RSSCOMPANIES: INDUSTRIES:
The Emerging Economic Order
(c) Jack Ohman
U.S., China and the Emerging Economic Order
Henry Kissinger
The assumption that the end of the recession will restore the familiar global economic system ignores the psychological and political upheaval that has taken place.
A vast tide of liquidity coupled with America's appetite for consumer goods had sent enormous amounts of dollars to China that, in turn, China lent back to us for still more buying.
Economy: Past Stormy Weather and What May Follow
Paul A. Samuelson
The Fed and the majority of the consensus forecasters fear that this expected recovery might be a weak one that does little to reduce Main Street's unemployment. And it may also imply that future private consumer and investment spending will continue to be anemic. That would mean that at the global level there might not be the replay of the old-time drama in which the American locomotive comes to the rescue of depressed economies.
Divine Debt Trumps All
Victor Davis Hanson
In modern America, debt -- whether national, state or trade -- now plays the same overarching role as the ancient Greek notion of fate. And the president, Congress and the states for all their various agendas are impotent since they must first pay back trillions that have long ago been borrowed and spent.
Joseph Stiglitz Left's Favorite U.S. Nobel Economist
Andres Oppenheimer
U.S. Nobel laureate Joseph Stiglitz has become a sort of rock star in left-of-center Latin American countries for his vocal criticism of free-for-all capitalism. But in a wide-ranging interview, he offered some advice that many of his fans in the region may not want to hear.
The Dollar's Fate, in the Longer Term
Paul Kennedy
There is a most interesting debate going on at present in the academic community about the longer-term fate of the U.S. dollar as the supreme reserve currency for foreign-exchange transactions and, more importantly, for the currency holdings of national governments, global companies and the producers of oil, gas and other raw materials.
The Dilemmas of the Dollar
by Barry Eichengreen
Legions of pundits have argued that the dollar's status as a reserve currency has been damaged by the credit crisis of 2007-9. The crisis has not exactly enhanced the attractions of the United States as a supplier of high-quality financial assets. It would be no surprise if the disfunctionality of U.S. financial markets diminished the appetite of foreign central banks for U.S. debt securities.
Low and Behold the Price of Oil
by Edward L. Morse
The rapid fall and then rebound in oil prices over the past year surprised many people. But it was not unusual: commodities markets are cyclical by nature and have a history punctuated by sudden turning points. Although this generally makes it difficult to forecast prices, it is safe to say that commodities markets will remain lower over the next few years than they have been over the past five.
General Motors: 'Cash for Clunkers' a Huge Success
Amanda Ruggeri
Not everyone supported the Senate's passage of a bill that boosted "cash for clunkers" by $2 billion, effectively extending it through Labor Day. But it's hard to argue that the program, which gives rebates to people who trade in old cars for more fuel-efficient vehicles, hasn't made the auto industry happy. That's true for General Motors ...
Growth With Equity: Brazil's Path to Economic Recovery
by Patrus Ananias
The financial crisis has left few corners of the global economy unscathed, but many of the loudest cries reflecting the deepest pain are largely ignored. These are the cries of the world's poorest citizens whose suffering is not measured in battered portfolios and retirement plans but in their daily survival
Government Bailout
(c) Paul Tong
Opportunity Cost of the Bank Bailout
Arianna Huffington
The lopsided 'recovery.' Banks that received billions in taxpayer handouts now reporting massive profits and setting aside record amounts for executive bonuses, and the American people continuing to face 9.5 percent unemployment, 10,000 foreclosures a day and vital services being cut.
Boomers, Housing and Retirement:
A Symbiotic Relationship Unravels
By Mark Miller
The housing market is showing some tentative signs of recovery. But if you're a baby boomer relying on housing wealth to help fund
retirement, don't hold your breath. True, the most recent Standard and Poor's/Case-Shiller home price index showed that U.S. home
prices rose in May on a month-to-month basis for the first time since
Is the Economic Marriage Between China and U.S. on the Rocks?
Niall Ferguson Interview
China and America had effectively fused to become a single economy: Chimerica. The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing. As the Chinese strategy was based on export-led growth, they had no desire to see their currency appreciate against the dollar. The unintended effect of this was to help finance the U.S. current account deficit at very low interest rates. Without that, it's hard to believe that U.S. financial markets would have bubbled the way they did from 2002 to 2007.
Nine Reasons the Economy is Not Getting Better
Mortimer B. Zuckerman
We are now looking at unemployment numbers that undermine any confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. A better image is to look at the true total of jobless people as a prudent navigator looks at an iceberg
House Votes to Give Cash for Clunkers Another $2 Billion
Amanda Ruggeri
After "cash for clunkers" proved so popular that it threatened to run out of cash within its first week, the House pushed aside the other items on its agenda today to save it, passing a bill that allots another
4 Things to Know About the Cash-Strapped 'Cash for Clunkers'
Matthew Bandyk
The government set aside $1 billion for the "cash for clunkers" program, which is meant to give $3,500 or $4,500 vouchers to people who
trade in their gas-guzzling vehicles for new, fuel-efficient ones. But now that the
Cash for Clunkers Program Has Its Roadblocks
Kathy Kristof
If you want to trade in your junker for a new vehicle under the federal government's 'cash for clunkers' program, you'll have to act fast. Plus, qualifying for the vouchers isn't as simple as you might think. In fact, you'll need to know three things to decide whether it's a good deal for you.
Making Sense of 'Cash for Clunkers'
Matthew Bandyk
With new-car sales slumping, automotive companies have been looking for ways to get consumers back into showrooms. Washington checked one item off car companies' wish list when it passed the Consumer Assistance to Recycle and Save Act of 2009 -- commonly known as 'Cash for Clunkers' ...
Why June Jobs Report Is So Depressing
Liz Wolgemuth
The brutal truth about the
Unemployment Reaches 9.5 Percent, Highest in 26 Years
Amanda Ruggeri
The Labor Department's job report this morning may not be surprising, but it's still disappointing: The unemployment rate rose in June to 9.5 percent, making it the worst in 26 years. The rise, from 9.4 percent in May, is slight. However, it keeps the economy on track to hit a 10 percent unemployment level by the end of the year, as analysts have predicted.
Would Second Stimulus Create Jobs?
Liz Wolgemuth
Americans are stumbling through a job market that is overwhelmed with supply, stripped of security, and skimmed of hours and benefits, and the unemployment rate has already climbed much higher than officials had forecast. So, the real question is, what could a second Obama administration stimulus do that the first one couldn't? To answer that, it's necessary to know how the first $787 billion package has disappointed.
Accurately Counting Stimulus Jobs Proving Tough
Amanda Ruggeri
As Americans become more skeptical of the administration's promise that the stimulus package will create or save 3.5 million jobs, there's an added frustration: Even if the $787 billion act is successful in creating work, Americans may never know. That's because counting the jobs involves estimating what would have happened without legislation, a slippery task even if the economy weren't so volatile.
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We've Gone From Saving Wall Street in Order to Save Main Street to Just Saving Wall Street
Arianna Huffington
Remember how, when taxpayers were being asked to fork over billions of dollars to bail out Wall Street, we were told it was essential to saving Main Street? Well, in just a few months, we've gone from saving the banks in order to save the economy to just saving the banks. It's the opposite of mission creep.
Editorial Cartoon by David Horsey
Happy Economic Recovery vs. An Anemic One
Paul A. Samuelson
The number-one question preoccupying economists, policy agents of government and Main Street families is this:
Will "recovery" from the current U.S. financial meltdown arrive before the end of 2009? Or, failing that, will it at least arrive early in 2010?
Geopolitical Consequences of the Financial Crisis
Roger C. Altman
It is now clear that the global economic crisis will be deep and prolonged and that it will have far-reaching geopolitical consequences. The long movement toward market liberalization has stopped, and a new period of state intervention, reregulation, and creeping protectionism has begun.
Economic Crisis will Create the Social Heroes of Tomorrow
Alvin and Heidi Toffler
The economic crisis now gripping the world is going to go away. We may not know precisely when, where and how. But one thing is certain. Nothing is likely to blow away the waves of change that have marked human history
House Prices, Mortgage Interest Rates Key to Housing Market Recovery
By Ilyce Glink
With housing prices falling and mortgage interest rates rising, it's hard to say the housing market has bottomed out. And, yet, there are some reasons for a more optimistic housing forecast, according to Mark Zandi, chief economist for Moody's Economy.com
10 Most Dollar-Discounted Housing Markets
By Luke Mullins
As the historic real estate bust continues to gut home prices throughout the country, property owners everywhere are scrambling to attract buyers. For some home sellers, that might mean chipping in for closing costs; others might try to sweeten the deal by handing out perks, like a free parking spot. But for many homeowners, the most efficient way to sell a home in a depressed market is to simply drop the listing price.
