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HOME > FINANCIAL MARKETS > ECONOMY

 

Economic Risk in 7 Countries Spooking Investors
Matthew Bandyk

Despite federal spending consuming 27.2 percent of GDP, the United States maintains a Aaa rating. But you can't say the same about many countries in both the developed and developing world where continued fallout from the economic crisis is hurting their credit ratings. As a result, investors have viewed the economic situations in these countries as increasingly risky bets.

 


The Emerging Economic Order
(c) Jack Ohman

The New Population Bomb
Jack A. Goldstone

Averting this century's potential dangers will require sweeping measures. Policymakers must adapt today's global governance institutions to the new realities of the aging of the industrialized world, the concentration of the world's economic and population growth in developing countries, and the increase in international immigration.

President Obama's Surprising Relationship With Lobbyists and Big Business: Tim Carney discusses Obamanomics
Jessica Rettig

Barack Obama campaigned for president, says Tim Carney, as an advocate for big government, claiming that more federal regulation and spending will protect American consumers against the excesses of big business. But, Carney argues the president's push for more intervention actually favors big business and lobbying

Keep Congress Away From the Fed
Mortimer B. Zuckerman

The Federal Reserve has to be protected. If global financial markets came to believe that Congress and political pressure was determining monetary policy, there would be dangerous consequences.

The Case for a National Infrastructure Bank
Mortimer B. Zuckerman

The costs of long neglect of our infrastructure and our precious land -- and the commensurate benefits of doing something about it -- are manifest to every commuter, every driver, every airline passenger, every flood victim. Now, the vital rebuilding of America must begin with federal government money

Latin America: Chile Now One Step Closer to First World
Andres Oppenheimer

Recently, the Organization for Economic Cooperation and Development (OECD) -- the club of the world's richest democracies -- formally invited Chile to become a member. Chile had applied for membership two years ago. Chile will become the first South American member of the OECD

Beginning of a New World Epoch
Paul A. Samuelson

President Barack Obama's 2008 electoral landslide victory averted a global financial meltdown. Had Republican Sen. John McCain won that election, present U.S. GDP would have been even lower than it is now, by more than 15 percent! And similar losses in global productivity would also have taken place.

Unemployment rate in October rockets to 10.2 percent
Unemployment Rockets

October Jobs Report: A True Witches' Brew
Liz Wolgemuth

In what will no doubt boost skepticism over the Obama administration's message of stimulus success, the unemployment rate in October rocketed to 10.2 percent, a figure much higher than economists had expected and just 0.6 percentage points away from the post-World War II high seen in 1982. While unemployment snapped back down swiftly in the early-1980s recession, it is widely expected that job creation will be slow in this recovery.

Economy: Cities Where Jobs Recovery Will Be Slowest
Liz Wolgemuth

While the nation's job market is awful overall -- thousands of Americans are exhausting their unemployment benefits daily -- it's clear that the true jobs picture is as varied as the nation's topography. With the promise of a recovery on the horizon, new data show that the employment upturn will be regional as well

Forget Inflation, Deflation Is a Bigger Danger
Mortimer B. Zuckerman

Inflation typically results from 'too much money chasing too few goods.' Today, too much supply is chasing too little demand. That, coupled with consumers' need to save money to rebuild their finances, raises the risk of deflation, not inflation. And as workers compete for scarce jobs and companies underbid one another for sales, both wages and prices will remain under pressure.

Economy: Finding Opportunity in the Recession
Matthew Bandyk

Of all the industries devastated by the recession, the media has been one of the most notoriously affected. According to the Bureau of Labor Statistics, 65,000 media jobs were cut in 2008 -- nearly 4 percent of the industry's total. Newspapers are perhaps the biggest loser, with more than 9 percent of jobs eliminated in 2008. However, ...

Unemployment and Foreclosure: If You Don't Have a Job, How Will You Pay the Mortgage
Ilyce Glink

When it comes to foreclosure, the problem isn't just the 7.2 million jobs that have been lost during this great recession. There are millions of Americans who took a huge pay cut to keep their companies going. Unpaid furloughs and 10 to 25 percent pay cuts mean tens of millions of Americans are having a much harder time paying their bills -- and their mortgages are at risk as well.

Latin American Economy Will Do Well, but Not Great
Latin American Current Events, News & Affairs - Andres Oppenheimer

The news that Brazil and Mexico have come out of the recession and are poised for solid growth in 2010 should be celebrated, and both countries' leaders should be given credit for their sound economic management. But in the global economic context, the two Latin American giants' recovery will be modest.

The Dollar and the Deficits
C. Fred Bergsten

The dollar is under attack on two fronts. Private investors are driving it lower in the foreign exchange markets. Monetary authorities are questioning its role as the world's key currency. There is an obvious linkage between the two attacks: expectations of further falls in the dollar's value will accelerate the prospect that foreign central banks will switch to euros

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

States Forced to Cut Services to the Bone: Opportunity Cost of the Bank Bailout (c) Paul Tong
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 July 2006. But that shouldn't be taken as a sign that the market is going to rebound to pre-crash levels anytime soon. At best, the Case-Shiller index hints that we may have found a bottom in housing. Maybe

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 $2 billion to keep the program running. The passage of the bill, by a vote of 316 to 109, helps stave off a temporary shutdown of the Consumer Assistance to Recycle and Save (CARS) program.

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 White House says the program doesn't have enough money to get through the weekend, many consumers are confused about what to do next. Here are four things that consumers can do in this rapidly-changing environment

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 Labor Department's June jobs report is that it offers strong evidence companies are still hacking away at their payroll costs -- slicing hours and chopping jobs. Employers cut 467,000 jobs last month, according to the report. The unemployment rate -- a measure of the percentage of workers who are unemployed and looking for work -- rose slightly to 9.5 percent, from 9.4 percent in May.

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.

Economists Jobs & Careers Search

Find your next job as an Economist today. In one simple search, get free access to millions of employment opportunities from thousands of websites.

