its steady state over time. Instead of talking about fluctuations, we increasingly used the term “business cycle.” Even when we later developed techniques to deal with nonlinearities, this generally benign view of fluctuations remained dominant.
In such a political, non-scientific environment, an assured way to gain attention is to attack, at any opportunity, the leading voices of the opposition and for the the Keynesians that would be Paul Krugman.

So Saint Louisan Stephen Williamson does attacks with regularity, which most disregard. Today we have a new attack on Krugman. Stephen Williamson: New Monetarist Economics: What Have We Learned Since 2009?

And here is the Williamson's argument, "If the phenomenon can be described, and we can find some regularity in it, then it can also be described as the outcome of rational behavior."

But it is Econ 101 that there is no regularity due to: (1) mistakes (Soros); (2) asymmetry of information (Yi-Cheng Zhang, 2005); or (3) reflexivity (“expectations about the economic future tend to actually shift that future” (Syll, 2014). Further, “The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the individual level.” (Syll, 2014).

Raise State Taxes $3.5 billions (still less than 1980 levels). Idea No. 1 for Missouri's 100 Great Ideas No. 000076

Missouri is not over taxed. In fact, Missouri taxes at only about 60% of the rate it taxed in 1980.

Our state auditor reported in June:
This tax limitation amendment imposes restrictions on the amount of personal income used to fund state government and the amount by which fees and taxes can be increased. Mathematical formulas are used to determine the relevant threshold amounts each year.
The Hancock Amendment limits the amount of Missourians' personal income that may be used to fund state government to no greater than the portion used to do so in 1981. In other words, since 5.6 percent of Missourians' personal income went to fund state government in 1981, then no more than 5.6 percent can be used to do so in future years, unless revenues are specifically excluded by a vote of the people.
The Hancock Amendment also requires voter approval before taxes or fees can be increased by the General Assembly beyond a certain annual limit. Based upon the calculation provided by the Office of Administration, Division of Budget and Planning, the relevant annual revenue limit for fiscal year 2012 was $84.2 million.
For the fiscal year ended June 30, 2013, our review determined no Hancock refunds were due. In fact, total state revenue was approximately $3.6 billion under the refund threshold. In addition, the Office of Administration, Division of Budget and Planning determined that net taxes and fees increased by a total of $28.6 million. As a result, our review concluded the state complied with these provisions of the Hancock Amendment.

The revenue limit has not been exceeded since the year ended June 30, 1999.

Source: MO State Auditor's Office

What next for the United Kingdom? No. 000075

The biggest political news this week might have been the Independence for Scotland election. An insightful look is this new post: What next for the United Kingdom?

Within that essay is a paragraph showing how in many ways our Friends are much more politically sophisticated:

In the last days of the campaign the UK government promised further devolution for Scotland and protection for its current level of fiscal transfers (the so-called Barnett formula). The rest of the UK, notably the leadership of the Welsh assembly, reacted with some anger to this. Scotland currently receives more under the Barnett formula than Wales, which was particularly badly affected by the destruction of the UK's mining industry in the 1980s and 90s and remains depressed with high levels of unemployment to this day. 
The Barnett formula is default rule for allocating national government expenditures locally, on a per capita basis.

Missouri needs this debate for Saint Louis is over taxed, with the taxes its pays to the state being spent outstate, causing lower incomes, fewer jobs, and lower property values in Saint Louis.

Proof that John Cochrane is inept No. 000074

Twitter is a great equalizer. Anyone may confront self-offered pundits and “public intellectuals.”

Recently, I had the opportunity to cross the path of one of our worst “public intellectuals” John Cochrane of Booth (University of Chicago School of Business School).

With tenure, Cochrane is highly paid because he supports the Chicago/Booth political brand with his writing and public appearances. This attracts "investment" in Booth from the wealthy who are interested in preserving and expanding their political power and a higher salary for Cochrane who also enjoys the benefits of the wealthy who overtly attempt to influence his writing and public appearances with fine wine, expensive meals, and access to public officials.

Feynman on learning from experiment or observation when we are wrong.

Cochrane is an inflation hawk who for the last 5 years has preached a brand of non-fact based economics in support of the GOP's political agenda.

Cochrane pretends that his economics is science, wrapping it in math and models, but omitting to mention that his economics has been disproved by scientific method. Feynman explained:

If it disagrees with experiment [or observation], it's wrong. In that simple statement, is the key to science: it doesn't make any difference how beautiful your guess is; it doesn't make any difference how smart you are, who made the guess, or what his name is—if it disagrees with experiment, it's wrong, that's all there is to it.

Source. Richard Feynman, Seeking New Laws, Project Tuva
Cochrane's World view, as summed up by Michael Pettis, is that only by increasing savings through wealth inequality, leading to "trickle down," will lead to long-term economic growth.

