Our Racism (post 24)

Our racism is now and always has been America's greatest problem.

When I say "our racism" I mean America's racism. And, yes, that has predominantly been racism by whites against people of color.

Every American who watches Baltimore's riots feels emotions that go deeper than our lifetimes. These emotions from beyond our own experiences bring anger and denial.  For some, the anger is aimed at some black men and women who took this moment to inflict damage on each other and our society. For others it is aimed at some black and white elites who ridicule, condemn, apologize for, defend or applaud their actions. For others, the anger is aimed at predominately white police forces, government institutions and media who continue to perpetuate racist policies, attitudes and actions.

Our racism prevents us from living with each other.
Our racism prevents us from putting ourselves in each other's shoes or attempting to see the world through each other's eyes.

If you believe there is a purpose to this world, or even if you just believe that it's in everyone's best interest to learn to live with one another - then just for a moment imagine all human beings on this Earth as children of a single parent.

What would that parent want for us?

I imagine he or she would want us to look out for each other, to be there for one another and to love each other.

When some are sick, we should help them heal.
When some are without a job, we should help them find jobs.
When some are without a home, we should help them find homes.
When some are selfish, we should help them learn to give.
When some are violent, we should defend.
When some are unjust, we should restore justice.

If you are angry about Baltimore or if you are angry about racism or racial things that have happened to you - then talk about it. Tell people about it. And listen to their responses.

Our racism gets worse when we avoid it.

Dealing with Problem Members (post 23)

In this article on the potential for Greece's continued membership in the EU, an unnamed Wall Street executive makes the following statement:

"Some top executives on Wall Street argue that it would be much worse for creditors to cave in to demands for more lenient terms from Greek’s anti-austerity political leaders. Because that would mean other debtor nations would also soon clamor for relief. Better to rip the bandage off and put an end to the charade that Greece will ever pay back all its loans."

He claimed that markets would benefit from Grexit because "you kick Greece out and the world realizes this is not a systemic problem and the euro rallies because they just got rid of the weakest link."


The mentality expressed here is the type I find the most disheartening. It embraces the idea that a community becomes stronger when the weakest or most disruptive members are punished or excluded.

When a community identifies members that are disruptive and/or weak, there are a limited number of things it can do:

1) It can ignore them - which seems unlikely to help.

2) It can punish them - which, while in some cases may be helpful, often only serves to make people weaker and/or more disruptive.

3) It can exclude them - this seems to be the solution suggested by the Wall Street executive above concerning Greece. It is the solution embraced by so many middle class Americans who primarily choose to deal with crime, poverty and cultural tensions by moving away from them. This may be the worst solution.  It is a temporary avoidance of symptoms, but it inevitably makes underlying problems worse.  When unwanted people are excluded from participation in a group, they congregate and exacerbate each other's problems. They harbor resentment toward the people who excluded them, and they inevitably act on that resentment in ways that are unfortunate for everyone. If Greece is excluded from the EU, it doesn't just go away. It is still there and it becomes a resentful enemy of the EU - an enemy on the EU's doorstep. Only a short sighted fool in a Wall Street corner office would think that is a good idea.

4) It can kill them - eugenics, genocide. Thankfully these are no longer explicit options within the civilized world.  Yet we know there are corners of the world - even in America - where such practices are still very much going on.

5) It can embrace them - this is probably the most difficult option but also the one with the most promise for improving a community. If someone has a weakness or disability - then a community should come together to help that person.  If someone is disruptive, then a difficult judgement needs to be made.  Some people are so violent that lifelong imprisonment is the only good solution.  For some people, punishment really does help them become more disciplined.  But, in my experience, most people who are disruptive are so because they have never learned to value discipline or cooperation. Punishing such people is never going to help them. Neither is excluding them. People need to be embraced by a community in order to learn the value of a peaceful existence within a community.

The situation with Greece was mishandled by all sides. The Greek people have had a serious problem of corruption among their political and business elite. The rest of Europe was negligent in making so many loans to Greece and Greek institutions without first addressing those issues. But the past can't be undone. What is the best solution moving forward? Punishing the Greek people by imposing austerity measures on them doesn't help anyone. Excluding Greece from the euro and thus the EU creates a enemies at a time when the EU desperately needs friends. The euro group would be best served by forgiving all sovereign debt of its member states and moving forward with plans for greater fiscal integration and oversight of sovereign policy making.