Joseph Stiglitz:
Will Capitalism Survive Wall Street Apocalypse
Matthew Bandyk
A few days after writing about how the United States is not heading towards socialism, Joseph Stiglitz suggests that might not be true about the rest of the world. Stiglitz argues that the lesson many Third World nations might take from the financial crisis is that capitalism is fundamentally flawed.
Asia Economy: Tamed Asian Tigers, Distressed Chinese Dragon
by Brian P. Klein and Kenneth Neil Cukier
Since the 1960s, Asian economies have focused primarily on exports. It was the key to success in Japan, South Korea, Hong Kong, Singapore, and Taiwan. Much of Southeast Asia and China soon followed suit. Over the past decade, the region's exports have increased from 37 percent to 47 percent of GDP. By hitching their wagons to exports, however, Asian countries left themselves vulnerable to a drop-off in Western consumption
Whistling Past Economic Graveyard: Audacity of Misplaced Hope
by Arianna Huffington
When Tim Geithner unveiled the Public Private Investment Program, he said that dealing with these assets was a "core" part of solving the financial crisis. But the banks would much rather keep pretending that their toxic assets are not that toxic, and worth much more than they really are -- a risky charade the relaxed mark-to-market rules allow them to continue to pull off
Not Going to Be Economic Depression
Global Economic Viewpoint
Last week at the Milken Global Conference, three Noble Laureates in Economics sat down to discuss the global recession -- Gary Becker (Nobel Prize, 1992), Roger Myerson (Nobel Prize, 2007) and Myron Scholes (Nobel Prize 1997).
All three agreed that this is not going to be a depression and that the free-market economy is fundamentally healthy.
Why No One Can Guess When
Main Street Recovery will Occur
Paul A. Samuelson
Federal Reserve Chairmen Ben Bernanke glimpses a possible recovery by year end. He is a cautious scholar, backed by the best forecasters in the world at the Federal Reserve Board.
I would be a rash fool to quarrel with this quasi-optimistic view that by year end some stability will occur. You and I should hope that there will indeed be a glimmer of light at the end of the tunnel ahead. But shift our vision now to the future. Even if the short run prospect for a 2009-2010 recovery turns out to be good, I must warn once again that the long-run outlook for the U.S. dollar is hazardous.
Free-Market Economy Fundamentally Healthy
Global Economic Viewpoint
Last week at the Milken Global Conference, three Noble Laureates in Economics sat down to discuss the global recession -- Gary Becker (Nobel Prize, 1992), Roger Myerson (Nobel Prize, 2007) and Myron Scholes (Nobel Prize 1997).
All three agreed that this is not going to be a depression and that the free-market economy is fundamentally healthy.
Brazil, China & India Can Mitigate Global Crisis
Global Economic Viewpoint
Brazil, India and even China will not be able, by themselves, to correct the dysfunctions that produced the global crisis. But it is true that the economic power of these three countries can mitigate its negative consequences. ...
The Global Economy: Worse & Worser
Today's global economic debacle shares a disturbing number of similarities with the early stages of Japan's "lost decade" of the 1990s.
Without good policy and better luck, the world may well fall into a prolonged period of slow GDP growth, high unemployment, and stagnant living standards like that which unfolded in Japan almost 20 years ago.
Today's Global Economic Debacle: The Japan Fallacy
As the United States sinks deeper into recession, many observers fear the country could reprise Japan's "lost decade," the decade of stagnation that followed its mammoth property bubble in the late 1980s. But this fear is unawarranted.
Even the United States can Manage Itself into Economic Irrelevance
Chris Thomas
America has been the greatest of all nations for a long time. But we should not forget, especially at a crucial juncture like this, that with enough bad decisions and enough political incompetence, we can indeed manage ourselves into decline.
Deng Undone: China Halts Market Reform
Since the present Communist Party leadership took power, fresh market-oriented liberalization has been minor. Such policies have been wound down and supplanted by renewed state intervention. In privatization, prices, even foreign trade and investment, the PRC was heading away from the market well before the financial crisis erupted.
Why China & U.S. Not Ready to Upgrade Ties
Calling on the United States and China to do more together has an undeniable logic. Both Washington and Beijing are destined to fail if they attempt to confront the world's problems alone, and the current bilateral relationship is not getting the job done.
But elevating the bilateral relationship is not the solution. It will raise expectations for a level of partnership that cannot be met and exacerbate the very real differences that exist between Washington and Beijing.
Larry Summers: Brilliant Mind, Toxic Ideas
by Arianna Huffington
According to most commentators, the president's press conference went a long way toward taking the spotlight off the roiling anger over AIG, bonuses and Wall Street abuses -- and putting it back where the president wants it: on the imperative need to pass his budget.
But the best laid plans of our remarkable president may be laid to waste by a bank rescue plan that is the product of exhausted ideas put together by men far too beholden to Wall Street.
To understand why a man as brilliant and accomplished as Summers can be so wrong about what to do with the banks and Wall Street, it would be useful to turn to "The Innovator's Dilemma," by Harvard Business School professor Clayton Christensen.
Worried Consumers Continue To Shun Credit
Consumers borrowed less for a record eighth straight month in September amid rising unemployment and tight credit conditions. Economists worry the declines in borrowing will drag on the fledgling recovery. The Federal Reserve said borrowing fell at an annual rate of $14.8 billion in September.
Money In A Bottle: The Celebrity Scent Business
If you walk down the cosmetics aisle of any big store, you might mistake the perfume collection for the guest list to a Hollywood party. But star-studded scents account for only about 10 percent of fragrance sales; their value is the publicity.
U.S. Economic Steps May Be Leading To Bubble
The global economy is slowly recovering after the worst financial crisis in decades, but government efforts to stimulate growth, including the Fed's move to drive interest rates down to zero, may be creating another problem. Prices for assets — gold, stocks and real estate in Asia — are soaring, leading to warnings that a new bubble could be forming.
Jobless Rate Highest Since 1983
The government says the nation's unemployment rate hit 10.2 percent last month, the highest since 1983. Economists had expected the figure to rise to 9.9 percent.
Jump In Jobless Rate Puts Spotlight On Obama
News that the jobless rate has crossed the psychologically important 10 percent mark comes in the same week that Democrats suffered a sobering Election Day. Some experts say it dims Democratic prospects not just for 2010 but for the health care vote this weekend.
Jobless Rate 10.2 Percent, Casts Doubt On Recovery
Little over a week after the government said the economy has begun to grow, the unemployment rate climbed to 10.2 percent, the first time it has hit double digits since 1983. That, along with the loss of an additional 190,000 jobs in October, shows the economy is still struggling to emerge from recession.
Wal-Mart, Amazon Price War Extends To DVDs
Wal-Mart Stores Inc. is trimming the online preorder prices of some upcoming DVDs following last month's price cut on books. The move led rivals Amazon.com Inc. and Target Corp. to reduce some DVD prices, which pushed Wal-Mart to take a few more cents off its offerings.
Boosted By Bailout, AIG Racks Up Profitable Quarter
AIG said it posted profits for the second quarter in a row as its core insurance operations continue to stabilize after the company's government bailout last year. American International Group Inc. also got a lift from the increasing value of investments it still holds that soured last year and helped drive it to the brink of collapse.
October Unemployment Rate Tops 10 Percent
The unemployment rate rose to 10.2 percent in October, the first time it's been over 10 percent since 1983. The economy shed jobs for the 22nd straight month, losing a net total of 190,000.
Monthly Unemployment Rate Tops 10 Percent
The Labor Department says the jobless rate hit 10.2 percent in October. That's the first time it's gone over 10 percent since the recession of the early 1980's. The economy shed a net total of 190,000 jobs in October.
How Many Losses For The Democrats In 2010?
Historically the party that holds the White House almost always loses seats in its first midterm election. When one party holds the White House, the House and the Senate, the losses tend to be bigger. If the economy doesn't turn around, it will be a very difficult election year for Democrats.
Colorado Plans To Lower Minimum Wage In 2010
Colorado will soon become the first state to cut its minimum wage. The 3 cent reduction will bring the wage down to $7.25 per hour, the same as the federal minimum. The cut is required by a law that ties the wage to inflation. But employment experts say companies are unlikely to cut the minimum for existing workers.
Recession Drives Women Into Role Of Breadwinner
More and more women have had to become their family's primary source of income. But women still don't make as much money as men. When a woman becomes the breadwinner, her family must survive on less than half of their previous income.
How Do You Find A Job? Ask The Algorithm
The state of New York is looking for ways to reduce the time the unemployed spend looking for jobs, and it's turning to a mathematical formula for help. Using an algorithm developed by a Boston technology company, the program directs resumes to the employers most likely to make a hire.
Homebuyers Credit, Jobless Benefits To Be Extended
The White House says President Obama on Friday will sign a bill that expands a popular homebuyers tax credit and extends unemployment benefits. Congress on Thursday completed work on the $24 billion economic package that seeks to help out the millions who have lost jobs and have been unable to rejoin the workforce.