 

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.

economy; recession; hit bottom. Waiting for the Payoff: Debate Continues Over Obama's Recovery Plan | iHaveNet.com
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

Global Economy | Worse & Worser | iHaveNet.com

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

China | Deng Undone: China Halts Market Reform | iHaveNet.com

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

China | Why China & U.S. Not Ready to Upgrade Ties | iHaveNet.com

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.

 

Global Reality Challenges IMF's Free Market Gospel
In a notable turnaround, the International Monetary Fund recently acknowledged that some developing countries might benefit from controls on capital inflows. IMF research found that countries with such regulations were better equipped to weather recent global economic crises.

Forget Taxing Marijuana; The Real Money's In Cocaine
A Harvard economist estimates how much revenue each state would raise by legalizing and taxing illicit drugs.

More Than 40 Detroit Schools Slated To Close In June
The city's emergency financial manager announced the closing of more than a quarter of Detroit's 144 public schools as the district fights steadily declining enrollment and a budget deficit of more than $219 million. The closures are part of a $1 billion, five-year plan to downsize the district while improving education, test scores and safety.

Blockbuster Stock Dips After Bankruptcy Warning
Shares of Blockbuster Inc. sank 30 percent Wednesday after the video rental chain warned that it may have to file for Chapter 11 bankruptcy protection. The chain is trying to convince creditors to restructure a big chunk of its debt amid as it struggles to compete in a shifting market.

Senate Passes Jobs Bill For Obama's Signature
It would provide a temporary payroll tax holiday to companies that hire and would pump $20 billion into the federal highway construction fund to make up for low gasoline tax revenues.

Weak Economy Keeps Wholesale Inflation Low
Prices at the wholesale level plunged 0.6 percent in February, the largest amount in seven months as a big drop in energy prices offset higher food costs. The drop was steeper than the 0.2 percent decline economists had expected.

Robust Job Growth Not Expected This Year
Three of President Obama's leading economic advisers were on Capitol Hill to answer questions about a variety of economic issues Tuesday. They warned that U.S. companies are unlikely to hire enough workers to bring down the unemployed rate much this year. Rep. Marcy Kaptur (D-Oh) accused the administration of not taking the unemployment problem seriously enough.

FDIC Chief: Banking Challenges Remain
The chairman of the Federal Deposit Insurance Corp. says challenges remain in the banking sector, but the number of banks affected is a small portion of institutions overall. Sheila Bair also says that smaller banks are doing a better job of lending than larger ones.

Fed Leaves Interest Rates At Record-Low Level
The Federal Reserve decided to keep its benchmark interest rate near zero, reinforcing a commitment that rates should stay "exceptionally low" as the economy emerges from recession. Officials said high unemployment and low inflation were at the crux of the decision.

Dissecting The Plan To Overhaul Financial Regulation
On Monday, Sen. Chris Dodd (D-CT) released a bill that would overhaul regulation of the American financial system. Tell Me More's Money Coach Alvin Hall and John Taylor, president and CEO of the National Community Reinvestment Coalition, discuss the proposed plan.

Blizzards Take Toll On February Home Construction
Housing construction fell 5.9 percent last month as winter blizzards held down activity in the Northeast and South. Building permits, considered a good barometer of future activity, fell 1.6 percent.

Debate Pledged To Begin Soon On Financial Bill
Senate Banking Committee Chairman Christopher Dodd introduced a bill to overhaul financial industry regulations Monday. The move follows months of bipartisan negotiations that failed to produce agreement on such controversial issues as consumer protection and reining in practices that led to the financial collapse in 2008. The way forward looks murky, but Dodd plans to move the bill through his committee next week.

Dodd Unveils Sweeping Financial Regulation Plan
Senate Banking Committee Chairman Christopher Dodd has unveiled his second attempt at overhauling financial regulations. His first bill flopped. On Monday, he introduced a 1,336-page bill, which includes provisions negotiated with Republicans. David Wessel, economics editor of The Wall Street Journal, talks to Linda Wertheimer about the chances of this measure succeeding.

Economists Debate Impact Of Temporary Hiring
There are thousands, if not millions, of people hoping to use a temporary job as a stepping stone to something more stable. But economists are divided over whether the bump in temporary hiring means a surge in full-time employment is around the corner.

The End Of 9-To-5: When Work Time Is Anytime
A public agency in Minnesota is engaged in a cutting-edge experiment with flexible work schedules. It's called a results-only work environment, and it gives everyone in an office ultimate freedom to do their jobs — whenever and wherever they want — so long as the work gets done.

NPR Topics: Economy
NPR news on the U.S. and world economy, the World Bank, and Federal Reserve. Commentary on economic trends. Subscribe to NPR Economy podcasts and RSS feeds.

 

Correction: Bank administrative costs

The administrative costs per $1m lent by the World Bank and the International Development Bank during 2009 were $20,600 and $15,314 respectively, not $19,000 and $26,833 (“Cap in hand”, March 6th). And despite "general consensus", shareholders of the European Bank for Reconstruction and Development do not vote on its capital-increase plan until May. Sorry.

...

Labour markets: Distemper

Temporary work may dim future employment prospects

IS ANY job better than no job? Some research has suggested that unemployed workers should take up any job they can get, including temporary work, as a bridge to higher-paying employment. But what may be good for the economy, reducing the drain on government coffers, may be bad for the individuals concerned. In a forthcoming paper in the American Economic Journal: Applied Economics, David Autor of the Massachusetts Institute of Technology and Susan Houseman of the W.E. Upjohn Institute for Employment Research in Michigan show that taking up temporary work after a spell of unemployment can hurt future earnings.

The authors looked at data from Detroit’s “Work First” welfare-to-work initiative, which uses placement agencies to put low-skilled unemployed people into paid jobs. They then assessed participants’ earnings and job tenure before and after their involvement in the programme. ...