There is as you know a political divide between economists. One group focuses primarily on managing demand to prevent the underutilization of labor and capital (often called Keynesians). The other insist that it is only by increasing savings, which usually means increasing wealth inequality and allowing the benefits of growth to "trickle down", that we can generate the increases in investment that drive long-term economic growth (often called supply-siders, or Austrians, although for some reason true Austrians seem to loathe supply-siders)
This raises the question, do we have insufficient savings, today?
Given that demand raises the price---the interest rate---if we had a shortage of savings we would have to see evidence of demand for savings, but there is none. Instead, the price for savings has been declining for 50 years.

This view is confirmed by the yield on Ten Year Treasuries:

So, in sum, we now that Cochrane's underlying premise, his world view is wrong.

This is no to say that there are not times and places where there has been what appears to be a shortage of savings (or a suitable substitute), but in the United States, now and for the past 50 years, we have not had insufficient savings.


The late 20th Century gave us three great economists, Soros, Buffett, and Munger. Why no mention of academic economists? Because none had sufficient skin in the game and most are incredibily siloed. 

Here is an admission by Richard Posner, the most important Law and Economics advocate of Chicago/Booth:

Until last September, when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money,…It was a work of macroeconomics–the study of economy-wide phenomena…Law, and hence the economics of law…did not figure largely in the regulation of those phenomena. Having [now read The General Theory], I have concluded that…it is the best guide we have to the crisis.
- Richard Posner, Judge, U.S. Court of Appeals for the Seventh Circuit; Senior Lecturer of the University of Chicago Law School. September 23, 2009

Why did John Cochrane never walk down the hall and visit with Judge Posner?

If the most cited legal scholar of the 20th century, a poster boy of the so-called Law & Economics movement, can preside and preach for over thirty years without reading Keynes' magnum opus, something has gone terribly, terribly awry. Economy-wide phenomena are, in fact, legal phenomena. "Interdisciplinary" law school curricula that ignore them are woefully impoverished.

Similarly, economics schools are woefully impoverished.

Sunday, September 14, 2014

Minnesota’s prosperous economy linked to tax, investment and talent-attraction policies No. 000073

Minnesota has the best economy in the Great Lakes. It has a 2012 per capita income of $46,227, $8,730 more than Michigan, and a 2013 unemployment rate of 5.1 percent, well under Michigan's rate of 9.1.

Michigan Future, Inc. asked top state business reporter Rick Haglund to investigate the policies Minnesota has pursued to grow its economy. The results are the topic of his new report: "State Policies Matter: How Minnesota's tax, spending and social policies help it achieve the best economy among Great Lake States."

The report examines policies of two states that looked much alike in 1990, when Minnesota's per capita income was just $555 more than Michigan. The report shows how Minnesota has made major investments in education and urban communities, embraced regional government, and supported policies that make the state more welcome and open to all.

"For decades, Minnesota, under Democratic, Republican and Independent Governors, has rejected the idea that low taxes are the key to a prosperous economy," said Michigan Future President Lou Glazer. "Its alternative has been to focus on making investments needed to educate citizens and create a welcoming and great place to live and work.

The link to the study by Michigan Future is here.

Here is the chart from the BEA release:

Tuesday, September 9, 2014

Minnesota's economy is top dog in the Great Lakes region No. 000072

Minnesota's economy is top dog in the Great Lakes region | Michigan Radio


Minnesota is one of the top-ten best economies in the country; it is also a high-tax and high-spending economy.

"For so long, the accepted formula is that in order to have a healthy state economy, you have to have low taxes, low spending, and right-to-work laws," Haglund says. "Minnesota actually has turned all of that on its head."

In 1990, Minnesota and Michigan were roughly comparable in per-capita income. Now, Minnesota's per-capita income in $9,000 per-person higher than Michigan's. Unemployment is 4.7% in Minnesota, and it hasn't had a month with double-digit employment rates since 1976. Minnesota has one of the highest percentages of adults in the labor force in the country, while Michigan has one of the lowest.

Haglund says it's difficult to say that Minnesota's high-tax and high-spending economy is the sole reason for its success. There are underlying policies that Minnesotans enacted decades ago that contributed to their healthy economy.

"They also have a pretty rich mix of industries," Haglund says. "They're less dependent on one industry, as we are here in Michigan."

Minnesota has a progressive income tax system where those who earn more pay more. Its top income tax rate is 9.85%, and people with lower incomes pay 5.35%.

Michigan has one rate of 4.25%.

Minnesota's corporate income tax rate is a third higher than Michigan's.

The gasoline tax is nine cents a gallon higher in Minnesota, the sales tax rate is 6.85%, and local jurisdictions can add up to a percentage point on the sales tax.

Minnesota has a good education system and has led the nation in the percentage of students who are college-ready, and has the highest percentage of college graduates in the Great Lakes region.

Sunday, August 24, 2014

Do we know how an economy works and do we need to know? No. 000071

Professor Noah Smith, author of Noahpinion had two interesting tweets this afternoon.

First, however, I think it important to note that about the Autor paper which was the basis of my post No. 000068 on China being the cause of FERGUSON Professor Smith wrote on Friday, "MIT prof and economic policy advisor David Autor has written an excellent new paper about labor market polarization, which you should read."