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Correction: Wouter Bos
In “Denial or acceptance” (October 24th) we inadvertently rechristened the Dutch finance minister. Apologies to Wouter (not Walter) Bos, and to readers. This has been corrected online. ...
Buttonwood: Exit, followed by a bear
The dilemmas facing policymakers WHEN the fire is raging, it is no time to worry about water damage. Central banks and governments have flooded the system with monetary and fiscal stimulus, desperate to prevent a repeat of the Depression. Now that many countries have returned to economic growth the debate has started about how to reverse some of these extraordinary measures. A seminar held in London this week by Fathom Financial Consulting, an independent economic forecaster, asked three former members of Britain’s monetary-policy committee—Charles Goodhart, Willem Buiter and DeAnne Julius—for their views on exit strategies. The consensus seemed to be that, in Britain’s case, loose monetary policy might be appropriate but fiscal policy needed to be tightened. Professor Buiter even had a long list of policy suggestions, from freezing health-care spending through to raising the state-pension age very rapidly, that would be politically suicidal for the government to adopt, given that an election is due by June 2010. ...
Failed financial firms: The bust that worked
CIT’s bankruptcy fuels the debate about resolving financial failures CIT might just be that rarest of things: a financial-services firm that emerges from bankruptcy largely intact. The small-business lender filed for Chapter 11 protection on November 1st with the backing of most bondholders in a so-called “prepackaged” filing. A judge this week agreed to rule on its reorganisation plan on December 8th. If all goes well, a new, creditor-owned company, shorn of $10 billion of debt, could be up and running by the beginning of next year. If CIT can persuade the judge to approve its plan, its fate will then rest with its regulators, including the Federal Deposit Insurance Corporation (FDIC). Badly burned when bond markets seized up, the company wants to move some important businesses to its Utah-based bank, where they can be funded by cheaper deposits. At the moment it is paying much more to borrow than it can charge for its loans. ...
Rural job guarantees: Faring well
India’s grand experiment with public works enjoys a moment in the sun AMIT KUMAR must be one of the few bankers in the world turning away depositors. The manager of a village bank in the Indian state of Rajasthan, he was reluctant to take a cheque for 1m rupees ($21,200) from the elected head of the village, or sarpanch. The cheque was meant to pay hundreds of villagers for their work under India’s National Rural Employment Guarantee Act (NREGA), which guarantees 100 days of minimum-wage employment on public works to every rural household that asks for it. But getting the work is not always easy. And getting paid for it is gruelling labour in itself. Mr Kumar has three colleagues but no computer. It will take him four days of paperwork to distribute the money to hundreds of tiny accounts opened by NREGA workers. He will get to it when he can, he says. It could be worse. In the eastern state of Jharkhand, a banker was more enthusiastic about the NREGA. He conspired with a local official and contractor to fake the number of days worked under the scheme, withdrawing the extra money from oblivious workers’ accounts. ...
India's gold purchase: Adornment and investment
India is eager for the IMF’s bullion IF YOU count bangles, necklaces, anklets and other pieces of jewellery, India is the largest repository of gold in the world, according to the World Gold Council. Many Indians see gold as an investment as well as an adornment. India’s post office sells 24-carat gold coins, as small as 0.5 grams, to savers wary of fiat currencies or mutual funds. The latest big investor in the metal is the Reserve Bank of India (RBI). On November 3rd the central bank said it had bought 200 tonnes of gold from the IMF, a purchase that would have cost about $6.7 billion. The news pushed the price past $1,090 an ounce for the first time. The IMF’s gold holdings are less decorative than India’s, but also impressive: the third-biggest official stash in the world. Its sale to the RBI is part of a plan to offload 403.3 tonnes, or an eighth of its total. The proceeds will create an endowment to cover the fund’s operating expenses and help expand its lending. It is doing its best not to rock the market by selling first to central banks, in keeping with their agreement in August to sell no more than 2,000 tonnes over five years. But the gold market is now interested in how much central banks might buy, not how much they might sell. ...
Hong Kong's property market: Flat out
A boom gathers momentum HAVING seen the damage caused by property bubbles, Hong Kong officials are determined not to have a repeat on their own patch. Last month the territory’s de facto central bank pushed banks into increasing the amount of cash they demand of homebuyers. John Tsang, Hong Kong’s usually tepid financial secretary, called in big developers to warn of government intervention if the housing market became “unfair” or “unhealthy”. On November 2nd the territory’s chief executive, Donald Tsang, vowed to cool prices. The mounting disquiet reflects a huge jump in the price of property, particularly luxury flats. Statistics compiled by CB Richard Ellis, an estate agent, show that prices of high-end flats have risen by 40% since January, and are now just 13% below their 2008 pre-crisis peak. Some are once again priced at record levels. One flat, at 39 Conduit Road, was reported by the developer to have sold in October for HK$71,000 ($9,200) per square foot. The spike in flat sales has propelled shares in property companies higher, too. That, in turn, has prompted a flood of primary and secondary offerings in property-related shares. ...
Award: Philip Coggan
Philip Coggan, our Buttonwood columnist, was named “Journalist of the year-pensions issues (trade)” at the 2009 State Street Press Awards in Britain. ...
Contingent capital: CoCo nuts
Lloyds is first out of the gate with a new kind of capital MENTION hybrids these days, and most people think of fuel-efficient cars. In banking, however, the word has less pleasant connotations. Hybrid forms of capital were meant to combine the cheapness of debt with the support that equity offers to banks in times of crisis. Yet they proved to be less well-bred than originally planned. When an extra capital cushion was needed to protect depositors and other creditors, these hybrid instruments could not provide it without the bank first defaulting. Now a new version is emerging. On November 3rd Lloyds Banking Group (LBG), Britain’s biggest retail bank, said it would convert existing debt into about GBP7.5 billion ($12.3 billion) of “contingent core Tier-1 capital” (dubbed CoCos). This is a kind of debt that will automatically convert into shares if the bank’s cushion of equity capital falls below 5%. LBG is not the first bank to issue contingent capital, but it is the biggest to do so just as many regulators are looking at ways of giving banks access to equity when they need it and forcing creditors to share the pain of financial distress. ...
Monetary policy: Leaders and laggards
Central banks pick different paths back to normality CENTRAL banks in the rich world cut interest rates in lockstep in 2008 as the world economy spiralled. Their paths back to normal interest rates will be more disparate. Some are already en route. On November 3rd the Reserve Bank of Australia raised its cash rate to 3.5% from 3.25%, the second increase in as many months. On October 28th Norway’s central bank became the first in Europe to tighten, raising its policy rate to 1.5% from 1.25%. On November 4th the Federal Reserve squelched speculation that it might soon follow suit. The Federal Open Market Committee, the Fed’s main policymaking body, reiterated that it would keep its rate target between zero and 0.25% for an “extended period”, so long as unused economic capacity is ample and inflation, and inflation expectations, remain “subdued”. ...
Europe's troubled banks: The muscles from Brussels
Decisive action on zombie banks from…the European Commission NEELIE KROES has, according to one analyst in London, “cut through all the bullshit”. Europe’s competition commissioner has trod where national regulators dare not, by imposing harsh penalties on the banks that received the biggest bail-outs in Europe. On November 3rd Britain’s two monsters, Royal Bank of Scotland (RBS) and Lloyds Banking Group (LBG), got the treatment. In the preceding week ING, a Dutch insurance and banking conglomerate, surprised investors by announcing a break-up and a capital raising. Over the summer Germany’s Commerzbank and WestLB both agreed to tough penalties. Several more banks, including Dexia and KBC, both based in Belgium, and Germany’s Hypo Real Estate, are next in the commission’s line of fire. Ms Kroes is acting under a generous interpretation of her mandate. The objectives of reversing the damaging effects of state aid on competition and of ensuring that bailed-out firms have viable business plans are not controversial. But the commission’s apparent desire to address concerns over moral hazard by punishing firms that have been rescued by the state is much more provocative. National governments have so far done precious little to tackle this issue. That partly reflects their defence of national champions, but also a reluctance to start messing about with big banks while the supply of credit to the economy is still under threat and while they still need to raise more equity from private investors. ...
Economics focus: Pay for delay
Wage subsidies and fatter jobless benefits have softened the impact of the recession but may yet hurt recovery AMERICA may lead the rich world in periods of prosperity, but Europe has shown a greater talent for dealing with recession. Unemployment in the euro area has risen by 30% from its pre-crisis levels. America’s jobless rate has more than doubled. In Germany, the largest country in the euro zone, output fell far harder than America’s during the worst months of the crisis but Germany’s unemployment rate barely rose. Consumer spending has held up surprisingly well in a country where high saving is the norm even in good times. “Germany is calm,” says one official with satisfaction. By comparison, America is deeply troubled. What explains the resilience of continental Europe? Some of it was already built-in. Job-protection laws make it costly for firms to lay off workers, and where posts are sacrificed, the newly unemployed are preserved from penury. They receive benefits worth around two-thirds of their lost salaries in most countries. Only in Italy are benefits anywhere near as skimpy as in America and Britain, where new claimants receive just 28% of their previous earnings. European governments also have fewer qualms about intervention. A new report from the OECD identifies 14 kinds of job-market initiatives put in place since recession struck. France ticks 12 of those boxes, more than any other country. ...