Economics focus: The inflation solution

The merits of inflation as a solution to the rich world’s problems are easily overstated

IT HAS long been considered a scourge, an obstacle to investment and a tax on the thrifty. It seems strange, then, that inflation is now touted as a solution to the rich world’s economic troubles. At first sight the case seems compelling. If central banks had a higher target for inflation, that would allow for bigger cuts in real interest rates in a recession. Faster inflation makes it easier to restore cost-competitiveness in depressed industries and regions. And it would help reduce the private and public debt burdens that weigh on the rich world’s economies. In practice, however, allowing prices to rise more quickly has costs as well as benefits.

The orthodoxy on inflation is certainly shifting. A recent IMF paper* co-authored by the fund’s chief economist suggests that very low inflation may do more harm than good. Empirical research is far clearer about the harmful effects on output once inflation is in double digits. So a 4% inflation target might be better than a goal of 2% as it would allow for monetary policy to respond more aggressively to economic “shocks”. If the expected inflation rate rose by a notch or two, wages and interest rates would shift up to match it. The higher rates required in normal times would create the space for bigger cuts during slumps. ...

Spanish banks: All talk, no walk

A financial system in suspense

THAT old Spanish stereotype of putting things off until manana still applies today. For nearly two years bankers have been talking about the need to restructure a bloated financial system, particularly the country’s 45 unlisted savings banks, the cajas de ahorros. About half of the cajas, which are controlled by local politicians, have announced their intention to merge, hoping to tap into the €99 billion ($135 billion) Fund for Orderly Bank Restructuring (FROB), which was created in June.

Regional politicians, reluctant to give away their piggy banks, are prepared to sanction some internal mergers. Catalonia, for example, has allowed some consolidation, as has Andalusia. Progress is slower elsewhere. Caixanova, a savings bank in Galicia, is resisting a union with Caixa Galicia, a rival. The sector has also been waiting for Spain’s second-largest savings bank, Caja Madrid, to make a move. Until recently, it was paralysed by a political power struggle at the top. ...

MetLife buys Alico: Snoopy sniffs an opportunity

AIG reluctantly hands its crown as America’s global life insurer to MetLife

ANOTHER week, another opportunity for AIG’s rivals to expand at the American insurer’s expense. Days after sealing a $35.5 billion deal for its Asian life-insurance operations with Britain’s Prudential, the firm, which is being dismembered to recoup bail-out costs, agreed on March 8th to sell another crown jewel, Alico. This will propel New York-based MetLife, which is paying $15.5 billion, into the industry’s global elite. Although it is the biggest life insurer in America, where its Snoopy mascot is ubiquitous, it has been tentative abroad. Alico will give it a presence in 64 countries, up from 17 now, taking its non-American revenue from 15% of the total to 40%.

The biggest leap will be in Japan, the world’s second-largest life market, in which Alico is a top-tier competitor. But MetLife’s boss, Robert Henrikson (who took over in 2006 from Robert Benmosche, now AIG’s chief executive), also has his eye on the faster-growing markets in eastern Europe, the Middle East and Latin America that make up almost a quarter of Alico’s business. Another attraction is its distribution network: 60,000 agents, brokers and other local middlemen. ...

Chinese local-government debt: Shell game

Beijing signals a crackdown on borrowing by local governments

ENDLESS arcane pronouncements spew forth from China’s bureaucracies. But some matter much more than others. In recent weeks a number of the country’s senior leaders and regulators have signalled an end to the practice of local governments extending guarantees on loans taken out by their special financing entities. That could spell big trouble for Chinese banks.

The comments have focused attention on research done by Victor Shih, a professor of Northwestern University in America, into China’s local investment companies. These financing vehicles allow municipalities to circumvent central-government restrictions on direct borrowing. As many as 8,000 of these investment companies may exist, estimates Mr Shih, whose work draws on regulatory filings and various government announcements. ...

Savings and the poor: A better mattress

Microfinance focuses on lending. Now the industry is turning to deposits

IT IS hard for people in the rich world to imagine what it is like to live on $2 a day. But for those who do, the problem is often not just a low income, but an unpredictable one. Living on $2 a day frequently means living for ten days on $20 earned on a single day. The task of smoothing consumption is made more complicated if there is nowhere to store money safely. In an emergency, richer people might choose between dipping into their savings and borrowing. The choice for the great mass of the unbanked in the developing world is limited to whom to borrow from, often at great cost.

That they can borrow at all is partly due to the rapid growth of microfinance, which specialises in lending small amounts to poor people. Several big microfinance institutions (MFIs) also offer savings accounts: Grameen Bank in Bangladesh is a prominent example. But the industry remains dominated by credit, and the ability to save through an MFI is often linked to customers’ willingness to borrow from it. Of 166 MFIs surveyed in 2009 by the Microfinance Information Exchange, a think-tank, all offered credit but only 27% offered savings products. Advocates of a greater variety of financial services for the poor argue for more balance. ...

Sovereign debt and the euro: All for one

Eurocrats offer up half-baked ideas to prevent a future sovereign-debt scare

NOW that Greece has given in to pressure from its peers for a more austere budget, the euro zone’s policy brass suddenly seems more sympathetic towards its most troubled member. On reflection, perhaps the fault with Greece’s parlous public finances lay not just with its budgetary profligacy but also elsewhere: in the absence of a central euro-zone authority for helping out cash-strapped countries; or with the credit-rating agencies that had unhelpfully downgraded Greek government bonds; or with the amoral speculators who had bet against those bonds and helped drive up borrowing costs.

It was mildly surprising that some of the messages of support came from Germany, where fiscal indiscipline is least tolerated. On March 7th the finance minister, Wolfgang Schauble, floated the idea of a European Monetary Fund (EMF) to act as a lender of last resort to euro-zone countries that could not raise funds in capital markets on tolerable terms. He offered few details about how an EMF would be financed or how it would operate. It would not be a “competitor” to the IMF, based in Washington, DC, though it would seek to police the fiscal policies of lax member countries. ...