First he wrote:

He continued:

My answer to Professor Smith is that we do know well enough how the economy works and have known at least since the great American Economists Hamilton, Franklin, and Morris used that understanding to write the Constitution and ask the First Congress to replace state Revolutionary War debt with U.S. Government debt and also asked the First Congress to create the Bank of the United States.

In fact, we know so well have the economy works---and that all distribution of income is a political question---that millions if not billions of dollars are raised and spent each year on political campaigns and lobbying for the express purpose of passing legislation that will use known economic principles to the favor of one faction and the loss or another.

What we do not know how to do is perform acts of Alchemy with Economics.

For example, it is not possible to have a trade deficit and a fiscal deficit in the United States and over time have meaningful job growth. Economists lie through their teeth when they said free trade will create jobs, as I point out in No. 000068. Instead, under those circumstances you will have job losses and income declines in the United States.

I put this question to Professor Smith, Doesn't Professor Autor show that to be our knowledge about economics of international trade in his "excellent new paper about labor market polarization?" (page 33).

In closing, let me be clear that I am using Alchemy both literally and metaphorically. I am using the term literally in talking about whether you can create jobs while having both substantial trade and fiscal deficits.

Alchemy also has many metaphorical applications but particularly this applies to Monetary Policy in its sundry forms. Here, I am talking about Alchemy being a lazy way to sound public policy---we can turn the Economy over to the control of the Federal Reserve. One cannot do that any more than one can push string for what we do know about Economics is that there is no law of Economics that says the amount of money available to be lent is equal to the amount of good loans that can be made. There are many reasons why but technology is a prime one. Tomorrow, someone can invent a new technology that completely disrupts the technology on which you relied in making a loan today. It is very easy to understand that when you have a series of new technologies summed up as the Internet, the personal computer, tablets, and smart phones that do disrupts every method of doing business that capital will exceed the good loans that can be made.

The failure then becomes one of imagination. Great Britain became great because it had the imagination to create maritime insurance against the risk of loss of shipwrecks. We, by contrast, have failed to use our imagination to insure against the risk of loss from the storms of new disrupting technology.

In sum, what may be the real problem with Economics is its moral hazard. The existence of the learning and the sincere belief of people that Government will work for the favor of the boarder public good lulls people into believing they may disregard politics and disregard their need to participate in the political process to assure that the Economics we know and understand is applied to their favor.

Saturday, August 23, 2014

Ferguson and Al Gore: The most important video you can watch? No. 000070

Watch this video carefully but not for the reasons you might think, although this 25 minutes presentation may be the most useful single resource on the Internet.

Jeff Smith asks:

At 5:38 you will hear an Al Gore no one ever heard in his entire political career (Senator, Vice President and candidate for President).

Then watch Tony Robbins's explanation why.

Ferguson happened because neither Bill Clinton nor Al Gore were capable of speaking for Democrats.

In No. 000068 we went into the economic literature that explains there are no jobs for our citizens in Ferguson because they have been exported to China and Mexico.

Jeff Faux explains:

Nevertheless, Clinton and his Republican successor, George Bush II, then used the NAFTA template to design the World Trade Organization, more than a dozen bilateral trade treaties, and the deal that opened the American market to China -- which alone has cost the U.S. another net 2.7 million jobs. The result has been 20 years of relentless outsourcing of jobs and technology. 
He continues explaining that Clinton and Gore were providing access for foreign policy reasons (implicitly to raise the standard of living of the Chinese at the expense of America's middle and lower income workers)
Given this dismal history, why would a smart "liberal" Democratic president who says he cares about the middle class continue to plunge ahead with more NAFTA-type trade de-regulation? One explanation is that providing more access to the U.S. market for other countries is a way of shoring up the fading influence of the U.S. political class in world politics.

Ross Perot predicted Ferguson in 1992, a Giant Sucking Sound No. 000069

Friday, August 22, 2014

Why Ferguson in three words: China, Clinton and NAFTA No. 000068

This Friday in August is an important, really important, day in Economics.

The Federal Reserve Bank of Kansas City holds its Annual Jackson Hole Economic Policy Symposium and the attendant papers are released from embargo.


The theme this year: Re-Evaluating Labor Market Dynamics.

You or I would use this title: Why there are no jobs, why this has been a jobless recovery?

At 9:30 a.m., Professor David Autor, MIT, throws a major league bean ball at the entire economics profession. Why are their no jobs? Who knew except every man, woman, and child on Main Street. Why we gave those away to China.  The money quote, on the last page of the paper:
A second is the employment dislocations in the U.S. labor market brought about by rapid globalization, particularly the sharp rise of import penetration from China following its accession to the World Trade Organization in 2001. As documented by Autor, Dorn and Hanson (2013), Pierce and Schott (2013) and Acemoglu et al. (2014), China's rapid rise to a premier manufacturing exporter had far-reaching impacts on U.S. workers, reducing employment in directly import-competing U.S. manufacturing industries and depressing labor demand in both manufacturing and non manufacturing sectors that that served as upstream suppliers to these industries. Globalization, like technological change, is not typically Pareto improving, particularly in the short run. While the long-run effects of these developments should in theory be positive, the adjustment process, as with technological adaptation, is frequently slow, costly, and disruptive.
"[N]ot Pareto improving" means many are going to lose their jobs and they won't find new ones. Wages will fall. Home values will collapse; mortgages will be foreclosed. Families will separate and divorce follows Children will miss meals at worst and college or trade school at best. You know: #FERGUSON

Note the rest of story is in the phrase, "the long-run effects of these developments should in theory be positive." Why do economists in 2014 argue for free trade based only on theory?