Bad Reasons for Inflation (post 22)

William Dudley gives four terrible reasons for why he thinks inflation is going to pick up this year in the United States.  His reasons:

1) Oil is no longer plummeting
2) Rents are rising
3) Jobs and incomes are growing
4) Household expectations of inflation have been stable (despite disinflation)

Why are these reasons terrible?

1) Oil is no longer plummeting, but oil isn't a part of core inflation - and core inflation has been falling since 1992.

http://www.tradingeconomics.com/embed/?s=usacorecpirate&d1=19920101&d2=20151231&h=300&w=600&ref=/united-states/core-inflation-rate

2) Rents are rising.  But that is only because there are fewer and fewer rental vacancies.  If vacancy rates were stable and rents were still going up, then that might point to higher inflation.  But if vacancies are going down and rents are going up, that is simply explained through supply and demand.  Interestingly, there has been a lot of hype this year about apartment vacancy rates remaining flat.  But apartment vacancies are and always have been a very small part of rental vacancies.  They don't drive rental prices.



3) Jobs are growing - that's great news.  However, incomes are barely growing.


And incomes fell a long way before they started to grow.  Prices didn't fall along with median real wages, so, arguably, there may be slack between wages and prices that needs to be taken up before wage increases can cause inflation.

4) Household expectation of inflation has been (sort of) stable - this fact actually supports the opposite of Dudley's conclusion.  Inflation expectations can create inflation.  Deflation expectations can create deflation.  The fact that Americans have been expecting greater inflation than we have actually been seeing has acted as prop for inflation.  Had Americans not been expecting as much inflation, our inflation rates would be even lower. So our expectations of inflation have been slowing disinflation, but they haven't been enough to prevent disinflation.  And American's expectations of inflation have been falling!!! This is not good news if you are hoping for more inflation (like we all should be).

Is William Dudley an idiot?  Probably not.  More likely he has an agenda.  He wants higher interest rates.  Why?  Because high interest rates help the very wealthy to create more wealth.

The Paradox of Thrift and Secular Stagnation (post 21)

A Note on the Paradox of Thrift

The concept of secular stagnation is controversial due primarily to misunderstandings among economists and financial professionals as to whether or not aggregate savings can exceed aggregate investment. The answer depends on what one means by ‘investment’ and the problem is exacerbated by loose talk. If one accepts the definitions provided in most economics textbooks, it is clear that aggregate savings cannot exceed aggregate investment – but aggregate investment includes inventory overhang (not just spending on capital goods). This means an increase in savings will lead to a glut in inventories which will arguably decrease investment in capital goods which will cause a decrease in income which will lead to a decrease in savings.

This hypothesis – that an attempt to increase aggregate savings can actually cause a net decrease in aggregate savings - is called the Paradox of Thrift. It is a vitally import concept to understand – more here, here, here, and here. The main argument against the Paradox of Thrift comes from Hayek. He argues that increased savings will lead to more investment in capital goods which will lower production costs and thus increase profits, income and preserve increased savings.

The truth of the Paradox of Thrift essentially hangs on the question of whether or not (or under what circumstances) an increase in aggregate savings will lead to an increase or decrease in investment in capital goods.  The answer should be an empirical matter. Although not enough to settle the issue once and for all, there is sufficient empirical support to make the Paradox of Thrift a working hypothesis – and its assumption underlies this analysis of secular stagnation.

Secular Stagnation

One of the most significant economic trends occurring in the world right now is the global stagnation of consumer spending. This is often referred to as secular stagnation (secular meaning "for a long time"). The position of this summary is that global stagnation of consumer spending is real, that it is depressing both interest rates and growth, and that it has no obvious solution.

In the aggregate, people can only do one of two things with their money: consume or save (if an individual makes a personal investment - such as buying stock or valuable art – that individual is simply trading positions with someone else - which has no effect in the aggregate). The important equation to remember is:

Aggregate Savings + Aggregate Consumption = GDP

A decrease in aggregate consumption must either lead to an increase in aggregate savings or a decrease in GDP (or both). And, as stated before, if an increase in aggregate savings isn't matched by an increase in investment in capital goods, then the paradox of thrift will eventually force a decrease in savings and a decrease in GDP.