India and capital flows: A world apart
India is caught in two minds about financial globalisation THE world is divided into two, according to Shachindra Nath, chief operating officer of Religare Enterprises, an Indian financial firm. On one side of the divide is a world with “cash but no opportunities”; on the other, a world with “no money, just opportunities.” In October Religare announced its ambition to shepherd money across this divide, by creating an “emerging-market investment bank”. The bank will be run from London by Martin Newson, a former head of global equities at Dresdner Kleinwort. Religare will start small, attaching itself to growing companies and expanding with them. As India’s companies go global, finding customers and buying companies abroad, they will want their banks to be global too, Mr Newson argues. His bank may still lack manpower (it has about 80 bankers) and experience (last year, it completed only two deals in its home market), but Mr Newson applauds India’s “get-up-and-go, ‘let’s attack’ attitude”. ...
Buttonwood: Bribing the markets
The impossible task of eliminating uncertainty LORD SKIDELSKY’s excellent new book, “Keynes: The Return of the Master”, makes one striking claim about the economist’s work. “The centrepiece of Keynes’s theory”, he writes, “is the existence of inescapable uncertainty about the future.” Uncertainty is different from risk, as Frank Knight, an economist, first pointed out in 1921. A poker player can figure out the odds of success when holding a pair of kings. But when dealing with macroeconomic events or forecasting stockmarket movements, you do not know the potential distribution of outcomes. There are an awful lot of jokers in the pack. ...
ING breaks up: Slimming cures
The great carve-up of European banking continues EUROPEAN bank presentations used to be filled with graphs of assets that sloped pleasingly upward. For those at the mercy of the European Commission, they now all lurch sickeningly downward. On October 28th the commission approved plans to split Northern Rock, which was nationalised by the British government last year, into two. The bigger surprise came two days earlier when ING, the biggest bank in the Netherlands, said that it would dismember itself—splitting its banking and insurance businesses and selling its American online-banking arm—and shrink its balance-sheet by almost half. Such butchery was unexpected. Earlier plans for “back to basics” banking entailed salami-slicing businesses worth just €2 billion-3 billion ($3 billion-4.5 billion). ...
Dubai's debt mountain: Dredging the debt
A chastened Dubai goes back to what it does best: borrowing money IT IS a story every banker in Dubai likes to tell: in the 1950s the emirate borrowed money from Kuwait to dredge Dubai creek, the first of many leveraged bets on infrastructure. Dubai’s government is now looking to borrow $6.5 billion to help clear a different kind of sediment: the accumulated debts of over $80 billion left behind by Dubai’s years of speculation and irrational exuberance. According to a prospectus issued on October 21st, Dubai hopes to raise the money by selling a $4 billion bond and an Islamic bond, or sukuk, worth $2.5 billion. It is a sign of how quickly sentiment is turning that Dubai can even contemplate such a pitch (see chart). Until recently, investors were expecting Dubai to meet its obligations by running down its assets or rolling over its loans—not by issuing fresh liabilities to new investors. ...
The outlook for private equity: Sticking-plasters of the universe
The buy-out barons say the worst is over. They would IN THE half-century since private equity first appeared, the industry has produced stretches of great profitability, culminating in a spectacular run from 2002-07. During that golden age, private equity was charmed. Investors poured record amounts into the industry. Bankers did their bit by relaxing standards on credit. Nine of the ten largest buy-outs in history occurred between 2006 and 2007 (see chart), averaging $30 billion each. Four-fifths of that was borrowed. Can private equity ever regain those glory days? As a result of the crash the industry faces four big obstacles to recovery. Thanks to frothy equity markets, the industry is closest to overcoming the first barrier—exiting current investments. TPG this week offloaded its remaining shares in Debenhams, a British department store. Blackstone is reportedly planning initial public offerings (IPOs) for as many as eight portfolio companies and trade sales for another five. Kohlberg Kravis Roberts (KKR) recently filed for an IPO of Dollar General, a discount retailer, amid reports that it plans to float six more companies. ...
Economics focus: Buffer warren
Why are banks so averse to raising equity? THE usual laws of corporate finance do not seem to apply to banks. Almost all big industrial companies—and decent analysts of them—are subject to a tight mesh of proven rules, backed up by decades of financial theory. Everyone agrees, for example, that accounting values are often flaky and that cashflow matters most when valuing a firm or trying to work out if it might go bust. The profitability of any activity, too, must be assessed before the magnifying effects of leverage are taken into account. In bank-land, however, anything goes. Accounting, not cash, is king. And most common yardsticks for measuring performance are all in some way distorted by leverage, not least return on equity (ROE). The peculiarity of the banks is not some arcane matter. Regulators are furiously trying to find ways to prevent taxpayers picking up the tab for banking crises. The latest bill passing through Congress aims to hit the industry for the cost of bail-outs, for example. Their main weapon, however, is forcing banks to have bigger equity buffers. Bankers complain that equity is too expensive and will have a knock-on effect on the price of credit, damaging the economy. But this contradicts a cornerstone of corporate finance, set out by Franco Modigliani and Merton Miller in 1958, that a firm’s value is unaffected by its capital structure (at least in a perfectly efficient, tax-free world). ...
The Galleon affair: All at sea
The largest insider-trading case in decades snares a giant hedge fund MILTON FRIEDMAN argued for legalising insider trading on the grounds that it benefited all investors by quickly disseminating new information. These days such leave-it-to-the-market views are unfashionable. Regulators, lambasted for snoozing through the bubble, are keen to be seen rooting out manipulation. The case they have brought against Raj Rajaratnam, co-founder of Galleon, a big hedge-fund group, and five alleged co-conspirators could do much for their credibility. At $25m, the ring’s alleged profits were not unusually large. More shocking is the breadth of companies and the seniority of the individuals involved. Mr Rajaratnam, who is accused of soliciting and trading on non-public information but denies wrongdoing, is a well-known investor in technology stocks. Those said to have passed on tips about deals and upcoming earnings news at various public companies include a senior executive at IBM and employees from Moody’s, a rating agency, McKinsey, a consultancy, and Intel, a chipmaker. ...
American banks : The pyramid principle
America’s big banks are getting healthier. The small fry are not JUDGED by their giant compensation bills, Wall Street’s banks are in fine fettle. But pay is one of the few numbers in their accounts it is easy to make sense of. The investment banks may be booming but they remain black boxes. Both Goldman Sachs and Morgan Stanley, which reported a third-quarter profit of $498m on October 21st, continue to take high levels of trading risk. The accounts of big, troubled banks—in particular Bank of America (BofA) and Citigroup—are awash with exceptional items, including tax gains and changes in the value of their own debt. After adjusting for the funny stuff, those two firms’ common shareholders still made losses in the third quarter. Transparency did at least take a small step forwards at Wells Fargo, America’s fourth-biggest bank by assets and its most taciturn. As well as unveiling a $2.6 billion profit, it announced this week (by press release) that it would start conducting conference calls for investors and stockmarket analysts from January. ...
The Economist: Finance and economics
Finance and economics
Brown floats idea for global tax on banks
Finance ministers and central bank governors of the Group of 20 leading nations launched a framework to promote a better balanced global economy, but the meeting was overshadowed by a dispute about a global tax on financial transactions and little progress on financing efforts to reduce global warming
UK urges divided G20 to reach climate finance deal
British finance minister Alistair Darling urged his G20 counterparts to work toward a $100bn deal on tackling climate change as developing nations held firm they did not want to talk about it
Barcelona climate talks achieve little
Last negotiations ahead of of Copenhagen climate change summit end with many issues unresolved and continuing threat of developing countries walkout
OECD data point to strong signs of recovery
All the world's big economies are seeing strong signs of recovery from the worst global recession since the Great Depression, according to data from the OECD
Bullion quest is no golden opportunity
Gold purchases do nothing to change the monstrous growth of reserves in surplus nations, particularly in Asia, which means they also do nothing to address the global macroeconomic imbalances that leaders profess to worry about
Sweden and Finland clear Nord Stream plan
Nord Stream, the proposed gas pipeline between Russia and Germany, clears two crucial hurdles as Sweden and Finland give the go ahead for the $7.4bn project
Major trade disputes between China and the US
A list of major trade disputes between China and the US since Beijing's accession to the World Trade Organization in 2001
India warns on trade approach to climate
Nitin Desai, a member of Manmohan Singh's council on climate change, says a hard-nosed concession-based negotiation to reach a consensus on how to combat global warming would likely founder
G20 ministers seek to counter scepticism
This weekend's meeting of finance ministers and central bank governors in Scotland will seek to flesh out plans for growth and disprove fears of international posturing
Central banks still stepping on the gas
Central banks can do little more than they are already doing to help recovery: pessimism and insolvency risk are holding output back. They can, however, derail it by tightening too soon or too late
Iraq oil deal puts pressure on Opec
ExxonMobil and Royal Dutch Shell, the two biggest western oil companies, won the right to develop Iraq's giant West Qurna oilfield, raising the prospect of a big jump in Iraqi oil supplies
Freiburg builds a low-carbon future
German town transforms itself into an increasingly low-carbon and sustainable community, providing a potential blueprint for the rest of the world
Sri Lanka follows Indian move to buy gold
The Sri Lankan central bank is buying gold to diversify its reserves and smooth out periods of dollar volatility
Watchdog forecasts gas glut
The world faces a natural gas surfeit that will cool prices, says the International Energy Agency, raising the prospect that Moscow's hold over Europe's energy security will loosen
Green policies expected to hit gas demand
The International Energy Agency believes that the world's dependence on natural gas will drop dramatically if environmental measures are enacted to limit carbon emissions
FT.com - International economy
FT.com - International economy
The Ongoing Ridiculousness of the Health Care Debate
The Ongoing Ridiculousness of the Health Care Debate originally appeared on About.com Economics on Thursday, November 5th, 2009 at 08:20:24.
