Professor Krugman on Chairman (Professor) Bernanke

I don't agree with Paul Krugman often; although when  he focuses on economics rather than politics, the odds of agreement increase.  The New York Times published an excerpt from Krugman's new book concerning Ben Bernanke.  As an aside--Bernanke was chair at Princeton when Krugman moved to Princeton.  Krugman argues that Chairman Bernanke should listen to Professor Bernanke.  Bernanke's scholarly work centered on the Great Depression, and he is considered one of the leading experts on the causes and consequences of the Great Depression.  He also wrote about Japan's economic woes that began in the 90s, and urged the Bank of Japan to be more aggressive.  He suggested several things that the Bank of Japan could have done but didn't.  Krugman notes that Bernanke's Fed has also not done some of these earlier recommendation. 
I am less confident on the Fed's ability to do more than it has than Krugman, but he may be correct that the Fed has been too timid.  It is curious that Bernanke has not attempted policies he recommended while an academic.  Krugman offers a couple of reasons why Bernanke may be more cautious in his article.  One is that he is adapting to political pressures. While it is true the Fed is supposed to be independent of political considerations, Fed officials also know that Congress can change the rules.  Another is that the Fed bureaucracy got to Bernanke when he was newly on the Board.
I think a third possibility exists.  It is one thing to write academic papers and make recommendations.  It is another to implement untried policies in the real world where unintended and unknow consequences may follow.  A former professor of mine left academia and became an economist for a business. I saw him a couple of years later, and he commented that it often was daunting.  As he put it, "It's tougher when real dollars at stake and not hypothetical dollars represented by a diagram on a blackboard."
Krugman's article can be found here.

Apple and Taxes

The New York Times today has a long and detailed article on how Apple, the most profitable company in the U.S., pays little taxes as compared to most non-tech firms.  The key idea is that Apple is able to locate parts of its company where revenue is generated in low-tax areas. Nevada rather than California, for example.  So, while a firm like Wal-mart pays about a 20% tax rate, Apple pays less than 10%.  Apple is able to use both states in the US and other countries in this process of minimizing taxes.  The things Apple and other tech firms can do cannot be replicated by more standard businesses where it is diffiult to relocate production facilities.  Perhaps the Occupy Wall Street folks should think about occupying Apple. They can use their Iphones to organize their activities.

An interesting reflection on Milton Friedman on the 100th anniversary of his birth by Allan Sanderson.  The link is here: http://www.milkeninstitute.org/publications/review/2012_4/79-84MR54.pdf.

Busy Week for Economic Data

There is an interesting article in Business Insider today.  It provides a daily listing of the economic data announcements, central bank meetings, and so on for the week. It will be a busy week, indeed.  The first Friday of the month is usually a big deal with the employment report from the Dept. of Labor. Given the tepid GDP growth for the first quarter, I expect the employment numbers will not be great.
Given all that is going on in Europe, the article also highlights a few European items.  There, the big one may be the French election on Sunday.  If Hollande wins, there will be increased tension in the French-German relationship in the EU.

Is the Collapse of the European Union a Realistic Scenario?

Martin Schulz, president of the European Parliament, said that the collapse of the European Union is a realistic scenario.  As president of the parliament, he is certainly an advocate for greater centralization of power in the EU.  For the average European, I believe, the goal is to have the gains from an economic union but they do not want a political union.  As I indicated in a recent post, I think the push for the single currency fifteen years ago was based more on political than economic goals.

Schulz attributed the danger to rising xenophobia and nationalism in the member nations.  But the pressures caused by the sovereign debt problems in Greece and Spain are not the result of xenophoba--there are more the result that Greece has no business in a monetary union with Germany.  Either Greece needs to pull out of the euro or increased political coordination is needed. That is, the EU becomes more like a United States of Europe with more spreading the wealth across borders.

Another point made by Schulz involves the mobility of people across borders.  France and Germany have suggested alterations to the Schengen treaty so a country can reimpose border controls for a longer period of time without EU approval.  They say they fear illegal immigration as countries like Greece have a harder time controlling illegal entry into their country. If someone enters Greece illegally, they can then without trouble travel to Germany. This obviously is similar to the US where if someone gets into Texas they  can then travel to Michigan without facing border guards.  To the extent that illegal aliens is the concern, Germany and France may have a point. On the other hand, perhaps they really want to keep unemployed in Spain from coming to France looking for work.