Hence a dearth of consumption is a major global problem because it leads to falling wages which further reduces consumption and so on. Once this negative cycle begins it is difficult to end. The last time the world experienced such a cycle of declining consumption was the Great Depression. The Great Depression was ended by World War II - an event which created a huge spike in jobs, wages and spending while destroying or distributing much of the world's debt and real assets.

1) The Case for Inadequate Consumption.

   a. This conclusion that the world is suffering from a prolonged shortage of aggregate consumption is neither obvious nor uncontested. Gross World Product (GWP) has been rising steadily at about 3% for the past few years.  Very few countries are currently experiencing recession.  Global unemployment has fallen to a reasonable looking 5.4%.  On the surface, these facts do not reflect or portend stagnating consumption.

   b. However, average GWP since 1950 has been over 4.5% - so a fall to just over 3% is a significant decline.  And for the World's largest economies, the situation is getting worse.  The stagnation has been most concentrated in Europe and Japan.  Japan, which has been the global bellwether for stagnation, has been in and out of recession for the past 20 years and is still unable to generate significant growth.  The European Union had a recession in 2012, has experienced essentially no growth since the financial crisis, and was flirting with recession early this year.  Russia and Iran are both in recession (mainly due to falling oil prices and sanctions which don't help the situation).  India, Brazil, Indonesia and Saudi Arabia have all seen their GDP growth evaporate.  Canada and Australia are both worried about commodities related recessions. So, of the world's 15 largest economies (which represent over 80% of GWP) only China, the United States, Mexico, Turkey and South Korea have been demonstrating sustained growth.  And each of these countries face numerous headwinds moving forward.


   c. The International Labour Organization reports that global wage growth is more than 30% below where it was before the financial crisis began and has been slowing over the past two years.  Simon Wren-Lewis argues that potential GDP is 25% greater than actual GDP in the US and greater still in Europe.  Underemployment is a problem all over the world.

   d. Arguably, of the world's largest economies, the US has the most optimistic outlook. But while US employment, GDP and corporate revenue are all on the rise, wages are stagnant. Although the US unemployment rate has been falling, the labor force participation rate, at 62.7%, is the lowest it's been since 1978.  Underemployment is especially problematic. Auto sales have been an over-sized contributor to growth in the US over recent years, and much of this spending has been based on debt.  Although the US debt to GDP ratio has fallen significantly since the start of the financial crisis, recent rises in auto and student loans contributed to the rate of US consumer borrowing hitting an all-time high this February.

2) Inadequate Consumption Leads to Deflation and Depression.

   a. Prolonged inadequate consumption can lead to deflation.  Deflation is when goods and services become less expensive over time.  This may sound like a positive thing, and it can be in situations where prices have accelerated faster than a growing demand.  But when prices fall due to falling demand there are three very negative consequences.  One is that lowering the prices of goods and services ultimately leads to lower wages.  Another is that, if prices keep falling, it encourages people to delay purchases.  An expectation builds that, if one waits longer, things may become cheaper.  The third consequence is an extension of the first two; if people are receiving lower wages and have incentives to delay purchases, consumption will sink further. This is known as a deflationary spiral.

   b. Deflationary spirals are not myths. Japan has been in a deflationary spiral for the past twenty years.  Throughout that time Japan has repeatedly fallen in and out of recession.  In recent years, Prime Minister Shinzo Abe has moved aggressively to create inflation (via programs known collectively as Abenomics) with mixed success.  Japan had a small amount of inflation over the past two years, but it fell into recession again last year and the inflation rate has been falling (see tradingeconomics.com).

   c. Beyond Japan, several European countries have recently begun experiencing deflation and several others are dangerously close.  In the United States, inflation is currently under 1% and has been falling since 2011.  Canada and Australia's inflation rates are between 1.5% and 2%.  Although higher than other developed countries, these rates are far lower than their historic averages and the rates have been falling for the past several years (more here).

   d. The developed country that is arguably in the best position to generate demand and resist deflation is the US.  Market predictions of future inflation in the US can be inferred from the right side of the yield curve of treasury bonds.  The yield curve currently has a small but positive slope (data).  This indicates that market expectations of both growth and inflation over time are low, but not non-existent.  The extent to which this picture is muddied by short term expectations of a Fed rate hike are difficult to determine.