One thing I find frustrating about the whole health care debate, on both sides, is the presumption that more doctors and hospitals and technologies (either paid by the private or public sector) is the lowest cost way of improving the health of the population. But given how many illnesses are caused by lifestyle (overeating, excessive drinking, smoking) or environmental (pollution) factors, we need to be considering other solutions to improve health. A Pigovian tax on sources of air pollution offset by lower income taxes would improve the health of the population, be a net benefit to the economy (by replacing an economically damaging tax with a less damaging one) and come at zero financial cost. Why do I feel like I am the only economist, on either the left or the right, talking about these things?
More here: One Economist's Thoughts On the Health Care Debate.
Understanding Cross-Price and Own-Price Elasticity of Demand
It is a common topic in first year microeconomics courses that often confuses students. I hope this walkthrough helps - Price Elasticity - How to Use Cross Price and Own Price Elasticity. Understanding Cross-Price and Own-Price Elasticity of Demand originally appeared on About.com Economics on Saturday, October 31st, 2009 at 17:15:41.
Aggregate Demand, Aggregate Supply and Expansionary Monetary Policy
Aggregate Demand, Aggregate Supply and Expansionary Monetary Policy originally appeared on About.com Economics on Saturday, October 31st, 2009 at 15:07:09.
A reader has a question about the role expansionary monetary policy plays in the AD/AS model. See my response here: Expansionary Monetary Policy, Aggregate Demand, and Inflation Adjusted Wages.
Do Consumers Actually Face Significant Deflation?
Do Consumers Actually Face Significant Deflation? originally appeared on About.com Economics on Thursday, October 29th, 2009 at 09:19:47.
If you buy this argument, they do:
It seems to me that the best way to instantly raise your standard of living is to live in the past. If you subsist entirely on two-year-old entertainment, and the corresponding two-year-old technology used to power it, you're cutting your fun budget in half, freeing up that money for more exciting expenditures like parking meters and postage.
This makes sense to me. I don't mean used goods here, rather new goods that are 2-year old technology. They are way, way cheaper than what they cost when they were originally launched. Mind you, you can only take this so far - you cannot, for instance, buy a brand new Commodore 64 at Best Buy. But you can for a number of goods. I find it difficult to find 1980's style wood hockey sticks, but when they are in a store I can get them for cheaper than I could have in the 1980s.
However, when we measure inflation, we compare the year 2007 price of a DVD of a movie released in 2007, with the 2009 price of a DVD of a movie released in 2009. But what if we instead compared it to the 2009 price of a DVD of a movie released in 2007. If we did, we would see much lower levels of inflation than the statistics indicate.
Cool.. Steve Landsburg is Blogging!
Cool.. Steve Landsburg is Blogging! originally appeared on About.com Economics on Thursday, October 29th, 2009 at 08:48:54.
His new blog here - The Big Questions. One of the real joys I had as a University of Rochester Ph.D. student in Economics is discussing various ideas with Prof. Landsburg. I can't tell you how many times I found a new way of looking at things after a discussion, even if I did not totally agree with him (and I rarely did). I suspect and hope his blog will provide similar insights.
Currency Adjustment and the U.S. Dollar
Currency Adjustment and the U.S. Dollar originally appeared on About.com Economics on Monday, October 26th, 2009 at 09:13:51.
I love it when Paul Krugman posts on international trade and exchange rates - it reminds me why he is a 'first ballot Hall of Famer' economist. His post Adjustment and the dollar is a must read. A few points:
So something has to give -- specifically, the relative price of US output, and along with it such things as US relative wages, has to fall.
Terrific stuff - I wish we would see more of this from Krugman.
There are three ways this could happen: (1) deflation in the United States (2) inflation in the rest of the world (3) a depreciation of the dollar against other currencies. Leave (2) aside, on the grounds that central banks will fight it. Then the choice is between (1) and (3)...
And here's the thing: deflation is hard (ask Spain), because prices are sticky in nominal terms. How do we know that? Lots of evidence. See, for example, A Sticky Price Manifesto by Larry Ball and some guy named Mankiw. But the most compelling evidence -- familiar to international macro people, but oddly uncited by most domestic macroeconomists -- comes from exchange rates...
So, the bottom line: to narrow international imbalances, we need a lower relative price of US output. Because prices are sticky, by far the easiest way to get there is dollar depreciation.
More on exchange rates:
Can An Interest Rate Hike Ever Cause a Currency to Depreciate?
Economic wisdom suggests no - that higher interest rates lead to a reduction in expected inflation and, ceteris paribus, an appreciation of the currency. Nick Rowe has a rather bizarre thought experiment that gives a scenario where an interest rate hike could cause a depreciation. I do not think I buy Rowe's argument, but I really need to think about it more. I would love to hear your insights. As an aside, Rowe adds:
But were those words unexpected enough to cause the Loonie to drop by 2% Tuesday morning against the US dollar and the Euro? Then recover it all before dropping back again? Dunno. Like Stephen, I can't make sense of the forex market sometimes. The intraday oil price blip doesn't seem big enough to explain it.
The MERT relationship suggests that a $1 rise in oil should coincide with a 0.62 cents rise in the Canadian dollar. On Wednesday the Canadian dollar rose 0.43 cents (from 95.17 to 95.60), but WTI cushing rose $1.95 - suggesting the Canadian dollar should have rose by 1.21 cents. On Tuesday the Canadian dollar dropped about 2 cents, but oil prices dropped only 60 cents (from $79.47 to $78.87). On both days the dollar 'went down' relative to where it should have gone given oil prices. Can An Interest Rate Hike Ever Cause a Currency to Depreciate? originally appeared on About.com Economics on Friday, October 23rd, 2009 at 10:31:45.
Paul Romer on 'Skyhook' Economics
Paul Romer on 'Skyhook' Economics originally appeared on About.com Economics on Tuesday, October 13th, 2009 at 18:24:14.
A must read from Paul Romer. Here's a sample, but the entire thing needs to be read:
Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles. In fact, they almost always invoke a skyhook, some unexplained result without which the entire structure collapses. Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up, building a crane that can support the full range of economic behavior...
I wish I had something clever to add to that. All I can say is:
Economists who have become addicted to skyhooks, who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today - how to improve the quality of bad rules that cause needless waste, harm, and suffering.
Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can't tell the difference between assuming and understanding.
Williamson and Ostrom Win Econ Nobel
Williamson and Ostrom Win Econ Nobel originally appeared on About.com Economics on Monday, October 12th, 2009 at 11:37:23.
A great New York Times piece on the selection here - Two Americans Share Nobel in Economics.
My thoughts - I was pretty certain that the committee would not pick any of the macroeconomists being mentioned, for the reasons outlined here. I agree with Don Bodreaux that Williamson's The Economic Institutions of Capitalism remains a must read - it is one of the books that convinced me to continue studying economics.
I must admit that I am not as familar with the work of Elinor Ostrom, though I recognize the name and am certain I must have read a paper or two in my travels. Good summaries of her work available at Env-econ.net and Marginal Revolution. In fact, when I heard the annoucement I got her confused with economist Sylvia Ostry with whom I am much more familiar.
All in all, Williamson is a fine choice. I will have to get more familiar with the work of Prof. Ostrom before I can make an informed opinion.
The True Cause of Inflation
The True Cause of Inflation originally appeared on About.com Economics on Thursday, October 8th, 2009 at 08:15:03.
Brian Kearsey is not a fan of my definition of inflation:
Saying inflation is rising prices is akin to saying rain is wet streets. The wet
streets are the result of the rain; the rising prices are a result of the inflation
of the money supply.
I do not disagree with Mr. Kearsey. However, I tend to emphasize the price definition, not because I am trying to establish a causal relationship, rather it is the general rise in prices that the average person cares about. In other words, what is inflation, not what causes inflation. So I will stick with the definition that "inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole."
