Macroeconomists debate feverishly about the causes of a stagnant U.S. economy. Some such as Paul Krugman argue that demand deficiency (a Keynesian diagnosis) requires very aggressive monetary and fiscal policy until the economy reaches its potential.  Others, such as Edmund Phelps in an August 6th opinion piece in the New York Times argue that our macroeconomic problems are structural and not related to deficient demand.  He argues that

“The [aggregate demand] prescription will fail because the diagnosis is wrong.”  He goes on to argue that our focus on reviving demand “lulls us into failing to think structural.”  He cites such structural deficiencies as “short term” incentives employed by established businesses and financial managers, poor incentives for innovation, and a lack of inclusiveness in income gains that have arisen over the past two decades.  Phelps suggests a number of policy actions that might be taken to put the US economy back on a dynamic path essential for prosperity and growth.  In short, we need to move beyond short term demand stimulus to long term incentives to innovate.  In his view, “the economy needs a bit of ingenuity.”

In a recent weblog, economist Jeff Frankel makes a strong case that the best way to gain energy independence – whatever that might mean – is to leave the oil in the gulf until a real emergency arises.  He notes that the “drill, baby, drill” advocates essentially want to drain America of oil before we buy from others.  This makes no economic or security sense.

If you want real time numbers on the macroeconomic character of the U.S. economy including debt levels, check out U.S. Debt Clock. org.  If the numbers themselves won’t get you, the dizzying changes certainly will.

In today’s Economix blog, Uwe Reinhardt addresses the time honored debate regarding the role companies play in an economy.  He contrasts the Neo-Classical view, with appropriate reference to Adam Smith, with communitarian views   expressed by many critics of capitalism.  He argues that simple ideological distinctions misinform rather than inform a discussion of how wealth is generated or destroyed by business.  Reinhardt writes superbly.  I encourage all to read his regular entries to the NYTimes Economics blog.

Are you overwhelmed by the mail in your email inbox?  Does the United States have a long term budget deficit problem? Arthur Pigou, via Greg Mankiw, offers the perfect tax to clear both inbox congestion and Federal budget problems.  Is this real Pareto Improvement?  What do you think?

What do the Goldman Sachs and the Catholic Church have in common?  Is this comparison fanciful?  Even Goldman CEO Lloyd Blankfein opined that the firm was doing “God’s work.”  See if you agree with Stephan Richter’s argument.

Today’s headlines reveal that the Federal Reserve Bank of the United States contributed its net income (PROFITS) of $47B to the Federal Government in 2009.  It is required to do so by law.  Those who go on the Chicago trip in May (or who read the article)  will learn that the Fed is a regular contributor to governmental coffers.   Furthermore, it’s not just seigniorage (for those of you in Econ 320.)

In today’s Wall Street Journal, Gerald O’Driscoll spells out on how theft and fraud have become commonplace.  This is not a new story but a growing phenonmenon.  The Goldman-Sachs and Lehman cases show how pervasive things are.  The cartoon tells it all.

An Economy of Liars

In 2006, Massachusetts (with Mitt Romney as Governor) passed a health reform law that shares many of the features of the U.S. reforms recently passed in Congress and signed by President Obama.  The op-ed piece linked below suggests that when “market failure” meets “regulatory failure” the results will be ugly.

Come to Econ Tea on Monday to discuss this topic.

1. Asymmetric information and poor incentives cause private markets to work poorly.
2. Collectivized markets (and strict regulation) poorly serve the public when there exists a wide range of preferences.
3. Exchanges (which Alain Enthoven once called managed competition) “can” work but only if they don’t fall into the traps provided by 1 and 2 above.

We’re doomed!

http://seminal.firedoglake.com/diary/39434

This comment follows directly on Professor Gerard’s observations about the difficulties political structures have in reducing governmental debt.  Ken Rogoff, fresh off his appropriately well received recent book with Carmen Reinhardt entitled This Time is Different: Eight Centuries of Financial Folly, opines in Wednesday’s Financial Times that “Bubbles lurk in government debt.”  (Follow the link below.) He argues, persuasively in my view, that “conventional economic theory can rationalize bubbles” and that Reinhardt and he observe that large increases in both leverage (debt) and asset prices often “implode if confidence fades,” which inevitably it will.  Losses in the equity market fall directly (and often quickly) on the equity holders.  Losses in the debt market, however, generate long, drawn out negotiations about who should bear the losses.  Opportunities for shifting these losses from the politically strong to the politically weak abound, for governmental debt (and off-budget guarantees), which lacks sufficient transparency until its too late.

http://www.ft.com/cms/s/0/f22a3704-4248-11df-9ac4-00144feabdc0.html

The Congressional Budget Office is designated as the official scorekeeper for budgetary proposals.  It recently posited that the health insurance reform bill, passed by Congress and signed by the President, would reduce the Federal budget deficit over a 10 year.  Many economists, including Greg Mankiw and yours truly, beg to differ.  See the entry from Mankiw’s blog included below.  Don’t miss the warning label!