Three articles of interest

Yesterday's NY Times had several things worth reading.  A front-page article details bribery by Wal-mart in Mexico.  If accurate, there can be serious repurcussions for the company and its executives.  The company has faced criticisms from many for labor practices and for driving out of business smaller, local firms before, but this will inflame sentiment against the company even more.  Another concern may be the company's actions in China.  I am unaware of any legal issues, but the Chinese system is pretty corrupt and the opportunity to gain market share through favors to key bureaucrats exists there as well. Hopefully, the problem Wal-mart had was with the Mexican leadership and not company wide.


A column by Frank Bruni shows the effects of austerity in Portugal through grafitti on buildings there.  The use of debt to prosper for awhile comes back to haunt both people and countries in many ways.  It is a sobering examination of the aftershocks of prosperity through debt.
 
Finally, an  op-ed piece that brings us to China.  Nicholas Kriftof discusses the scandal in China around Bo Xilai.  He suggests, and I find it likely to be true, that it is an indication of more widespread problems in China.  American firms face a quandry--the market is so big it cannot be ignored but the potential problems are also huge.

Pressures in the European Union

There has always been a tension in the European Union between forces that want more integration of the member states and forces that want to maintain sovereignty. Some want integration to be primarily economic while others want more political integration. Politicians in Germany and France have tended to support further integration, including policial integration, but there are signs that may be changing.

According to news reports, Germany and France senta joint letter to the Denmark, which currently holds the rotating presidency of the European Union. Germany and France want a reform of the Schengen Treaty, which is the legal structure that facilitates the free movement of people within the EU. They call for the right of a nation to re-impose border controls unilaterally for 30 days if the national authorities believe other countries are not keeping their borders secure. The concerns are primarily member nations in the eastern and southern parts of Europe. If someone is able to enter Greece illegally, they can then move to Germany without any border controls. Currently, the member governments can impose border controls for five days and that period can be extended only with approval from the EU.

I argued in a previous post that the Euro-zone is not an optimum currency area, and that the push for monetary union was actually a political more than an economic move. Monetary integration cannot work well without more political integration and the move was, at least in part, to force more political integration. But right now, most of Europe is facing economic difficulties with some in crisis. Countries in such situations often look for ways to protect their labor markets. Given very high unemployment rates in Spain and Greece, there has been a large exodus of people from the countries looking for employment elsewhere. France's Sarkozy faces an election Sunday and has been making the EU borders an issue in his campaign.

Will the EU hold together and someday become the United States of Europe, or will it gradually fall apart from nationalistic pressures among the member nations? I still think it will hang together, but I am less sure of the belief now.

Two Interesting Articles

Two interesting articles in today's Wall Street Journal include one on how states are able to use federal money allocated for coal mine cleanup to other uses, such as refurbishing the University of Wyoming's football stadium. It appears most of the clean up of old mines was accomplished many years ago but the money continues to come. This is one reason why cutting federal spending turns out to be so difficult.
The second article is more fun--about Doener Kebabs. I look forward to eating these when I go to Germany to teach a short course for a college there. Turkish immigrants brought the food with them to Germany when they came as guest workers in the 1950s. Es schmeckt!

China Still Relies on Connections

An interesting article in today's Financial Times concerns the fall of Bo Xilai and his relationships while still party head in Chongqing. He relied heavily on recommendations from friends and family matters rather than following the party bureaucracy or other channels. This is always a problem in political rather than business settings, although big business often likes working with politicians in this way. Competing for access to an important political figure may be better than competing in marketplace. It happens here too, but fortunately not as often as in much of the world.

Happy Tax Day

Today is the last day for filing 2011 taxes with the IRS. Sunday's New York Times had an interesting article on taxes, including post-war history of taxes, tax rates and the economy. It can be found here. It also deals with the impending increase in taxes set for January 1 and what the effects might be. One could hope that Congress and the president would deal with the issue prior to the end of the year, but given this is an election year, that is unlikely.

It would also be nice if our elected officials would think about the tax system as a way to raise revenue needed by the federal government to operate rather than as a way to do favors for some and to denigrate others. I can dream, can't I?

On Re-reading The General Theory

I read Keynes' GENERAL THEORY for the history of economic thought I am now teaching. This was the first time I read the book since graduate school. Given the resurgence in interest in Keynes and his work, it was interesting to read it with fresh eyes. I think that some of what he emphasized is important and should be emphasized, but have to disagree with much else.