Because in the entire history of economics no one has every been able to conduct a study showing, in fact, free trade is a good thing. But the literature is flooded with first class studies all showing that free trade reduces jobs and cuts income in the United States.

A sampling of the literature. David H. Autor,  in the American Economic Review, China Syndrome: Local Labor Market Effects of Import Competition in the United States.

Clinton and NAFTA

I am unable to find a Democratic economist who is a free trader now that Larry Summers has based a substantial part of his theory of Stagnation on our trade deficit.

The last hold out appears to be Professor Brad Delong who impeaches himself with his own chart.

In the upper right corner you will see that Exports are a major component of aggregate demand, i.e., the sum of all demand for workers (jobs).

That means the inverse. Imports destroy aggregate demand and jobs.

Professor Delong admits to his credit that may have been wrong on Clinton's NAFTA, which is very admirable since he was a member of the Clinton Administration and supported NAFTA's passage:
3. Well, it seems that my letting my neoliberal freak flag fly on NAFTA has annoyed Robert Scott and Jeff Faux of the EPI. Lots to think about here...
Follow the links!

Here are the bloody awful facts about NAFTA from Jeff Faux writing about NAFTA's Impact on U.S. Workers, at the Economic Policy Institute Blog:

NAFTA affected U.S. workers in four principal ways. First, it caused the loss of some 700,000 jobs as production moved to Mexico. Most of these losses came in California, Texas, Michigan, and other states where manufacturing is concentrated. To be sure, there were some job gains along the border in service and retail sectors resulting from increased trucking activity, but these gains are small in relation to the loses, and are in lower paying occupations. The vast majority of workers who lost jobs from NAFTA suffered a permanent loss of income.
Second, NAFTA strengthened the ability of U.S. employers to force workers to accept lower wages and benefits. As soon as NAFTA became law, corporate managers began telling their workers that their companies intended to move to Mexico unless the workers lowered the cost of their labor. In the midst of collective bargaining negotiations with unions, some companies would even start loading machinery into trucks that they said were bound for Mexico. The same threats were used to fight union organizing efforts. The message was: “If you vote in a union, we will move south of the border.” With NAFTA, corporations also could more easily blackmail local governments into giving them tax reductions and other subsidies.
Third, the destructive effect of NAFTA on the Mexican agricultural and small business sectors dislocated several million Mexican workers and their families, and was a major cause in the dramatic increase in undocumented workers flowing into the U.S. labor market. This put further downward pressure on U.S. wages, especially in the already lower paying market for less skilled labor.
Fourth, and ultimately most important, NAFTA was the template for rules of the emerging global economy, in which the benefits would flow to capital and the costs to labor. The U.S. governing class—in alliance with the financial elites of its trading partners—applied NAFTA’s principles to the World Trade Organization, to the policies of the World Bank and IMF, and to the deal under which employers of China’s huge supply of low-wage workers were allowed access to U.S. markets in exchange for allowing American multinational corporations the right to invest there

Sum of it All.

Ross Perot was right and the election in 1992 was what created Ferguson.

Tuesday, August 19, 2014

No. 000067 To Investigate the incompetence of the Ferguson police. The best reason for an independent prosecutor

We expressed our agreement in Post No. 65 that the fault for all this mess lay, as explained by the Wall Street Journal, with the Tea Party politics of  Ferguson. Ferguson is a city of low taxes, forced to collect 25% of its revenue from traffic fines and court costs, limited poor quality government.

In the words of the Walls Street Journal:
"…policing in Ferguson has been a total failure."
Regardless  of whether Prosecuting Attorney Robert McCulloch has sufficient emotional detachment to investigate Officer Wilson, he and his office, using the resources of the Saint Louis County Police Department, cannot be expected to investigate the total failure of the Ferguson Police Department that lead to #Ferguson and the death of #MikeBrown.

Saint Louis County police officers cannot investigate Ferguson police officers by day and stand with them shoulder to shoulder at night.

No. 000066 WSJ Fault lies with Ferguson Police Department

Bret Stephens repudiates the Tea Party, low taxes, and limited government:

"…policing in Ferguson has been a total failure."


Because Ferguson is a poor city with low taxes, and limited government, unable to hire the professionals it needs to run a police department that can meet its challenges.

Read the piece here.

Of Ferguson and Fallujah

To get around the firewall Google: Of Ferguson and Fallujah

No. 000065 People--those Journalist buy ink by the barrel and paper by the rail car (and now it is free)

Ferguson now has a new front, an entirely separate war between journalists from around the World and the police.

This, too, is a war we cannot win. In 20 years these journalists are going to have a reunion with t-shirts reading, "Gassed and arrested in St. Louis." 