3)  Currency Depreciation and Low Interest Rates Will Continue

   a. We have seen that prolonged inadequate consumption can harm a country.  There are limited things a country can do to fight inadequate consumption.  One is an intentional depreciation of its currency.  Countries do not have complete control over their exchange rates, but they can influence them by buying and selling foreign currency and/or foreign currency bonds on the open market or by expanding their monetary base.  When they are successful in these operations, their currency depreciates and the country's exports become cheaper on international markets.  In a sense, this allows them to "steal" demand from countries with stronger currencies.  Since 2008 we have seen many countries engage in activities to intentionally depreciate their currencies. Recently, among developed nations, we have seen depreciation of the yen, the euro, the Canadian dollar and the Australian dollar (more here).  The US dollar, the pound, the Swiss franc and other non-euro European currencies have strengthened in response. In the short term, the depreciating countries will take some demand from non-depreciating countries.  Unfortunately, depreciation is only a viable strategy to fight local consumption slumps.  It cannot successfully be used to battle a global shortage.

   b. Another way countries can fight a lack of consumption is by lowering interest rates.  Lower interest rates can stimulate consumption by creating incentives for people to borrow money to make major purchases.  Interest rates in developed countries have been near or below historic lows for many years now.  Without inflation or wage gains, there is no impetus for rates to increase.  Even if inflation and/or wages begin to pick up, a premature increase in rates could send economies back into disinflation.

   c. Interest rates do not seem likely to rise in Europe or Japan anytime soon, and, in Europe, rates have gone negative.  The US Fed is currently deciding whether or not it will raise its rates this year.  The market seems to have priced in this decision to some degree - but the exact degree is difficult to determine.  The fact that the US dollar has been strengthening relative to other major currencies may encourage the Fed to delay any rate hikes they may have otherwise been considering.

   d. In the US, our GDP is growing, our unemployment rates are falling and our deficit is decreasing. However, disinflation and currency depreciation in other countries can potentially siphon away some of our potential.  Demand slumps are like quicksand traps.  Even if you are not directly in the trap, but your neighbor is, they may grab onto you in an attempt to save themselves - and if you aren't completely secure in your own position, they could end up dragging you in with them.

4)  Reasons for Weakening Consumer Spending

   a. This prolonged period of inadequate consumption was precipitated by the global financial crisis of 2008/2009 - which, in turn, was sparked by crashes in real estate prices in the United States, Europe, China, South Africa and Australia and then exacerbated by credit crises in the global financial institutions which have issued or traded debt backed by the pre-crisis real estate valuations.  In a nutshell, much of the world was living on debt securitized by grossly inflated real estate prices.  When those prices crashed, much of the world suddenly owed money on unsecured debt - which means lines of credit were suddenly frozen - which means much of the world had to suddenly decrease the amount of money it spent - which means other parts of the world suddenly stopped making as much money - and so on .  This started a global deleveraging process which is often cited as the major cause of stagnating consumption (more here and here).  But this explanation is made problematic by this CEPR report from last year which indicates that, in aggregate, deleveraging has not reduced the global debt to GDP ratio (though it has shifted debt from developed countries to emerging ones).

   b. Beyond deleveraging, we know that longer life spans and decreased birth rates are contributing to stagnating consumption in a number of different ways. As anyone with children knows, the arrival of babies increases consumer spending - hence a decrease in the arrival of babies leads to a decrease in consumer spending. Longer life spans affect consumption by creating a need for increases in aggregate savings.  As we've stated before: in the absense of growth, a rise in aggregate savings is a decline in aggregate spending.

   c. Many theorists have attempted to show that accelerating wealth inequity has contributed to an increase in aggregate savings (and hence stagnation of consumer spending), but this point remains contentious.  There is an ongoing and notable debate over this issue between two Noble Prize winning economists, Paul Krugman and Joseph Stiglitz.  Stiglitz argues that inequality diminishes demand.  Krugman has been shifty in his objections to this. In 2011 he argued that savings were not increasing in the United States (which, while true, isn't a good argument because stagnation is a global phenomenon).  More recently he simply claims that inequality isn't necessary to explain stagnation. The degree to which Krugman really opposes the inequality hypothesis is anyone's guess as he has hinted that his objections may have more to do with political calculations than honest analysis. An excellent summary of their debate can be found here.