Microinsurance: Security for shillings

Insuring crops with a mobile phone

ONE of the things holding back agriculture in developing countries is the unwillingness of farmers with small plots of land to invest in better seed and fertiliser. Only half of Kenyan farmers buy improved seed or spend money on other inputs. Many use poor-quality seed kept from previous harvests. That is understandable when drought or deluge can destroy their crop, but it has the effect of reducing yields. A new microinsurance scheme promises to help.

Kilimo Salama, which in Kiswahili means “safe farming”, uses a combination of mobile phones and 30 automated solar-powered weather stations to provide crop insurance. It has been set up by UAP Insurance of Kenya, Safaricom, Kenya’s biggest mobile-network operator, and the Syngenta Foundation for Sustainable Agriculture, part of a big Swiss agribusiness group. After a successful trial with 200 farmers last year, Kilimo Salama has just been expanded in the hope of attracting 5,000 farmers in western and central Kenya this year. ...

Buttonwood: Apocalypse, not now

The alarming future for Japan's finances

CASSANDRA’S curse was that her warnings would never be believed. Doom-mongers in the Japanese government-bond market have suffered a milder fate: they were just far, far too early.

The trade has seemed obvious for years. Japan has run continuous fiscal deficits and seen its debt downgraded by the ratings agencies. With its bonds yielding between 1-2%, the downside risk of a bearish bet has been limited while the upside potential has looked huge. ...

Economics focus: On deaf ears

Does India’s government pay any heed to its economic advisers?

ECONOMISTS like nothing better than giving advice to governments. But why do they, of all people, imagine that anyone listens? In their models economists assume that governments, like other actors in the economy, have objectives of their own, which they seek to advance as best they can. They are not disinterested servants of the public good. So governments will ignore a recommendation from their advisers unless it suits them, in which case they would have done it anyway.

In his book “Prelude to Political Economy”, published in 2000, Kaushik Basu of Cornell University wrestled with this paradox. “If, seeing high unemployment in an economy, a person… advises entrepreneurs to employ more labourers, or consumers to demand more goods, this typically causes economists to share a laugh.” And yet economists routinely advise governments to act in the economy’s interests rather than their own. ...

Sovereign-debt ratings: The grim rater

Countries don’t like bad news about their creditworthiness

WHEN the subprime crisis broke in 2007, credit-rating agencies were among the first groups to take the blame. Critics argued that investors had drawn false comfort from the AAA ratings that the agencies handed out on complex packages of mortgage-related debt. Furthermore, the raters were hamstrung by the conflicts of interest inherent in being paid by issuers to assess their bonds. Never again, it was solemnly proclaimed, should the markets rely on the word of the agencies.

Now that investor attention has shifted to sovereign risk, the three big agencies (Fitch, Moody’s and Standard & Poor’s) once more find themselves at the centre of the action. Upgrades of sovereign debt exceeded downgrades in every year between 1999 and 2007. That has changed as a result of the financial crisis (see chart). ...

Buttonwood: Race to the bottom

Countries compete to weaken their currencies

ONCE upon a time, nations took pride in their strong currencies, seeing them as symbols of economic and political power. Nowadays it seems as if the foreign-exchange markets are home to a bunch of Charles Atlas’s 97-pound weaklings, all of them eager to have sand kicked in their faces.

First the dollar took a battering in 2009 when the return of risk appetite, and the ability to borrow the currency at very low rates, sent money flowing out of America for use in speculative “carry trade” transactions. Then the euro got pummelled because of concerns about the euro zone’s exposure to sovereign-debt problems in southern Europe. Finally sterling hit the canvas this week because of concerns about the British government’s deficit and the policy gridlock that may result from a hung parliament after a general election expected in May. ...

Multilateral development banks: Cap in hand

A difficult time for a fund-raising spree

Correction to this article

A SENIOR World Bank official describes its efforts to secure an additional $3 billion-5 billion in paid-in capital as a “once-in-a-generation increase to deal with the effects of a once-in-a-generation crisis”. The bank agreed to lend $32.9 billion to poor countries in the year to June 2009, two-and-a-half times the previous year’s outlay of $13 billion. If it carried on at this rate, Robert Zoellick, the bank’s president, warned in October, its lending would face constraints by the middle of this year. ...

Financial inclusion: A FAB idea

Should every child receive a bank account at birth?

YOU come into the world with nothing, the saying goes. A new campaign proposes to change that by giving every newborn child in the world an online bank account with $100 in it. The aim of the FinancialAccess@Birth (FAB) campaign is to do something about the fact that half the world’s population has no access to mainstream financial services. This is a huge handicap, exposing people who are typically already on the poverty line to risks that wealthier folk can manage through savings or insurance, and leaving them to pay unregistered moneylenders through the nose.

The campaign is the brainchild of Bhagwan Chowdhry, a finance professor at the University of California, Los Angeles, and is starting to attract some prominent supporters, including Peter Singer, a well-known philosopher, and Vijay Mahajan, an Indian social entrepreneur. ...

Prudential buys AIA: Grand Pru

The insurance industry’s biggest-ever acquisition has prompted the largest-ever rights issue: AIG and Prudential are both playing for huge stakes

INSURANCE is a pretty stodgy business. This week’s agreement by Prudential of Britain to buy AIG’s Asian life-insurance operations, AIA, is anything but. If the $35.5 billion deal goes through—and given the convulsions in both companies’ share prices, that is not certain—it will radically alter both Prudential and AIG and will provide a closely watched test of what can and cannot be done by financial firms as they try to build Asian franchises.

On paper, the transaction would transform Prudential into the region’s dominant insurance company. It will have a leading, if not the leading, presence in 15 big markets with a vast sales force offering critical health and investment products to a population that is becoming wealthy enough to appreciate them. Assuming the transaction goes through successfully, the proportion of sales Prudential generates from Asia should eventually expand from 30% to 80%. Prudential is paying a fraction of what AIA would have gone for prior to AIG’s implosion. It is a remarkable opportunity at a rather pedestrian price. ...