First, the good: Keynes emphasized strongly the importance of uncertainty when business people are deciding on investment projects. This emphasis was not the result of the Great Depression, but was part of his dissertation on probability. (His doctorate was in mathematics). His discussion of uncertainty is similar to that of Frank Knight, who distinguished between risk and uncertainty, where risk can be calculated such as with actuarial tables but uncertainty cannot be calculated. The future is inherently uncertain. Keynes goes so far to suggest that based on pure calculation, no one would make the investments that business people make. It is the fact that we humans like to be doing something that brings investment about--his notion of animal spirits. He then notes that when business people get pessimistic, they will not invest. It is the lack of investment that causes aggregate demand to be ineffective in bringing about full employment.

The rest of his arguments fall short, in my view. He denies the equilibrating of investment and saving via changes in the interest rate, putting much more focus on propensity to consume, and therefore the propensity to save, than on responses to interest rates. He saw the economy as inherently unstable and called for a socialization of investment. We could not leave investment in the hands of the private sector and public investment would have to ready and willing to make up for inadequate private investment to bring about full employment. Further, he argued, we have seldom had full employment. Hence the government needs to consistently spend on infrastructure to provide full employment. It is unclear what the government would do once the entire country is paved over.

Reading the book again made me appreciate Axel Leijonhufvud's interpretation of Keynes and the Keynesians. It is clear that what came to be Keynesianism after World War II differed substantially from Keynes own writings. For example, Keynes did not aggregate output; he aggregated either labor or things measured in money prices. I tend to think Axel's interpretation of Keynes' contributions are incorrect as Keynes' views, but make sense anyway. In particular, the idea that the economy is normally self-regulating, but if buffers are eliminated, the self-regulating mechanisms can break down. To me, it explains the depth and severity of the Great Depression and helps explain the Great Recession as well.

Visit to China

I visited China with a group of Hope College students during spring break. We visited a number of businesses while there, learning a lot about business in China. In Beijing, we visited Amway Asia, Super8, Motorola, and Sinochem, a state-owned enterprise. In Shanghai, we visited Dow Chemical, GM Asia, Gentex, TRW, and JCI. Some lessons learned:

China's perspective on their history over the last 150 years is that they experienced several "humiliations" at the hands of western powers, including two Opium Wars, the Boxer Rebellion, and the Japanese invasion during World War II. China can use a "nationalistic card" at almost any time. China wants to be treated with respect and not as one subjhgated to the West. Face matters.

China is trying to develop faster than any country has ever done. This involves several strategies. The process began thirty years ago when China opened up to trade. They had about one billon people, but 900 million were farmers. Today they have about 1.3 billion with about 600 million farmers. Urbanization has taken place by cities expanding geographically some amout each year.

According to a historian we met, many service workers in Beijing are "illegals", i.e. they are from rural areas and do not have the documentation needed to live in Beijing. There is a huge disparity between rural and urban areas in terms of income and education.

China sets goals, involving a series of five-year plans. The want to achieve urbanization of 70% of the population by 2020 and are trying to achieve this at the rate of 1 percent a year. They set goals for economic growth, extending development to the western provinces, industrialization, and so on. They acknowledge that pollution is a problem but have the strategy of grow first and then clean up.

Many American businesses there are part of joint ventures. In some industries, a foreign firm cannot operate in China except as part of a joint venture. An important example is automobile production. An American firm has to be in a joint venture and the Chinese firm has majority control. Joint ventures are not required in auto parts so Gentex is not a joint venture, although TRW and JCI are involved in joint ventures.

I suspect much of the data coming from China is inaccuate. They set growth rates and always make them or surpass them slightly. On the train from Beijing to Shanghai we passed some cities that appeared to be largely empty of people. A lot of construction has been done that appears to be unnecessary. Still, great economic gains are clearly evident, especially in the number of autos on the roads. We were informed that about 2000 new cars are on the roads in Beijing every day. The scary thing is that most of the drivers are new drivers and don't have much experience. Rules of the road seem to be suggestions at best.

I lived in Los Angeles for four years, and the pollutoin in Beijing is much worse than any I experineced in LA. Shanghai was a breath of fresh air--literally and figuratively. It would have been intersting to get into a more rural part of the country, but we didn't have time. It was a fascinating trip, and one that impacted our students greatly.