   5)  Solutions to Inadequate Consumer Spending

   a. Many economists (such as Stiglitz and Krugman) argue that the most obvious solution is for governments to increase deficit spending until the deleveraging spiral is halted.  Once the spiral is halted and demand returns, governments can go back to reducing their deficits or creating surplus.  This solution is not generally endorsed by more conservative economists nor does it seem likely to happen given the current political landscapes of most developed countries.

   b. In the absence of additional deficit spending, it is difficult to see what trends or changes could lead to increased consumption. Negative interest rates might help.  The retirement of Baby Boomers might help.  But the picture is bleak in many ways.  The precursor to consumption is wage growth, the precursors to wage growth are the organization of labor or an increased need for workers.  The organization of labor in the United States and elsewhere has been deteriorating for decades now. The precursor to an increased need for workers is an increase in consumption (which doesn't exist), or some sort of demand creating shock. The Great Depression was ended by the demand creating shock of World War II.  Obviously no one is hoping for a similar event, but what else besides a massive world war can, out of thin air, suddenly produce a huge demand for goods and labor?

   c. It may be that we start to see private companies spending more to replace and protect capital.  We are especially likely to see more companies spending significantly on data protection and cyber security.  Whether or not such endeavors become large enough to spur demand is unclear. We have also seen some companies (like Virgin, Tesla, Google and Apple) investing in speculative ventures such as private spaceflight, self-driving cars, wearables and fountains of youth - however, the overall trend in the United States and Europe has been a significant decrease in basic research and development.  Without wage growth, it is hard to see how large speculative ventures or basic R&D can grow large enough to impact the overall economy.

   d. Several local areas have recently passed or are considering minimum wage increases.  And several large companies, such as Walmart and McDonald's have recently increased wages - their motivation being the subject of much speculation. Whether such initiatives will have a measurable impact on consumption here in the United States is yet to be determined.  If it is able to generate consumer spending here, the extent to which that spending will be siphoned off to countries with depreciated currencies is yet to be determined - as is whether or not such distribution could help spur global demand.

Seeing All Sides (post 20)

Beyond the blatant bigotry and ignorance of the more rabid supporters of Indiana's RFRA, there are some real, difficult and important issues to consider.  These issues surround a host of hypothetical and real lawsuits where businesses refuse services, goods or accommodations to customers or clients for various reasons.

The preeminent case brought up in most of these debates (including Tuesday's excellent story in the Indianapolis Star) is the Washington state lawsuit, Arlene's Flowers v. Ferguson - where a local florist declined to make a flower arrangement for a long-time client's wedding because she did not believe the clients should get married.  The wedding was between two men.  Note that a key point in this case is that the florist was opposed to making a custom flower arrangement - it is unclear whether or not she was opposed to selling flowers.

So far, the Washington courts have ruled against the florist and have fined her for her refusal, but she is still appealing the case.

If you are like most people, then right now you see one of the sides of this dispute as clearly wrong and the other as clearly right.  Before going any further, I ask you to imagine yourself in the shoes of whichever side you think is wrong.  Try to be as sympathetic as you can be, making up as many details as you need to.

Imagine you just got engaged and you're excited to plan your wedding. There is a florist you've been going to for years, and you would love for her to design a flower arrangement.  When you ask her, she says she won't - because she doesn't think you or people like you should have the right to get married.  Her words open a wound that you thought had finally started to heal.  It isn't like you are asking her to bear the rings.  You are merely asking her to do something she does everyday of her life as her job.  You believe that if someone opens a for-profit business to the public, then it is their duty to make that business available to all members of the public, regardless of personal beliefs.

-or-

Imagine you are a florist who owns a small flower shop.  You believe we are suppose to live our lives according to a set of rules, and homosexuality is a major violation of those rules.  This doesn't stop you from being friendly toward gay customers.  It is just, in your heart, you believe what they do is a sin.  When you find out that gay marriage has been legalized in your state, you are appalled.  One day a long-time customer, who you know is gay, asks you to make an arrangement for his wedding.  You tell him that you cannot because that would be condoning something that goes against your religious beliefs.  The client is visibly upset, and later you find out he's sued you.  After a very public trial, where many people you've never met say all sorts of hateful things about you, a court rules against you and fines you - all for refusing to participate in something you think is morally wrong.