The Federal Reserve: Back from the Fed

The central bank loses a vice-chairman but starts to regain its standing

THE Federal Reserve, accused by critics of monetary and regulatory malpractice, has seen its standing plummet. The House of Representatives has passed one bill to audit its monetary decisions and proposed others to strip it of regulatory duties. Almost a third of the Senate voted against confirming Ben Bernanke to a second term as chairman.

It appears, however, that its rehabilitation has begun. As part of negotiations on a financial-reform bill, Chris Dodd, chairman of the Senate Banking Committee, is considering a proposal that would let the Fed retain most of its regulatory duties. Mr Dodd originally wanted to take oversight of banks away from the Fed and other regulators and give it to a new body. He wanted to hand oversight of consumer protection to another new creation, the Consumer Financial Protection Agency. ...

Correction: Financial risk

The default rates in chart 3 of our special report on financial risk (“The gods strike back”, February 13th) were for asset-backed securities, not CDOs made up of those instruments. Sorry.

...

Short-selling rules: Shackling the scapegoats

American regulators approve long-awaited restrictions on short-selling

THE main cause of the financial crisis may have been reckless optimism, but the pessimists are hardly being hailed as heroes. When stockmarkets tumbled in 2008, short-sellers—those who borrow shares and sell them in the hope of buying them back later at a lower price, thereby profiting from a fall in their value—were cast as villains. Politicians have wanted to clip their wings ever since. On February 24th, after a year-long debate, America’s Securities and Exchange Commission (SEC) responded with fresh curbs on shorting.

The restrictions will be triggered when a stock has fallen by 10% or more in one day. At that point, short-selling would be allowed only if the sale price is above the best available “bid” in the market. This provision could affect a fair number of shares—4% of the market on an average day, and much more in turbulent times, the commission calculates. ...

The Economist: Finance and economics
Finance and economics

 

Copenhagen talks enter 'new phase'
Copenhagen climate conference enters a 'new phase' as ministers join in intensive negotiations to deliver an agreement by the end of the week, the president of the meeting says

Obama presses banks to boost lending
President Obama told the US's top bankers that they had a 'special responsibility' to help spur on the economic recovery after they received government bail-outs last year, urging them to increase lending to small businesses and mortgage refinancing

Darling defies threats on bonus tax
The chancellor has warned he will not water down his 50 per cent supertax on bonuses or offer special deals after brokers and banks threatened to move staff out of the UK

Clouds mar Europe's sunnier outlook
Prospects have brightened noticeably since August, when the map was last published, with northern Europe capturing the best of the light. A robust recovery in Germany and evidence of a clear turnaround in France have helped

Fed to split monetary and liquidity policy
The Federal Reserve is unlikely to make any big changes to its monetary policy stance at the conclusion of its December meeting on Wednesday, though there is a chance it could make some alterations to its provision of liquidity

Greece moves on costs and corruption
The Athens stock market lost 1.2 per cent in early trading as investors absorbed news of the Greek government's plan to reduce the country's budget deficit

US banks to repay rescue funds
Citigroup and Wells Fargo unveiled plans to sell a total of up to $30bn in stock and return a combined $45bn to US taxpayers in a move that will free them from heightened government supervision but could hit shareholders

Japan business confidence remains low
Business morale improves more slowly in the fourth quarter and large manufacturers surveyed by the central bank plan record cuts in capital spending as a strong yen threatens a fragile economic recovery

China eclipses US in initial public offferings
Chinese stock exchanges raised double the amount of money secured by IPOs across the US showing how activity is shifting from west to east

Pipeline brings Asian gas to China
The first pipeline bringing central Asian natural gas to China opened, underscoring Beijing's importance to the former Soviet republics. China's president, Hu Jintao, joined counterparts from Turkmenistan, Kazakhstan and Uzbekistan for the ceremony

Rich nations step up pressure on Beijing
Developed countries are putting the Chinese delegation under intense and co-ordinated pressure. The harder line has come about partly since they suspect China of using the G77 group of 130 developing nations to advance its agenda

White House predicts jobs growth
The US economy will be creating jobs by the spring, the White House predicted for the first as the President prepares to meet chief executives from twelve of the US's largest banks to increase the pressure on them to lend to small business

Nobel laureate who turned economics into a science dies
No economist alive is unmarked by the work of Paul Anthony Samuelson, who did more than any other theorist to turn economics from a scattered selection of insights into a social science

UNDP calls for capital controls in Asia
Asian economies have been urged to put in place stronger regulatory systems to prevent asset bubbles in equity and property markets wreaking havoc in the wake of the global financial crisis

For Congress, debt vote is an unwanted gift
Unless Congress votes before Christmas to raise the US government debt ceiling from $12,100bn to nearly $14,000bn, the US government will have to stop work in a matter of weeks

FT.com - International economy
FT.com - International economy

 

Raising Revenue Through a VAT
I am a supporter of the VAT, so I was interested in reading Veronique de Rugy's anti-VAT piece The Wrong Policy at the Wrong Time. I was surprised to find that there were two sentences I was in complete agreement with:

Which suggests a final thought: Focusing on revenue mechanisms such as a VAT in deficit-reduction discussions misses the point that spending and revenue tend to be very loosely correlated. Governments spend when don't have revenue and they spend when they do have revenue.
That sounds an awful lot like my anti-'Starve the Beast' argument from Will Higher Taxes on Gasoline Lead to Higher Government Spending?

Raising Revenue Through a VAT originally appeared on About.com Economics on Tuesday, March 9th, 2010 at 16:32:32.

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How Much Does Public Policy Contribute to Long-Term Unemployment?
Arnold Kling quotes from a terrific piece by Eric S. Raymond:

We've spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker -- which meant the minimum revenue-per-employee threshold below which hiring doesn't make sense has crept up and up and up, gradually. This effect was partly masked by credit and asset bubbles, but those have now popped. Increasingly it's not just the classic hard-core unemployables (alcoholics, criminal deviants, crazies) that can't pull enough weight to justify a paycheck; it's the marginal ones, the mediocre, and the mildly dysfunctional.
As a small business owner with a number of employees, I agree wholeheartedly with this. The expense of hiring and retaining a worker goes beyond wages and include training costs, employer-side payroll taxes, health insurance and many other items. Some of those (though not all) are direct functions of government regulation (payroll taxes and the minimum wage for low-wage jobs).