A Warning about CBO Scoring

Michael Lewis in his recently released book The Big Short highlighted several investors who anticipated the financial crisis and took actions to gain from it.  One of them, Michael Burry was featured on a recent edition of 60 Minutes.  In Sunday’s New York Times,  Burry lays out the case.

Op-Ed Contributor – I Saw the Crisis Coming. Why Didn’t the Fed? – NYTimes.com

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I Saw the Crisis Coming. Why Didn’t the Fed?

Wisconsin Sports Development Corporation has an opportunity for a student or class to gain real-world experience in conducting an economic impact survey of the 2010 Badger State Summer Games held in the Fox Cities during the weekends of June 18-20 and June 25-27.

Wisconsin Sports Development Corporation (WSDC) is a nonprofit 501(c)(3) charitable organization devoted to fostering participation, competition and memorable experiences through our events and programs that promote health, active lifestyles and a sense of community.  WSDC’s marquee event is the Badger State Games.  The philosophy of the Badger State Games is that everyone plays regardless of age or ability. The Games embody the values of participation and good sportsmanship. BSG is Wisconsin’s only Olympic-style sports festival and is truly a grassroots organization that relies on the dedication of thousands of volunteers and the support of corporate partners.

WSDC wishes to ascertain the economic impact the Badger State Games has on the Fox Cities area.  In order to do this the following steps will need to be accomplished (see attachments):

1. Review past processes, tools, timelines and reports
2. Revise, update or create new processes and tools
3. Create a timeline for implementation
4. Recruit and train volunteer staff as needed to implement the study
5. Collect and analyze appropriate data
6. Prepare reports and deliver presentations to various stakeholders – eg: BSG staff, board of directors, funding sources, and other constituents.

See Professor Finkler if this project intrigues you.

In a recent NYTimes Economix blog entry, Edward Glaeser argues that we should watch Detroit under mayor David Bing and see if the answer is yes.  Bing, former NBA all-star guard, has formulated a plan to downsize Detroit; that is, identify policies that will help Detroit generate a sustainable comparative advantage by reducing and removing those policies that are destructive.  It’s an intriguing and very politically challenging idea.  See what you think.

http://economix.blogs.nytimes.com/2010/03/16/shrinking-detroit-back-to-greatness/

Leave it to reality television to resurrect the Stanley Milgram experiments in front of a live studio audience.

The game involved contestants posing questions to another “player”, who was actually an actor, and punishing him with 460 volts of electricity when he answered incorrectly.

Eventually the man’s cries of “Let me go” fell silent, and he appeared to have died.

Not knowing that their screaming victim was an actor, the apparently reluctant contestants followed the orders of the presenter, as well as chants of “Punishment” from a studio audience who also believed the game was real.

The programme’s producer and a team of psychologists recruited 80 volunteers, telling them they were taking part in a pilot for a new television show.

Well, I think that speaks for itself.

Last week’s report by Lawrence Alum Anton Valukas on Lehman Brothers reveals that the actions taken by Lehman were assumed to be legitimate and above board. Transparency was evident. But as Andrew Ross Sorkin opines in the linked New York Times story below,  which matches Michael Lewis’s view, the incentives were wrong, and regulators did not look in the obvious places.

http://www.nytimes.com/2010/03/16/business/16sorkin.html?adxnnl=1&ref=business&adxnnlx=1268751826-n8L9ylXvRETjzarAOCJirg

In the opinion piece below, Alan Blinder explains why it is critical to carefully read documents, especially if they involve legislation and even more importantly if they affect the Federal Reserve Bank.

Alan Blinder – Opinion piece on PBS
January 2010 “The Future of the Federal Reserve”

Do you ever get the feeling that this country is over-lawyered? Well, here’s another example.

Ron Paul, the libertarian congressman who wants to abolish the Federal Reserve, has long promoted a first step in that direction. The so- called Paul bill would subject the Fed’s monetary policy decisions to GAO audits. Like most economists, I find the idea, well, appalling.

But I breathed a sigh of relief when a modified version was appended to the House’s financial reform bill late last year. The Paul-Grayson amendment added what I thought was an important clause. Let me read it to you.

“Nothing in this subsection shall be construed as interference in or dictation of monetary policy to the Federal Reserve System by the Congress or the GAO.”

That sounds like a strong affirmation of the Fed’s independence, right? I certainly read it that way and so did my students. Then I talked to a lawyer.

So put on your lawyers glasses and read it again. Nothing in this subsection shall be construed as interference and so on.

Read literally, the sentence does not instruct Congress to keep its nose out of monetary policy. Instead, it asserts that the proposed law does not interfere with monetary policy even if you think it does. Orwell’s big brother would have been proud. He gave us war is peace, freedom is slavery. Now the House thought police give us interference is not interference.

Ladies and gentlemen of the House, could we please fix this?