The leaders will give speeches and toasts on having guns pointed and waved in their faces.

They will recall, "Saint Louis, first time I was gassed."

They are not going to report on the beauty of a sunrise over The Arch or the laughter at the show at the Sea Lion Arena or an Italian Dinner at Cunetto's House of Pasta after driving down Elizabeth Avenue.

There are now 1000 or more of them here, most all with 40 or 50 year careers before them. 

They are not going to leave town as friends of Jay Nixon, who apparently has returned to his people at the Missouri State Fair, leaving them penned away from the action (but still being gassed and arrested).

They are going to be writing and talking about Saint Louis using free digital ink by the barrel and paper by the railcar for the rest of their professional lives.

Monday, August 18, 2014

No. 000064 It is time to Drone Ferguson with the First Amendment?

Watch the video. Isn't a drone a superior tool for reporting on a protest?

Sunday, August 17, 2014

No. 000063 The Michael Brown case is going to prove how failed our criminal justice system has become

Saint Louis has not had such a bad week since the Civil War. The reason is our criminal justice system in the hands of Robert McCulloch has become a complete failure.

The Mike Brown homicide case is, like most criminal cases, not CSI. It is about what the eyewitnesses in the case say happened.

We know there were several eyewitnesses. At least one had an account on Twitter with real time tweets. In the next few hours or days I anticipate it is going to emerge there were others.

Why, do I write such?

Because immediately after the shooting people walked out of their homes and started photographing and videotaping the scene. I will not be surprised if a voice can be heard of one or more additional eyewitnesses as the gathering crowd asks each other what happened. These may be partial accounts---I heard and I looked---but there will be accounts, additional eyewitnesses, perhaps second hand, but there will be more eyewitnesses. 

Since there events have happened I have called for the arrest of Wilson and an immediate public open trial starting Monday, August 18, 2014, because, based on experience (and with a general knowledge of the location)  I anticipated there would be several witnesses and that it was imperative that the public hear these witnesses and their testimony, immediately. 

Why? Only the truth will stop the protests by the protestors and the riots by the rioters in Ferguson.

Further, only from a prompt public trial could Wilson get his life back, at all, if that should be the proper outcome.

Mr. Wilson's distrust of the system and his failure to demand his arrest and immediate public trial means that, regardless of the evidence, his normal life is over. He made that choice, trusting his chief's plan to deflect attention from Wilson to Brown and "race riots." Don't ever bother me with some injustice being visited on Officer Wilson.

Further, even if the law permitted him to use deadly force, it did not command such. The Twitter timeline is explicit that Brown ran away. Regardless of what happened initially, Wilson exercise of discretion was so flawed that he deserves his fate. He showed no appreciation for the life of another and has never been a focus of my concern for he has always been in control of events and his life.

Here is a short further explanation why a public trial should be starting tomorrow.

First, contrary to other types of testimony, event fact witnesses testifying close to the event (thus not needing help in recollection) don't need preparation to tell the truth.

There probably isn't a better trial lawyer than Mark Lanier

Mr. Lanier made this point immediately after the closing argument of the Defendant Merck in the first Vioxx Trial. He called a Vioxx employee as a witness to which counsel for Vioxx objected on the ground that the witness had not yet been prepared or "horse shedded." 

Mr. Lanier responded, "Your honor, I wasn't aware that a witness needed to be prepared in order to tell the truth."

Events witnesses in most criminal cases do not need to be prepared to tell the truth, if their testimony is given promptly and in open court. What needs to be protected against is the loss of memory. Within a few days witnesses will not recall was it a sunny or overcast afternoon. What were you doing when you heard … What was on your mind that afternoon before you say . . . What time quickly erodes is the richness of the memory leading to embarrassment over details without consequence.

There is a great irony in this as much of Mr. Lanier's success may be due to his trial preparation with especial attention to courtroom graphics

Second, the other evidence in this case isn't going to tell us what happened. It may tend to corroborate the testimony of one or more witnesses but, unlike the Kennedy assassination, the autopsy is not going to tell us much more than how many times Mike Brown was struck by a bullet from Officer Wilson's gun. The sequence will have to come from the eyewitnesses.

Last, a small comment on Missouri criminal procedure. Missouri law permits the prosecuting attorney to file an information. Had this been done, instead of a jury trial, a preliminary hearing could start tomorrow. The eyewitnesses could testify on the issue of probable cause. There is no reason for any of the pain to which St. Louis is being subjected save the tactical and strategic considerations of the prosecuting attorney who is transparently favoring Officer Wilson.


I do not know what the evidence will be in the case or the result. Of what I am confident is that, after the case is over, there will not be anyone who will say that the system under the control of Robert McCulloch worked. Everyone will cynically and bittering being saying to themselves, Why didn't we hear the eyewitnesses testify immediately? All that we went through since could have been avoided.

Thursday, August 14, 2014

No. 000062 Governor Nixon Searches Within Himself

It is said Gaius Julius Caesar wept when he stood at the base of the statute of Alexander III of Macedon, Alexander the Great.