If a country really wants to reduce unemployment, the best solution would be to find ways of reducing the costs of employing workers. Eliminating employer-side payroll taxes would be a good start; the revenue can be made up through increased use of value added sales taxes. Swapping the minimum wage for a negative income tax would also increase employment and promote economic efficiency. The Second Welfare Theorem illustrates that altering the market price of a good (such as a price floor on labor) will necessarily lead to inefficiency. We can better achieve the outcome society wants through a straight wealth transfer, such as a negative income tax.

How Much Does Public Policy Contribute to Long-Term Unemployment? originally appeared on About.com Economics on Friday, February 26th, 2010 at 07:32:31.

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Oil and Ingenuity
Five years later, We Will Never Run Out of Oil is still one of my most read articles and the source of the majority of the angry e-mails I get. I wonder how many Prof. Boudreaux will receive for For oil, tap ingenuity. I particularly enjoyed this part:

Human creativity and effort also are at work finding not only substitutes for oil, but also new supplies of oil. Each success on this front increases the supply of oil. The reason is that oil deposits that remain unknown are economically nonexistent.

The same is true of oil deposits that are known to exist but are currently too costly to tap. Oil in the Earth's crust that is out of reach with existing technology is no more of a resource today than is oil on Pluto. But if and when human creativity discovers cost-effective techniques for extracting that oil, it then -- and only then -- becomes a resource. In effect, more of the resource "oil" is created.

Of course, as a matter of physics, there is indeed only a finite amount of oil in the Earth. But we have no idea how much. And our ignorance of this physical fact is economically relevant.
For a longer version of this argument, see: We Will Never Run Out of Oil.

Oil and Ingenuity originally appeared on About.com Economics on Thursday, February 25th, 2010 at 09:18:47.

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How to Think About Keynesian Economics?

The international trade / public policy course I teach at Ivey is quite Keynesian. Next time I teach the course I will give my students Arnold Kling's How I Think About Keynesian Economics - it is absolutely brilliant. I particularly find this part useful:

Imagine that all of us were chefs, each with a different specialty. In good times, I patronize others' restaurants and other people patronize mine. That is economic activity. In a recession, for some reason we stop going out to eat. I don't enjoy eating my own cooking every meal, but I don't think I can afford to go out. Since I am not patronizing your restaurant, you think you have to cut back on eating out, also. Economic activity declines.

Thinking about the economy in these terms, the idea of using government deficits to boost economic activity makes perfect sense to me.

This reminds me a little of Paul Krugman's baby-sitting scrip story - people stopped using the babysitting scrip, which meant others were not getting additional scrip, which cut back on their use of babysitting scrip and the amount of babysitting declined.

As such I do not think Don Boudreaux's money has to be taken from somewhere else story (that implies fiscal stimulus cannot work) is necessarily correct - that money may be horded (like the babysitting scrip). In theory, fiscal stimulus could work if the money goes from being horded to being spent. Of course, that does not mean that fiscal stimulus is the best option - increasing the supply of money (or scrip) seems far more effective,

In general, I do think fiscal stimulus is highly ineffective, but my criticisms are more practical in nature.

How to Think About Keynesian Economics? originally appeared on About.com Economics on Wednesday, February 24th, 2010 at 17:42:34.

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A Good But Fatally Flawed Argument For Higher Inflation
Paul Krugman makes an excellent argument based on behavior economics on the benefits of higher inflation:

I would add, however, that there's another case for a higher inflation rate -- an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it's really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts.
Agreed with all of this. Absolutely correct. But Krugman errs when he concludes:
So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.
That is possible, but not certain. What it could also lead to is higher use of labor contracts with cost of living allowances - that is, labor contracts that are indexed for inflation. Using inflation to cut real wages only works if wages are paid in nominal terms. But if the labor market expects inflation to be high for a significant period of time, then we should expect to see wages paid in real terms, at which point the added inflation gets you nothing.

Of course, one possibility is to ban the use of COLA clauses in labor contracts. I would be surprised if any economist, let along Prof. Krugman, would advocate that step.

A Good But Fatally Flawed Argument For Higher Inflation originally appeared on About.com Economics on Sunday, February 21st, 2010 at 12:38:32.

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Do We Need To Rethink Canadian Monetary Policy?
A terrific post at Worthwhile Canadian Initiative - Rethinking Canadian macroeconomic policy. A good read even if you're not Canadian. Most interesting is the suggestion is for the Bank of Canada to raise the target inflation rate from 2% to 4%. I am skeptical of our ability to measure long run inflation, but in the period of a year or so we can certainly do so.

I do not believe a higher inflation rate would cause too many economic problems so long as the Bank of Canada could keep it stable between a 3 and 5% bound. I can't imagine the menu costs problem is a great deal more of a problem at 4% rather than 2%. There would be some distributional effects - the Bank of Canada would earn more in seignorage, people on fixed incomes would lose, the Canadian dollar would depreciate (assuming our trading partners did not follow the same policy), so exporters would win but imports would become more expensive.

I agree with Stephen Gordon when he states:

My point of departure is 'If it ain't broke, don't fix it'. And it's not at all clear to me that the 2% target has failed as a policy... We could probably safely trade low and stable inflation against higher and stable inflation as an insurance policy against hitting the lower bound, but it's not clear that this choice is available to us... Did we hit the lower bound, or did we just graze it? The Bank never did see fit to actually implement a policy of quantitative easing, even though it (quite rightly) laid out the groundwork to do so.
One frustrating thing through this whole recession or crisis or whatever you want to call it is how many have equated monetary policy with setting interest rates. However, that is far from the Bank of Canada's or the Federal Reserve's only policy option, despite claims to the contrary by well known economists. As someone who teaches macroeconomics, I must take my share of the blame. For a generation we taught that monetary policy was simply altering the Federal Funds Rate. Occasionally we talked about altering the reserve ratio. I guess it is not surprising that so many believe the zero bound problem is such an important one - we never taught students that there are alternatives!