Read the first paragraph of this NY Times article where they acknowledge that the
inflation under Carter was created by the Fed printing money:
http://www.nytimes.com/2009/05/04/opinion/04meltzer.html?th&emc=th
I have loads of other articles from just the NY Times acknowledging the same thing.
Read this long article explaining how the Fed created the inflation by flooded the
economy with easy money and cheap credit to swing the 72 election for Nixon:
"President Nixon, concerned that high unemployment could cost him re-election in
1972, told (Fed Chairman Arthur) Burns to concentrate on revving up the economy. 'No
one ever lost an election on account of inflation,' Nixon confidently told him.
Burns did as he was directed. An eventual result was runaway inflation..."
http://www.nytimes.com/2008/01/20/magazine/20Ben-Bernanke-t.html?th&emc=th
The evidence goes on and on. From the Roaring 20's to the Housing Bubble, the
expansion of the money and credit supply is the inflation, both across the board
and, at times, more specifically in one segment of the economy (stocks in the 90's;
houses in the 00's).
For the causal relationship between price changes and the money supply (which is naturally very important), see What Is Inflation? and Why Does Money Have Value?
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Even When I Thought it Was Stimulation, I Knew it Was the Banks All Along
Arnold Kling
tries to explain recent Fed policy actions re: injecting
reserves into the economy and simultaneously paying banks
interest on reserves to high school students, and comes to a
sobering conclusion:
In spite of all the sophisticated rhetoric about "quantitative
easing" and "new tools for monetary policy," the only way that
I can understand what the Fed was doing is to say that the goal
was to stimulate bank profits, not the economy. If your goal
were to stimulate the economy, you would inject enough reserves
to do that and not pay interest on reserves. That might require
buying some long-term bonds or mortgage securities, but not the
hundreds of billions that the Fed actually bought.
Everything the Fed has been doing over the past fifteen months
makes sense if you think of their goal as transferring wealth
from taxpayers to banks. If you try to explain it as an attempt
to implement an expansionary monetary policy, you won't even
get past my high school students.
My November Reason magazine feature on the new political
war against the
Federal Reserve.
Executive Pay Caps We Can Believe In
Writing at The Freeman, economist Bruce Yandle (listen
to him talk about his famous “Bootleggers and Baptists” article
here)
makes the case for
capping a certain type of executive pay:
Yes, it is high time that pay and investment guidelines be
mandated for all top level executives who may in the normal
course their daily work push the entire economy too close to or
even over the edge of systemic risk falls. If nothing else,
this Great Recession has taught us that top executives can
practically capsize the economy.
But the chief concern is not with presidents and vice
presidents of too-big-to-fail banks and other bailed-out
enterprises. As large as they are, they are small potatoes
relative to the big generators of systemic risk. The critical
concern is with top government executives who can create
national and international panic, lay the groundwork for
international inflation or deflation, and just by voting and
writing regulations can change the risk profile of entire
industries.
We taxpayer/investors demand a set of risk-sensitive
compensation guidelines that will mandate pay and
wealth-management rules for all federal government top
executives starting with the president of the United States and
all cabinet members and their deputies. While we’re at it let’s
include all members of Congress and every member of the
commissions and boards that manage the nation’s independent
agencies, including, of course, the board of governors and
chairman of the Federal Reserve System.
Work Boots Give the Economy a Kick
Last week the Obama administration issued a report that
attributed 640,000 "saved or created" jobs to spending authorized
by the $787 billion stimulus package that Congress
approved in February. "Although President Obama
initially said that 90 percent of the jobs created by the
stimulus program would be in the private sector," The
New York Times notes, "the
data suggests that well over half of the jobs claimed so far have
been in the public sector." Indeed, most of the jobs cited
in the report are public school positions, and "some
school districts said that they might not have actually laid off
teachers without the stimulus money." The Times is too
polite to add that the rest of the school districts—the ones that
claim they're sure these jobs would have been cut but for the
federal money—are lying. Counterfactual assumptions about
teacher jobs may be the biggest source of uncertainty in the
report, but it is by no means the funniest. Consider:
If you've come across other striking examples of fudging or fraud
in the job report, point them out in the comments.
The Secret Message of Stimulus Spending
The idea behind the $787 billion stimulus bill is that government
can create jobs by spending money. For now, let’s ignore fact,
history, and economic theory and assume that government spending
can actually create jobs.
In that case, we should expect the government to invest
relatively more money in the states that have the highest
unemployment rates and less money in the states with lower
unemployment rates. So let’s check the data.
Using numbers from President Obama’s website Recovery.org and the
Bureau of Labor Statistics, this chart plots the amount of
stimulus funds spent per person in each state and the
corresponding unemployment rate in that state. The solid blue
line shows what the allocation of funds should look like if the
administration was allocating relatively more money to the states
with higher unemployment rates.
Yet, with a few exceptions, the data show that this is not the
case. Many higher-unemployment states are getting far fewer
stimulus dollars than lower-unemployment states.
Take Michigan, for instance. Michigan’s 15.2 percent unemployment
rate is the highest in the country. So far, it has received $403
per person in stimulus funds. That’s above the average stimulus
per person across all states ($326). However, it’s lower
than the $409 per person that the state of Vermont, a state with
relatively low unemployment (6.8 percent), has received so far.
Michigan's per-person take is also much lower than the $707 per
person the District of Columbia received. D.C.'s unemployment
rate is 9.9 percent.
Now look at the state with the lowest unemployment rate in the
country: North Dakota. It’s getting $253 per person with a 4.3
percent unemployment rate. Many other states are receiving
roughly the same amount of stimulus funds per person despite much
higher rates of unemployment.
Which suggests that stimulus funds are being allocated without
thought to the level of unemployment within states. If government
spending could in fact create jobs, then the problem of
unemployment could be mitigated by distributing funds to states
based on their relative unemployment levels.
But that's not being done at all. Instead, funds are being
distributed randomly, as quickly as possible, among the states.
That in turn suggests something else: Even the federal government
doesn't believe the myth that government spending can actually
create jobs.
Veronique de
Rugy is an economist at The Mercatus Center at George Mason
University and a columnist for Reason.
Recovery.gov Is Decadent and Depraved, Especially When It Comes To Doling Out Useful Information
Writing over at Big
Government, Mercatus Center
economist and Reason
columnist Veronique de Rugy digs into the compost pile of
"jobs created and saved" by the almighty Stimulus:
The most relevant information on Recovery.gov is that most of the jobs
created or saved are in the public sector. For instance,
according to Vice President Biden, out of the 640,329 jobs,
325,000 went to education and 80,000 to construction jobs. The
difference we will soon find out is going to other government
jobs.
You need more evidence? 13,080 grants went to the private
sector, and 116,625 went to feral agencies.
So even if we assume that the government could create jobs by
spending our money, we can see that what this money is being
spent on is big government. Or bigger government I should say.
So when you think that, on top of everything, the
government can’t create jobs
(here and
here), this data is transparently depressing.
Whole thing, worth reading, here.
Here's Reason.tv's interview with Mike Pickett, the CEO of Onvia,
whose private-sector website is delivering better and more info
on stimulus spending than the government's own.
How Much Stimulatin' Can an Economy Take?
Via
Hotair comes this bit from the DC Examiner about just how much all
those jobs created or saved actually cost:
Even if we take at face value the White House claim that it
created or saved all these jobs with approximately $150 billion
of the economic stimulus money, a little simple math shows the
taxpayers aren’t getting any bargains here: $150 billion
divided by 650,000 jobs equals $230,000 per job saved or
created. Instead of taking all that time required to write the
1,588-page stimulus bill, Congress could have passed a
one-pager saying the first 650,000 jobless persons to report
for work at the White House will receive a voucher worth
$230,000 redeemable at the university, community college or
trade school of their choice. That would have been enough for a
degree plus a hefty down payment on a mortgage.
Reason.tv: Rand-O-Rama—The Long Shelf Life of Ayn Rand's Legacy
Few authors have ever achieved the popularity that the
novelist and essayist Ayn Rand (1905-1982) did. With the
publication of The Fountainhead in 1943 and Atlas
Shrugged in 1957, Rand became a full-blown cultural
phenomenon, selling millions of books and inspiring countless
readers—ranging from former Federal Reserve Chairman Alan
Greenspan to Playboy founder Hugh Hefner to
actress Angelina Jolie—with her moral defense of capitalism.
A refugee from Soviet Russia, Rand argued that capitalism was the
best way of organizing society not simply because it was more
efficient than communism but because it allowed the individual to
fill his or her potential. A self-declared "radical for
capitalism," Rand emphatically rejected collectivism of all
stripes and embraced "man as a heroic being, with his own
happiness as the moral purpose of his life, with productive
achievement as his noblest activity, and reason as his only
absolute."
Decades after her death, Rand's work is hotter than ever. In an
age of massive government intervention into every aspect of the
economy and personal lives, sales of her books are way up and a
movie version of Atlas Shrugged is in the works.