Often, this is part of a metaphor about Caesar's ambition (but Caesar was less a man driven by ambition than the instinct to survive). 

What we do know from the Poets is that once any man or woman reaches a certain maturity there are moments where we must stand from time-to-time before some place, alone, with our own thoughts, in this moment of metaphor as old as human kind.

It can first be when a pet passes or a grandparent. It can be at an alter for Communion. It can be a battlefield monument of some forgotten regiment, filling a rainy afternoon away from the beach. 

We have built magnificent monuments—for Washington, Lincoln, Jefferson—or a handsome sculptures of generals on horseback or General Grant's tomb or cemeteries, anticipating such moments.

Or is can be entirely makeshift, as it is for Michael Brown, telling us that even the last of us is equal to the first, equally entitled to his or her statute or monument.

So here Governor Jay Nixon stands within the metaphor that will come to define him and his life. 

No Hollywood director or screen writer or novelist could ever have story booked this scene. A perfect Missouri August afternoon, mild and cooled by a breeze, without a cloud.

A young man passed here, from a family and community so threadbare …

From what we know about Governor Jay Nixon it is not easy to imagine that he ever thought that such a moment could come to him. He doubtless never scripted out that the last two years of his public life would be dominated by Twitter's social media hashtags of #MikeBrown and #Ferguson.

And, he now carries the knowledge within that when he reaches Saint Peter or whomever now gate keeps eternity he will be cross examined about this moment, the implicit promises being made here.


Sunday, July 27, 2014

No. 000061 100 years ago today, the first shots were fired in WWI

It should not surprise us that historians cannot agree on when WWI started.
This day, July 27, 1914 saw deaths in Mitrovitza, Serbia as Austria invaded a day prior to its formal declaration of war.  Francis Joseph Reynolds, II The Story of the Great War: History of the European War 291 (1916):
The first great campaign on the southeastern battle grounds of the Great War began on July 27, 1914, when the Austrian troops undertook their first invasion of Serbia. They crossed the Serbian border at Mitrovitza, about fifty miles northwest of Belgrade, driving the Serbians before them. The first real hostilities of the war opened with the bombardment of Belgrade by the Austrians on July 29, 1914 - six days before the beginning of the campaigns on the western battle fields.
In 1920 Francis William Rolt-Wheeler, wrote also of the first shots. The Boys’ Book of the World War, at 51:
On July 27, although  war had not yet been declared, the Austrians invaded Serbia, crossing the border at Mitrovitza on the Save. With the foe actually over their borders, the Serbians took a decisive step. They blew Up the great International Bridge across the Danube, at Belgrade, and, simultaneously, shots were exchanged between the troops on the Austrian and the Serbian banks of the river. Though Austria did not declare war until the following day, these shots at Belgrade, on July 27, 1914, were regarded as the opening fire of the Great War.
On July 28, 1914 Austria-Hungary, alleging that Serbia had not answered its demands in a “satisfactory manner,” declared war at 11:10 a.m. in a telegram to Serbian Prime Minister Nikola Pasic.

The next day, on July 29, 1914, Austro-Hungarian navy ships began bombarding Serbia’s capital, Belgrade.
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No. 000060 An open letter about the Taylor Rule, Keynes and Minsky

Sunday, July 27, 2014
Dr. Miles Kimball
Dr. Brad Delong
Dr. Noah Smith
Dr. Roger Farmer
Dr. David Andolfatto
The Taylor Rule, Keynes and Minsky
A letter to suggest that thought or investigation be given to questions about the Taylor Rule.

Interest rates should be as low as possible

In his General Theory Keynes argued for Government to work for the greatest possible reduction of interest rates at all times to encourage private investment as far as possible.
His arguments were so forceful I have always expected Professor Kimball to write a post or article relying on Keynes to support his argument for negative interest rates.

Republicans advocating for statutory Taylor Rule

Recently, the Republican Party has advocated statutory adoption of the Taylor Rule for the Federal Reserve.
This seems to me to beg this question:
Does the Taylor Rule lead to the greatest possible reduction of interest rates?

2008 Minsky Moment

Since we had a profound Minsky moment in 2008 (and a Federal Reserve which did not see such coming)[1] we certainly have what the GOP/Taylor/Cochrane group would call causation by the Taylor Rule as one event followed the other.[2]
That is to say that, following a prolonged period of application of the Taylor Rule interest rates were too high and debtors could no longer service their debts, resulting in a Minsky moment.
Has the Taylor Rule Been Investigated?
So my question is, does the Taylor Rule price interest rates too high? 
In closing I think it important to recall the lesson of Professor Taleb for all of this. Professor Taylor has cherry picked his data in support of his rule. His time frames are not long enough for us to say with confidence that he has included all the relevant data.
A work that supports this point of view is an OECD publication in 1999, EMU Facts, Challenges and Policies.
On page 54 the authors use the Taylor Rule to argue that interest rates set by the EMU were too high.
I think it important to use this dated work for the authors could not cherry pick their point of view on the Taylor Rule as they did not know the future and what we have learned from experience and observation in the last 15 years.

