A worth reading article by Nobel Prize winner , Paul Krugman, on US and world economy which is showing the signs of slipping again. He has been persistently arguing to keep the Monetary Policy easy and forgive the mortgages for people who are under water. It may sound unfair to some, but  he argues that there is no other way out. some excerpts from the article; ( F. Sheikh)

What, after all, is our fundamental economic problem? A simplified but broadly correct account of what went wrong goes like this: In the years leading up to the Great Recession, we had an explosion of credit (mainly to the private sector). Old notions of prudence, for both lenders and borrowers, were cast aside; debt levels that would once have been considered deeply unsound became the norm.

Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But my spending is your income and your spending is my income, so when everyone tries to pay down debt at the same time, you get a depressed economy.

So what can be done? Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up during the bubble years. More often, debt relief takes place implicitly, through “financial repression”: government policies hold interest rates down, while inflation erodes the real value of debt.

Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.

So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work. Whatever progress debtors make through suffering and saving is more than offset through depression and deflation. That is, for example, what happened to Britain after World War I, when it tried to pay off its debt with huge budget surpluses while returning to the gold standard: Despite years of sacrifice, it made almost no progress in bringing down the ratio of debt to G.D.P.

http://www.nytimes.com/2014/10/13/opinion/paul-krugman-how-righteousness-killed-the-world-economy.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region

If anyone has any interest in economics, one should not miss the discussion surrounding the book by Thomas Pikkety, Capital in the Twenty-First Century.

It has been called a dynamite in the current economics thinking, and has become a must read among economists and policy makers.. Mr. Pikkety argues,  supported by his data of over 200 years and  about 20 countries, that rate of return on capital exceeds the rate of growth ( r>g). The average growth ( g ) is about 1.5 to 2 % but rate of return on capital ( r) is about 6 %. The capitalists are earning about three times more than the growth and leading to accumulation of wealth in top 1%. To make the matters worse, the tax rate on capital gains is much less than earned income. He further argues that inequality is not due to skills of lagging workers either. To reduce inequality, Mr. Piketty argues for an internationally enforced progressive wealth tax, where the rate of tax rises with the level of wealth.

Many economists has commented on his work, and following are some excerpts from article by Larry Summers , former Treasury Secretary. ( F. Sheikh )

Once in a great while, a heavy academic tome dominates for a time the policy debate and, despite bristling with footnotes, shows up on the best-seller list. Thomas Piketty’s Capital in the Twenty-First Century is such a volume. As with Paul Kennedy’s The Rise and Fall of the Great Powers, which came out at the end of the Reagan Administration and hit a nerve by arguing the case against imperial overreach through an extensive examination of European history, Piketty’s treatment of inequality is perfectly matched to its moment.

Like Kennedy a generation ago, Piketty has emerged as a rock star of the policy-intellectual world. His book was for a time Amazon’s bestseller. Every pundit has expressed a view on his argument, almost always wildly favorable if the pundit is progressive and harshly critical if the pundit is conservative. Piketty’s tome seems to be drawn on a dozen times for every time it is read.

This should not be surprising. At a moment when our politics seem to be defined by a surly middle class and the President has made inequality his central economic issue, how could a book documenting the pervasive and increasing concentration of wealth and income among the top 1, .1, and .01 percent of households not attract great attention? Especially when it exudes erudition from each of its nearly 700 pages, drips with literary references, and goes on to propose easily understood laws of capitalism that suggest that the trend toward greater concentration is inherent in the market system and will persist absent the adoption of radical new tax policies.

Piketty’s timing may be impeccable, and his easily understandable but slightly exotic accent perfectly suited to today’s media; but make no mistake, his work richly deserves all the attention it is receiving. This is not to say, however, that all of its conclusions will stand up to scholarly criticism from his fellow economists in the short run or to the test of history in the long run. Nor is it to suggest that his policy recommendations are either realistic or close to complete as a menu for addressing inequality.

Start with its strengths. In many respects, Capital in the Twenty-First Century embodies the virtues that we all would like to see but find too infrequently in the work of academic economists. It is deeply grounded in painstaking empirical research. Piketty, in collaboration with others, has spent more than a decade mining huge quantities of data spanning centuries and many countries to document, absolutely conclusively, that the share of income and wealth going to those at the very top—the top 1 percent, .1 percent, and .01 percent of the population—has risen sharply over the last generation, marking a return to a pattern that prevailed before World War I. There can now be no doubt that the phenomenon of inequality is not dominantly about the inadequacy of the skills of lagging workers. Even in terms of income ratios, the gaps that have opened up between, say, the top .1 percent and the remainder of the top 10 percent are far larger than those that have opened up between the top 10 percent and average income earners. Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.

http://www.theatlantic.com/business/archive/2014/05/thomas-piketty-is-right-about-the-past-and-wrong-about-the-future/370994/

I’d like introduce a topic of discussion that’s different from most on the Thinkers’ Forum blog. Get away from the heated discussions of religion, theism/atheism. Let’s see if we can get the same passionate discussion about a more worldly subject.

Like most persons who know next to nothing about economics I always accepted both sides of the debate on whether raising the minimum wage would be beneficial or harmful to the economy. I bought both arguments, one saying raising the minimum wage would mean employers would hire less because of increased cost and thus would lead to higher unemployment; on the other hand i also bought the other side’s argument that if a person works full time job he/she should not live in poverty. So i bought both sides’ arguments, all the while suspecting that people who are against raising it – mostly rich folks – were not necessarily worried about the country’s economy but the economy of their own pocketbooks.

And then I heard this podcast; i am providing a link to it. It’s a little longer than i would want it to be but it’s informative and humorous. Instead of making either a knee jerk “liberal” or “conservative” argument, it makes an economic argument FOR raising the minimum wage. You’ve probably heard the argument that raising the minimum wage would mean the loss of 500,000 jobs; this podcast says even if that is true, the economy would benefit by virtue of 25 million more workers, who are at minimum wage salaries, getting 30% more who would buy more and be beneficial to the economy. So listen and make up your own mind; and better still, let us know your opinions by way of commenting on this blog.  Thanks.

http://thegoodfight.fm/episodes/20-minimum-wage-myths-busted

Shoeb Amin