At this point you may be thinking I've done a poor job creating sympathy for the side you agree with.  You may be right, but if that is what you're thinking then you're missing the point of this exercise.  The point is for you to ignore what you think is right and try to see this situation from the perspective of the side you think is wrong.

Once we have at least attempted to see the world from the other side, only then can we hope to look at the facts with dispassion.

And what are those facts?

1) Rules for when a business can or cannot refuse service to a customer very greatly from state to state.

2) According to federal laws, a refusal for service cannot be based on race, sex, age, religion, national origin or disability.  Beyond that - in many states, counties and municipalities - refusal of service also cannot be based on sexual orientation or gender identity.  These are protected classes.

3) If the refusal is not related to a protected class, a business can refuse service for any reason.  However, if the refused customer can claim damages, they can still sue the business.  Federal precedent has made it clear that such lawsuits can be successful if the refusal was arbitrary but will be unsuccessful if refusal was for a legitimate business interest.

4) The way in which a business is legally established can make a significant difference in the latitude they are given to refuse services.  A corporation will generally receive less latitude than a partnership or sole proprietorship.  Non-profit organizations are often exempt for anti-discrimination laws altogether.

Given these facts, what would be a pragmatic solution?

The complexity of this case rests on the fact that you have the freedom of speech and religion conflicting with civil rights.  Many supporters of the florist point out that forcing her to make the flower arrangement is both a violation of her freedom to exercise religion and her freedom of speech.  Do they have a point?

I make the following observations:

1)  What does the florist do in the case of non-Christian weddings?  Would she make flower arrangement for those?  If so, how can she morally justify making a flower arrangement for a non-Christian wedding but not for a gay wedding?  Aren't both outside of her understanding of Christianity?

2) What is the distinction between a business owner and an employee when it comes to being forced to do things that one finds immoral?  I ask this because I know there are millions of employees in this country who routinely do things they believe are immoral for the sake of keeping their jobs - and I don't see Republicans trying to pass a bunch of laws to help them out.  One might argue that they are not forced to do immoral things - that they could quit their jobs and do something more in line with their morality.  But you could say the same thing about the florist.  If she doesn't want to do arrangements for gay weddings (or for non-Christian weddings) then perhaps she should make it a policy not to do arrangements for any weddings.

3) Alternatively, if she really wants to make flower arrangements for straight Christian weddings but not for gay or non-Christian ones, then perhaps she should run her business as a non-profit.  As I mentioned above, most non-profits are exempt from anti-discrimination laws.

4) My point is that the florist is not being forced by the government to do something that is against her morality.  Rather, she is choosing to engage in a commercial enterprise where her morality comes into conflict with anti-discrimination laws.  Furthermore, she has multiple lines of recourse - she could refuse all wedding arrangements or she could reorganize her business as a non-profit.

However...

5) I am sympathetic to the idea that she sees a custom arrangement of flowers for this particular event as an act of expression that condones something - whereas the mere sale of flowers or a stock arrangement would not.  This brings up differences between commercial speech and non-commercial speech - which has a rich and controversial history (see more here).

Most people agree that a business shouldn't be able to refuse a customer based on that customer's religion. However, people are very divided on whether or not a business should be able to refuse to put a custom message on a product - based on the message's religious content - if custom messages are something they routinely do.

Several people have argued lucidly that messages on custom commercial work shouldn't be protected as free speech.  See Tobin Grant's arguments here.

However, there is a particular hypothetical example that causes me to reject Grant's argument:

Imagine you are a baker who routinely puts custom messages such as, "Steve is the best dad!" on cakes.  A member of the Westboro Baptist Church comes into your shop and asks for a cake that says, "Homosexuality is a sin".

If I was the baker, I would refuse.

Yet this example seems similar to one where a baker would refuse to write, "A Happy Marriage for Joe and David"

It also seems similar to the florist's predicament in Arlene's Flowers v. Ferguson.

Yes, there are differences in all these cases. It is unclear whether or not the baker could refuse on grounds that the message constitutes hate speech.  Historically, Westboro Baptist speech far more incendiary than that of our example has been upheld as legal, protected speech (here).

So where exactly should one draw the line, and how could that line ever be successfully legislated or consistently interpreted?

I do not have an answer.