Do We Need To Rethink Canadian Monetary Policy? originally appeared on About.com Economics on Friday, February 19th, 2010 at 08:17:01.

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Cafe Hayek on Peak Oil

Some terrific links here: We're Not Running Out Of - Or Even Low On - Sources of 'Nonrenewable' Energy.

I am not a geologist, so I am not going to provide any commentary on physical reserves. What I can comment on is the bad economics behind the peak oil theory (see: We Will Never Run Out of Oil). Peak oil theorists are a lot like basketball's Washington Generals - they haven't got anything right since 1971.

Just because I haven't posted this in awhile: SUPERKIDS:

From the dim recesses of the 1970s comes SUPERKIDS, a free educational comic published by the Office Of Energy Conservation of the Department Of Energy, Mines, and Resources of Canada and charmingly illustrated by Don Inman!

The comic is a fun read. I, for one, am glad we didn't run out of gasoline in 1986!

Cafe Hayek on Peak Oil originally appeared on About.com Economics on Thursday, February 18th, 2010 at 09:12:04.

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Of Course There's a Case for a VAT!
Tyler Cowen asks: Is there a case for a VAT?

I'm shocked he has to ask this - of course there is! The U.S. federal government has very few options to dig themselves out of their fiscal hole. Their fiscal options are:

  1. Significant cuts in spending, which sounds good in theory, but what to cut?

  2. Hold spending at the level of inflation and let government revenues grow as the economy grows. Easier than cutting spending - but it will take at least a decade for the economy to grow large enough to raise government revenues enough to eliminate the deficit.

  3. Raise taxes.
If you choose option 3, then a value-added tax makes the most sense, for the reasons described in The Efficiency of Value Added Taxes (VATs) over Income Taxes.

Frederic Sautet worries that "VAT rates generally go up quickly but rarely go down", which sounds funny to this Canadian, as our 7% GST, introduced 2 decades ago, replaced a 13% MSFT and has been reduced twice and is now at 5%.

Of Course There's a Case for a VAT! originally appeared on About.com Economics on Thursday, February 18th, 2010 at 08:19:48.

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Did The Stimulus Work?

King at SCSUScholars on the evidence (or non-evidence) that the stimulus package "worked":

Most of what we write about the effects of stimulus are just that, "an attempt to gain knowledge." A bureaucrat writes down some numbers. Reporters and bloggers find flaws. Econometric models estimate the effects, but those models were used to propose the policy put in place. It's not likely those models would go back and say the proposed plan didn't work: Econometric models aren't built to do that: If the model has as a premise that future government spending will create jobs, it isn't going to tell you that past government spending did not. Meanwhile, those in political opposition will look to find contradictions when none really exist. (GDP growth can lead employment growth.) And people get angrier and cynical.

There is nothing wrong with saying we don't know. It might have worked; it might not have. What we know is there are between three and four million fewer jobs than a year ago, and the deficit is larger. We want to know more. We are trying to know more. And if the volume of studies since 2000 of the Great Depression are any indication, we'll still want to know more a century from now.

Terrific stuff. I agree whole-heartedly with King - little evidence can be gained directly from the statistics. There is no shame in saying that we cannot be certain. Because the direct evidence is necessarily so spotty, theory is important. An analysis of the theory behind fiscal stimulus shows that, as the theory is constructed, it cannot work in the real world for anything but very severe recessions.

Did The Stimulus Work? originally appeared on About.com Economics on Thursday, February 18th, 2010 at 02:36:30.

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World War II as a Fiscal Stimulus - Part II
In the form of a blog comment in response to World War II As a Fiscal Stimulus?, reader Trevor leaves some terrific data:

You Are Missing Facts.

Government Spending By Year/National GDP By Year

1925: 3.6 Billion / ? (no data)
1931: 4.1 Billion / 76.5 Billion
1932: 4.3 Billion / 58.7 Billion
1933: 5.1 Billion / 56.4 Billion
1934: 5.9 Billion / 66 Billion
1935: 7.5 Billion / 73.3 Billion
1936: 9.2 Billion / 83.8 Billion
1937: 8.8 Billion / 91.9 Billion
1938: 8.4 Billion / 86.1 Billion
1939: 9.2 Billion / 92.2 Billion
1940: 10.1 Billion / 101.4 Billion
1941: 14.2 Billion / 126.7 Billion
1942: 35.5 Billion / 161.9 Billion
1943: 83 Billion / 198.6 Billion
1944: 100 Billion / 219.8 Billion
http://www.usgovernmentspending.com/
and
http://www.bea.gov/national/
1. Government Spending was increasing rapidly before the war. It went from $5.1 Billion in 1933 when FDR was elected to $9.2 in 1939 (your year of growth). That is an 80% increase.
2. Growth from 1938-1939 was 7.1%
Growth from 1939-1940 was 10%

Yes, BUT

Growth from 1937-1939 was less than 0.5%.

(You ignored the dip that took place just before 39′ & 40′)

Effectively there was no change in spending between 37′-40′ but also there was very little change in growth between 37-40 as well. And much of the growth itself was probably fueled on a lag from the massive jumps in spending between 1934-1936. You know that-you are a trained economist-you just chose to ignore it.

3. When government spending during the war started to kick in the economy grew incredibly rapidly. From 1941-1944 the GDP effectively doubled as government spending shot up rapidly. You can't deny that spending=growth in this instance and WW2 spending had an incredible stimulating effect on the economy.