Of course, we now know, based on first hand experience, that both the EMU and Taylor Rule rates were too high from 1990 on and throughout the decade, resulting in a deep recession from which the United States never fully recovered before the Lesser Depression of 2008.
In that OECD study the Taylor Rule rates crossed over the EMU short term rates in mid-1999, showing or tending to show that the Taylor Rule sets interest rates too high.
However, that does not mean that the time frames are not long enough for others to show that his rule set interest rates too high.
John L. Davidson

[2] Brad Delong, The Return of Hyman Minsky (May 18, 2009) (labeling events of 2008 as Minsky Moment).

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No. 000059 Most important Post of six months Frances Coppola's "America's Greatest Export Is It's Debt"

While the theme of this blog is Missouri state economics and attendant politics, there is a piece so important to understanding Missouri's place in the World that I must recognize it as the most important post on economics in the last six months.

America's greatest export is its debt

That piece is by Great Britain's Ms. Frances Coppola, "America's greatest export is its debt," for it explains why Missouri's economic problems are so intractable. Ms. Coppola and I frequently argue over her conclusion. She argues that the U.S. cannot eliminate its trade deficit without serious damage to the world financial system. Being a Hamiltonian Mercantilist, first, I argue the world financial system be damned, we need to eliminate the U.S. trade deficit and put people in Missouri back to work at jobs that provide for a growing and constantly improving standard of living.

What are the main points.

Trade with China costs jobs and income.

First, contrary to the free traders and the arguments for free trade you find throughout the economic literature, there is no evidence that free trade without capital restrictions improves the lives of Americans. The literature is consistent and uniform: free trade destroys jobs and incomes. More to the point, trade with China has destroyed jobs, incomes, and lives in Missouri. 

If someone is interested in the subtly of the matter start with Larry Summers here. Ask yourself whether the secular stagnation that surrounds us is real. And, ask yourself, does the ability of capital to move freely to the lowest wage country drive secular stagnation. When I listen to Mr. Summers that is what I hear him saying.

US has promoted Free Trade without the consent of its citizens.

Second, for political purposes, the United States has found it extremely advantageous to the United States dollar function as the World's Reserve Currency. Further, for political purposes, the United States has found it extremely advantageous to increase the standard of living of the Chinese people at the expense of most people living in Missouri. 

In both instances these policies have been pursued with the same level or skill and deception that assured the American public there were WMD's in Iraq. 

Ms. Coppola, as an observe across the Atlantic, is able to be very blunt on this point, writing
The trade deficit is a long-standing problem that is not easily solved: It principally arises from the world's demand for dollars. The U.S. dollar is the world's reserve currency mainly because much of the world's trade is settled in dollars, and all commodities and currencies are priced in relation to dollars. Since the world demand for dollars far exceeds the ability of the U.S. to produce enough goods and services to meet that demand, the U.S. imports far more than it exports.

It is often argued that the U.S. could cut its trade deficit by restricting imports and increasing exports. But this would seriously restrict dollar liquidity in the world. Back in the 1960s, Robert Triffin pointed out that the U.S.'s position as provider of liquidity to the world would force it to run substantial trade deficits. He was right. And the existence of such large trade deficits also forces the U.S. government to run fiscal deficits most of the time. The few times in recent years that the U.S. government has managed to run fiscal surpluses, the cost has been a significant reduction in private sector saving … Yet we want the private sector to save. We want corporations to have profits. We want households to provide for their futures. We bewail the lack of saving by U.S. households, and we call for more investment by corporations. None of these are compatible with the goal of running fiscal surpluses when there is a trade deficit — and the trade deficit cannot be eliminated without serious damage to the world financial system. Like it or not, the U.S. is stuck with its deficits.
In short, Ms. Coppola recognizes that US political goals have a cost; they appear to create a paradox. We can pursue our political  goals in the eyes of Ms. Coppola only at the cost economic ruin at home, ruin caused by the twin imbalances of higher debt and ever greater trade deficits. 

Tea Party has attacked both the quality and quantity of the safe assets we offer the World.

Ms. Coppola then makes two telling arguments about the know-nothings of the Tea Party: 
But in fact, the deficits are not nearly as serious a problem as many seem to think. The enormous trade deficit makes the U.S. a massive net importer of capital. And the world loves this. The U.S. government is the market leader in the provision of safe assets to the global financial system. And it is the number one provider of quality investment products for the world's savers. That's where the "glut of capital" that Ben Bernanke talks about comes from. The savings of the world come to America. It is the world's biggest investment fund.
Except that it doesn't behave like it. What investment fund would try to discourage people from investing in it? And what investment fund would set out to destroy its own credibility by undermining the quality of its investments? Yet the U.S. does both of these things. Deficit reduction discourages people from investing. And flirting with debt default undermines its quality. Look what happened to the yields on U.S. debt as the stalemate in Congress over the federal budget intensified through the summer and fall of 2013, finally ending after a two-week shutdown in October:

But the fact is that despite awful mismanagement by U.S. politicians, U.S. government debt remains the savings vehicle of choice for the world. It is America's greatest export.

Strength through Strength or Strength through more fiscal and trade deficits.