References to Rand are everywhere from Mad Men to
The Colbert Report to The Simpsons and there's
even a new critical appreciation, as evidenced by two new
biographies, Ayn Rand And The World She Made and
Goddess of The Market: Ayn Rand And The American Right.
Approximately four minutes long and produced by Meredith Bragg
and Nick Gillespie, "Rand-O-Rama" analyzes the
21st-century Rand renaissance.
It is part of the Reason.tv series Radicals For
Capitalism: Celebrating the Ideas of Ayn Rand. Go here for more
information, other videos, and related materials. Go here for
downloadable versions of "Rand-O-Rama."
Hillary Clinton: Low Marginal Tax Rates Lead to Terrorism
Did Secretary of State Hillary Clinton admit that Americans are
overtaxed during her business leader roundtable in Lahore,
Pakistan? The juxtaposition of quotes in this Pakistan
Daily Times article -- the first part about the
government's failure to locate al Qaeda leadership in Pakistan,
the second about taxation -- seems to say that:
“Maybe that’s the case; maybe they’re not gettable. I don’t
know... As far as we know, they are in Pakistan,” Clinton told
senior Pakistani newspaper editors in Lahore, AFP reported.
“The percentage of taxes on GDP (in Pakistan) is among the
lowest in the world... We (the United States) tax everything
that moves and doesn’t move, and that’s not what we see in
Pakistan,” she said.
But I think too that it is only fair to take a hard look
internally about what Pakistan needs to do. And at the risk of
maybe sounding undiplomatic, Pakistan has to have more internal
investment in your public services and in your business
opportunities. By any fair measure, for example, the percentage
of taxes of GDP is among the lowest in the world. The United
States, we tax ourselves, depending upon who is in power,
somewhere between 16 and 23 percent of GDP, and right now, it
usually hovers around the 20 percent. You're less than half of
that.
And so at some point, when you ask for partnership, you have to
ask what the equity state is that Pakistan itself is looking to
make, because it is difficult to go to our taxpayers and say we
consider Pakistan a strategic partner, we consider it a
long-term friend and ally, we have supported it since its
inception in 1947, we want to continue to do so, and have our
taxpayers and our members of Congress say, well, we want to
help those who help themselves, and we tax everything that
moves and doesn't move, and that's not what we see happening in
Pakistan.
A State Department video clip
is inconclusive. The "gettable" line (and by the way, that should
be "getatable") seems to have come in a press conference and the
tax line seems to have come in an address. The two have been
run together in news coverage, such as this BBC
story, but they weren't part of a single argument.
But in context, the quote is even more revealing. Clinton's
sentiment here is a variation on Oliver Wendell Holmes' claim
that taxes are
the price we pay for living in a civilization where imbeciles are
involuntarily sterilized. Note that Clinton was not satisfied
to make the legitimate suggestion that Pakistan reduce
its consumption of U.S. aid. She also specified how the
Pakistanis must achieve that goal, with a comparison that would
sound chauvinistic coming from any foreign minister, but sounds
especially so from one who represents the most powerful nation on
earth. It's Clinton business to suggest that Pakistan get off the
American tit, not to spell out how Pakistan does that.
In any event, it would be good to know what percentage of
Americans agree with the sentiment. The United States and
Pakistan are both former British holdings. When you consider all
the variables of history and luck that made Pakistan's government
dependent on American largesse rather than the other way around,
does anybody think it's our higher tax rate that made the
difference?
Media Matters says
Clinton's detractors are taking the quotes out of context, and
cites an extended passage from a State
Department transcript, which makes it clear that the
secretary was not saying the United States taxes of all animal
and mineral matter, but rather was imagining such a claim from a
hypothetical Other:
Financial Rescue Package Explained
With Oxonion pith, Parr describes how the markets were stabilized
during the 2008 financial crisis, explains the new rules for risk
in banking, and lays out a clear blueprint for regulators to
handle systemic risk in the future.
Here is the full 10-minute chat, and here is an excerpt:
Meanwhile, on this side of the Pond, irrepressible satirist Tim
Geithner sends up the
self-serving lies of greed-driven bankers with an
outrageously deadpan wit that rivals the best work of Professor
Irwin Corey.
I'm not one of those toffish,
royal-following, Masterpiece Theatre-watching
Anglophiles, but I rather wish our country had banking officials
of the caliber of Sir George Parr, who gives an erudite and
coherent
analysis of the financial meltdown.
Just in Time For Halloween, Walmart (and Costco) Start Selling Caskets!
And check out Walmart's
selection here.
Oh, it's fang-tastic! Just in
time for Halloween, discount retail giants Walmart and Costco
just
started selling caskets, a (seriously) major
breakthrough for customers in one of the most
protectionist industries ever. Check
out some details on how the racket works from this
interview with Chip Mellor, the head of the Institute for
Justice, which defended a free market in coffins.
God Bless the GDP? No, God Damn the GDP!
Over at Big Government, Mercatus
Center at George Mason University economist and
Reason columnist
Veronique de Rugy reports on the phoney-baloneyness of new GDP
numbers coming out of the Bureau of Labor Statistics (BLS, though
can be shortened simply to BS). BLS reports a whopping 3.5
percent growth for the third quarter, but don't start breaking
out the bubbly any time soon.
Note that de Rugy's point is not about this particular
administration vs. the previous idiot one or anything like that.
The methodology overall just stinks to high heaven. Off the bat,
GDP numbers include government spending. So if the feds break the
bank (which they've done of late), that automatically gets
counted in the plus column.
What’s more, the way the GDP accounts for government spending
is totally biased: It assumes that if the government is
spending $200,000 on a contractor to repave a road in the
middle of nowhere that it will create $200,000 of genuine
economic value. By contrast, GDP measures are tougher on
private-sector spending. As my George Mason university
colleague Garett Jones explained to me recently “So if Exxon
Mobil pays an engineer $200,000 per year, that only shows up in
GDP if the engineer finds an extra $200,000 of oil to sell, or
builds a new machine that sells for $200,000, something like
that. So our GDP measures of “government spending” are
awful–and when the government is in a race to spend money as
quickly as possible, these measures are going to be
even worse than usual.”
This is an very important point. Especially when we think
of this particular data. First, the current dollar GDP
increased $150.3 billion in the third quarter. In the
same time period, the government injected about $174 billion
dollars into the economy in the form of personal tax cuts,
unemployment assistance, student aid and nutritional
assistance, and grants. In other words, the amount of cash the
government injected in the economy exceeds the current GDP
increase.
Another point: the GDP doesn’t capture any changes in personal
stock benefits. This is key because high ranking executive are
getting
the majority of their compensation from that. That’s got to
be looking pretty bad right now. But the GDP doesn’t capture
that.
GDP also doesn’t capture Research and Development spending. The
cuts in this area were large and unaccounted for. Also not
included in the GDP figure: Pension benefits and the flow
of funds accounts of the United States Balance sheet
information from the Federal Reserve Board.
This is some of what’s wrong with the numbers.
Read the whole thing and cry. Then read it again, and cry,
cry again.
De Rugy appeared in this Reason.tv/Center for Freedom &
Prosperity joint earlier this year:
Soros to Vanquish Whatever Market Fundamentalists He Can Still Find
George Soros, a man who in the 1990s probably showered more money
on free market economists throughout the countries of
post-communist Europe than any living human being, is now
launching "a $50 million effort to purge economics of its
free-market zeal," according to Newsweek's
GQesque Michael Hirsh. The
skinny:
Why, Joe Stiglitz was so marginalized during those pre-crash
wilderness years that he only managed to chair Bill
Clinton's Council of Economic Advisers, work as chief economist
of the World Bank, and then win the Nobel Prize for
economics!
For those of us who have slogged through Soros' lifelong attempts
to
establish his bonafides as a philosopher, this
woe-is-paradigm stuff is more than a bit rich. The Hungarian-born
currency bettor has made his fortune pursuing the observation
that financial markets are filled with human irrationality. In
other words, that there is no one true, predictable paradigm, and
that markets are prone to speculative bubbles chasing underlying
hysteria. You may note that the same arguments can be heard from
many of the so-called "market fundamentalists" Soros so despises,
making his core beef more about the "guidance" of wise men than
the comparative predictive failures of various economics schools.
But my quarrel here isn't with Soros; it's with Hirsh (and his
many cohorts in the bloviosphere), for evidence-free
pox-on-market-fundamentalism paragraphs like this:
Needless to say, no deregulation was mentioned in the making of
this article. Also, the old school dominates what,
exactly? Ultimate frisbee games between the University of Chicago
and George Mason? There are many, many financial proposals coming
out of Washington and various mainstream opinion organs these
days; I'm at a loss to think of a single one that involves the
D-word, or in any sense reflects the insights of free-market
economics, aside from Ben
Bernanke claiming that he's following the (controversial-among-libertarians)
Milton Friedman/Anna Schwartz recipe for averting a Great
Depression. Which is a contention that Schwartz herself hotly
disputes.