Ms. Coppola ends her piece by recognizing that our fiscal and trade deficits have taken an enormous toll on America. Her solution is more debt. 
Embrace your debt, America. You are already the world's central bank: Your destiny is to be the world's savings bank as well. Expand your production to meet the world's demand for quality savings products. Forget this idea that deficits must be eliminated and debt must be reduced. That is not what the world is saying to you. No, the world is saying, "More! Give us more!"

But, of course, you need to take steps to ensure that the savings products you create remain the best in the world. You don't want to compromise your market leading position by cutting corners. Unfortunately, too many people seem to think that cutting corners is the best way of preserving the quality of your products. The Bank for International Settlements, for example, argues that you should always run a fiscal surplus to ensure that you can pay the interest on your savings products. And the IMF talks about achieving "fiscal sustainability" through medium-term fiscal consolidation. This is crazy. You are a bank. Do banks cut back lending in order to pay the interest on savings accounts? Hardly. They invest the money they have borrowed in productive enterprises. The money they make on their investment enables them to pay the interest on their debt, and pay their workforce handsomely, and have large expensive offices in prime locations, and STILL make a profit. You do not need "debt reduction measures." You need to invest what you borrow in productive enterprises.

America, you should spend the money you borrow on things that create real value. Invest in both physical and human capital. Build bridges and roads. Create the best education system in the world. Create the best healthcare system in the world. Develop new ways of capturing and storing the free abundant energy that is available to us from the sun, the wind, and the sea. Invest in technologies that will bring people long life, health, and prosperity.

And above all, think big. Large, long-term projects, the more grandiose the better. This is what we know and love you for — taking on the seemingly impossible and making it happen. Let's have a new space program. Or a deep-sea exploration program — since we know even less about the depths of the ocean than we do about Mars. Create a new Atlantis. Colonize the Moon. Build the Death Star. And establish trade links with Alpha Centauri. For even if none of these things in themselves generate value, the research and development done in the course of them may in the end create greater value than we could possibly imagine.

Now why does Ms. Coppola urge this view?

Ms. Coppola is not an American; she is British, interested in promoting the vital interests of Great Britain. Those interests do not align with the US interests.  London, and for 17 years she was a London Banker, has an enormous interest in maintaining the current World Financial System.

What do Warren Buffet and Charlie Munger say in response to Ms Coppola?

We’re like an incredibly rich family. We sit on the porch of our huge farm – so big that we can’t even see the end of it – and each year, we consume 6% more than the farm produces. To pay for this, each year we sell or mortgage a little bit of the farm that we can’t see, so we don’t even notice. We’re very, very rich and the rest of the world is happy to buy from us or lend to us, so each year they take a piece of our valuable assets – and they work very hard. But we will have to service this. If it goes on for a long time, our children will pay. 

My answer: Strength through Strength 

I do not believe, in light of current events in Iraq, Syria, Israel, and Libya, the Ukraine, and Afghanistan that Ms. Coppola would write her piece today. 

World events have accelerated the moment of truth of which Messers. Buffett and Munger so simply speak. Within the past month we have learned that our deficit financed military cannot provide the World with peace and stability. 

The bitter lesson for the former Christians of Mosul is that a debt financed U.S. military permits no policy mistakes. 

More narrowly, Great Britain and Europe have learned that their inability to finance a meaningful military presence has opened the door to renewed Russian dominance of European and Mediterranean  and Middle Eastern affairs. 

Like Ms. Coppola, I believe we in the US should be spending government funds that create real value. We are a rich big country, one that could easily tax itself and pay for the investments of which Ms. Coppola speaks if, as Mr. Minsky demanded, we put everyone to work

Moreover, my point of view is supported by Keynes. As Ms. Coppola knows, the country in the World that should be running trade and fiscal deficits now is China, not the US. Contrary to common myth, Keynes did not argue for deficit spending in Great Britain to solve the Great Depression. He argued for deficit spending in the United States, because it had a trade surplus with Great Britain

As a Keynesian, that is the policy I support today: deficit spending in China, where they should be because it has a trade surplus with the US.

Contrary to the views of Ms. Coppola, countries are not banks. When a country borrows money it is not acting as a bank; it is acting as a debtor. Every dollar you borrow cedes more power to your creditors. 

The flaw in Ms. Coppola's analogy is that countries do not lend the funds they borrow at a premium over their cost of borrowing. Countries are merely agents of their principals--spending on their behalf. The US fiscal and trade deficit is nothing but consumption spending for which the US is unwilling to pay in taxes. The US writes checks to US transfer payment recipients. These recipients use the checks to buy goods from China. China takes the $$$ and buys US government debt. There is no US investment in the cycle. It is mere consumption financing, nothing more.

More particularly, it is time to stop the World from taking a piece of our valuable assets each year through trade deficits. We are now energy self sufficient, able for the first time in 40 years to export oil. 

Ms. Coppola knows what we should do. It is exactly what Hamilton and Franklin and Morris planned and executed 225 years ago and would do today. Their ideas are as relevant today as Smith's (who after all was tutored by Franklin).