Some suggested reading for that quest: Katherine Mangu-Ward, on
whether
deregulation was to blame for the financial crisis. Anthony
Randazzo, on
the myth of financial deregulation. Veronique de Rugy, on the
biggest regulator since Richard Nixon (hint: wasn't Bill
Clinton). Former Security and Exchange Commissioner Paul Atkins,
on the regulations he tried (but failed) to
slap on derivatives trading. And to really blow the minds of
those who see free market enthusiasts as an undifferentiated
blob, here's a Reason roundtable about Greenspan,
Bernanke, and the Federal Reserve from
2006, featuring (among others) Milton Friedman and Rep. Ron
Paul. Newsflash: They don't all agree.
More on the Soros grant from Reason contributors
Veronique de Rugy and
John Stossel. Reason's Soros file
here.
This week Soros is gathering some of the
leading practitioners of the market-skeptic school, who were
marginalized during the era of "free-market fundamentalism,"
among them Nobelists Joseph Stiglitz, George Akerlof, Michael
Spence, and Sir James Mirrlees. He's also creating an
"Institute for New Economic Thinking" to make research grants,
convene symposiums, and establish a journal, all in an effort
to take back the economics profession from the champions of
free-market zealotry who have dominated it for decades, and to
correct the failures of decades of market deregulation. Soros
hopes matching funds will bring the total endowment up to $200
million. "Economics has failed not only to predict and explain
what happened but has also failed to protect society," says
Robert Johnson, a former managing director at Soros Fund
Management, who will direct the new institute. "That's what the
crisis revealed. The paradigm has failed. There is no
guidance."
It might be tempting to
dismiss all this as a war of words among brainiacs. It's not.
The critical issues being discussed in Washington about the
future regulation and control of the financial industry—the
very nature of Wall Street and the health of the economy—depend
on this battle of ideas. What led to wholesale deregulation in
the '90s and '00s wasn't just Wall Street lobbying money. It
was also that key legislators and policymakers, among them
Larry Summers, persuaded themselves that deregulation was sound
economics and good policy, and that markets and Wall Street
institutions could take care of themselves. Many of those views
have been discredited by the crisis. But in the absence of a
new paradigm of economics, confusion still reigns in
Washington. With no new concept of the proper role of
government and regulation in the economy, of the proper balance
between the markets and their minders, the old school still
dominates.
Look, I know (through
tedious experience) that it's a tempting intellectual
shortcut to say
Ayn Rand=Alan Greenspan=deregulation=crash, and that
therefore every one of us deluded souls who doesn't hi-five Wall
Street bailouts is some kind of fundamentalist ogre, but A) we
are, at least according to this Time poll,
55 percent of the country, and more importantly B) it's also
tempting to eat an entire chocolate cake by yourself. IF YOU'RE
SIX YEARS OLD. If you're not, and especially if you have a job
writing publicly about economic policy, it might behoove you to
at least attain a distant knowledge of whatever you think you're
condemning.
"The Pay Czar Is Unconstitutional"
Writing in today's Wall Street Journal, Stanford law
professor and former federal appeals court judge Michael W.
McConnell argues that the position of “pay czar” is
unconstitutional:
Mr. [Kenneth] Feinberg's ukase is the most prominent example
(and not just by the Obama administration) of the exercise of
power by an individual unilaterally appointed by the executive
branch without Senate confirmation—and thus outside the
ordinary channels of Congressional oversight....
The Founders understood that the president and heads of the
executive departments could not single-handedly carry out the
law, so they required Senate confirmation as what the
Federalist Papers call "an excellent check" on abuse or
favoritism by the president. Yes, there are some offices so
inferior that this check may be eliminated—but it is for
Congress to judge which ones these may be. Congress and
Congress alone has power to dispense with the safeguard of the
confirmation process.
The power to set compensation at large American businesses is
especially subject to potential abuse, favoritism,
arbitrariness, or political manipulation. It is no reflection
on Kenneth Feinberg, who has a sterling reputation and who
appears to have approached these sensitive duties with a spirit
of commendable integrity, to say that the checks and balances
of the Constitution should be scrupulously observed. They were
not. Because he is not a properly appointed officer of the
United States, Mr. Feinberg's executive compensation decisions
were unconstitutional.
Read the whole thing
here.
"Distress Index" Says Things Still Terrible Despite GDP Bump
The Foundation for Economic Education, the venerable libertarian
publisher of The
Freeman, makes a rare foray into pop-econometrics with a
"Distress Index" that indicates continuing economic troubles.
Here's what they
say:
Despite a reported increase in GDP in Q3 of 2009, the overall
economy remains in deep distress says the Foundation for
Economic Education, publisher of the Distress Index. The
Distress Index combines government statistics measuring
inflation, unemployment, GDP, household debt and industrial
capacity utilization. The current score is 58.4, down slightly
from a peak of 61.7 in June, the highest since 1975.
Historical analysis shows some correlation between the index
exceeding 47.0 and the economy slipping into recession. In
March of 1975, the index reached an all-time high of 63.9, more
than double the all-time low of 29.5 in February 1973. The
index was lowest in the 1990s, averaging 40.1. But the last
decade has shown a significant increase to an average of 46.6.
Since President Obama took office, the index has averaged 60.3.
The Distress Index was created by Mount Olive College’s Dr.
Paul Cwik and FEE’s Web Director Mike Van Winkle. It is
intended as a modernized version of economist Arthur Okun’s
Misery Index which measured only unemployment and inflation.
The index itself,
and how it was calculated.
A Hard Pill to Swallow
In August, Christina Romer, chairwoman of the White House Counsel
of Economic Advisers, suggested that we think of the $787 billion
American Recovery and Reinvestment Act as an extremely expensive
course of antibiotics. “Suppose you go to your doctor for a strep
throat,” Romer said in a speech to the Economic Club of
Washington, “and he or she prescribes an antibiotic.” If your
fever goes up after you take the first pill, just as unemployment
rose after the stimulus bill was enacted, that doesn’t mean “the
medicine is useless,” Romer noted. It could simply be that “the
illness was more serious than you and the doctor thought.”
But it’s also possible that your sore throat and fever are caused
by a virus, not a bacterium, in which case the antibiotic will
not help. Eventually, though, you will recover on your own, and
you may mistakenly conclude that your doctor’s prescription did
the trick.
Such erroneous causal inferences are always a hazard when it
comes to government spending aimed at alleviating a recession.
Even if most or all of the money is disbursed after the recession
has ended (which is typically the case), stimulus advocates can
say the recovery would have been weaker without the spending.
Since there’s no readily available parallel universe in which to
test that counterfactual hypothesis, it can never be conclusively
disproved.
Still, Romer seemed unreasonably sure that Dr. Obama’s medicine
was already kicking in. Although she conceded that “the evidence
from the path of the economy over time can’t settle the issue of
what the effects of the Recovery Act have been,” her answer to
the question posed in the title of her speech—“Is It
Working?”—was “absolutely.”
I guess that depends on how you define “working.” No doubt
spending billions of dollars in borrowed money has some impact on
the economy. But the idea that the stimulus package had much to
do with an incipient recovery that may have begun in June is
belied by a couple of inconvenient facts.
First, since World War II the length of recessions has ranged
from six to 16 months, with an average of 10. The current
recession officially began in December 2007, so a recovery by the
second half of 2009 is what you would expect.
Second, according to ProPublica, only $73 billion of the $580
billion in stimulus spending had been disbursed at the time of
Romer’s speech. Another $37 billion or so had gone out in the
form of tax cuts.
Romer conceded the latter portion of the stimulus did not seem to
be very stimulating. She said “consumption fell slightly in the
second quarter after rising slightly in the first quarter,” which
“could be a sign that households are initially using the tax cut
mainly to increase their saving and pay off debt.”
Is it plausible to suggest that $73 billion in stimulus spending
over five months had a decisive impact on a $14 trillion economy?
I say “decisive” because President Barack Obama, back in
February, presented the stimulus package as the only alternative
to a never-ending recession, and in August he claimed, “We’ve
rescued our economy from catastrophe.”
Even if we accept the Obama administration’s numbers, taxpayers
do not seem to be getting much employment bang for their buck.
Romer estimated that “employment is now about 485,000 jobs above
what it otherwise would have been.” That comes out to more than
$200,000 per job, which seems pretty pricey, especially since
many of these jobs are temporary.
Here is where the “reinvestment” part comes into play.
Administration officials say the stimulus package is all about
putting Americans back to work. When asked whether this is an
efficient way to do that, they claim all the work needs to be
done anyway. Conversely, when asked whether all the projects are
really worth the money spent on them, they cite jobs “created or
saved” as a backup justification. Stimulus means never having to
admit you’re wasting money.
Senior Editor Jacob
Sullum (jsullum@reason.com) is a syndicated
columnist.
© Copyright 2009 by Creators Syndicate Inc.
Economics
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