4. After the war, and the government spending, there were no significant economic problems for 30 years. In other words, massive government spending didn't lead to problems later.
This is terrific data, though I am not sure how Trevor draws the conclusion that World War II acted as a fiscal stimulus to get the U.S.A. out of the depression. A straight-forward reading of the data looks as follows:

  1. Government spending ramped up from 1934 to 1936.

  2. There was a short lived but severe recession (depression from 1936 to 1938.

  3. There were two rapid years of economic growth in 1939 and 1940.

  4. U.S. government spending started to ramp up in 1941 and exploded in 1942.
Can anyone explain to me how on earth this shows that World War II spending ended the depression? I just don't see it. In fact, a strict reading of the data could imply that the rise in government spending from 1934-1936 caused the 1936-1938 recession! It didn't, of course, but the fact there's more evidence for that hypothesis than the World War II ended the depression hypothesis is telling.

World War II as a Fiscal Stimulus - Part II originally appeared on About.com Economics on Wednesday, February 17th, 2010 at 07:48:27.

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Government-Subsidized Job Creation Preservation Elimination in Massachusetts

A Boston Globe investigation finds that Massachusetts' Economic Development Incentive Program, which during the last 16 years has dispensed hundreds of millions of dollars in state and local tax breaks to businesses that promised to create jobs, often has little or nothing to show for its efforts:

Hundreds of the projects delivered fewer jobs than promised, and some companies actually slashed employment. Many firms won subsidies for projects they were set to build without state assistance; in some cases, incentives were approved long after the projects were underway or complete. And many got generous packages though they agreed to create only a handful of low-paying jobs.

A review of state records found that more than 40 percent of the companies that received tax breaks pledged to create 10 full-time jobs or fewer, including nearly four dozen that promised only to add one full-time job. Often, the companies planned to pay new workers little more than minimum wage.

The Globe's examples of questionable projects range from a tiny pizzeria in Ware that got tax breaks when it relocated, even though the owner had already settled on a new site and no jobs were created as a result of the subsidy, to a telecommunications equipment manufacturer that promised to add 800 jobs at its campus in Billerica, for a total of 3,000, but actually whittled its work force there down to 145. Its tax breaks continue through 2014. Although the article allows that "often the incentives work and new jobs result," even companies that follow through on plans to hire more people in a particular jurisdiction might have done so without the tax breaks. Since the government is not very good at foreseeing the future, let alone peering into alternate universes where it chose not to grant tax breaks, creating a tax and regulatory environment that is hospitable to businesses in general seems like a better economic development strategy than picking favorites, many of which will turn out to be duds.

[Thanks to Michael Graham for the tip.]

Open Thread: Is Your Town Pro-Business? Anti-Business? Let Us Count The Ways

Today's episode of Reason Saves Cleveland With Drew Carey is titled "Taking Care of Business" and details the various ways in which The Mistake on The Lake makes it tougher than tough to start and operate businesses within the city's limits.

Well, what about the dump you call home? Is your burg pro-business or anti-business? Do lower taxes and less regulation really help entrepreneurs and established business folks? Or is that special pleading by moneyed interests? Consider this an open thread on what makes for a vibrant local economy and, the argument goes, a vibrant place to live. Extra credit for detailed, profanity-free experiences ripped from the playgrounds of your mind.

And set your Tivos to stun for tomorrow's episode of Stossel on Fox Business. It features Drew Carey, Dennis Kucinich, your humble narrator, and a cast of dozens talking about what went wrong in Cleveland and other once-great American cities.

Here's John Stossel hisself talking up the show:

Take Care of Business: Reason Saves Cleveland With Drew Carey, Ep. 4

 

After World War II, Cleveland was booming, thanks to its leadership role in heavy industry and a business-friendly climate. Today, the city’s high taxes and onerous regulatory demands make it nearly impossible for new businesses to set up shop while choking the life out of existing companies. While relatively laissez-faire cities such as Houston are growing even during the current recession, Cleveland remains stuck in a rut. How can city officials make the city a more welcoming place for entrepreneurs to thrive?

Reason Saves Cleveland with Drew Carey is written and produced by Paul Feine; camera and editing by Roger Richards and Alex Manning; narrated by Nick Gillespie; music by the Cleveland band Cats on Holiday. This is the fourth of six episodes that will air March 15-19, 2010.

Approximately 10 minutes long. Go here for iPod, HD, and audio versions of this video. Go here for a full episode guide and release schedule for Reason Saves Cleveland With Drew Carey.

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Timothy Geithner: He's Way Smarter Than You, and He Could Kick Your Ass

Of the awe-filled profiling of our treasury secretary there is no end, and the Atlantic has one this month that is so staggering in its scope, so wide in its perspicacity, so epic in its erudition, that one thing is for sure: you'll never get through the goddamn thing. (Full disclosure: I haven't yet either!)

So while I may have more to say later, I do have to point out my favorite part so far (after how it stresses a bit better than other Geithner profiles I recall how indebted his career is to having been anointed by Kissinger, for those who like to think about permanent entrenched elites):

In the course of many interviews about Geithner, two qualities came up again and again. The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment. Second was his athleticism. Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate). He inspires an adolescent awe in male colleagues.

It feels less than encouraging to me that this dude is surrounded entirely by sycophants who think he's not only, like, the smartest guy they've ever met, but could also likely whip their ass at any of the manly physical arts. However, let's remember the mantra of the Obama econ team: It could be woise!

The Wrong Kind of Toyotathon

Tales of runaway cars have a long history. The first sudden acceleration study by the National Highway Traffic Safety Administration (NHTSA) was done in 1978 and the agency had conducted more than 100 investigations involving 20 manufacturers by 1990. By the mid-1980s, the NHTSA, prodded by the Naderite Center for Auto Safety, was looking into a couple of thousand sudden acceleration incidents. A Nexis search finds that by 1987, NHSTA was reportedly investigating sudden acceleration in over 10 million vehicles involving models from Ford, GM, Chrysler, Nissan, Toyota, Honda, Volvo, and Audi. The Center for Auto Safety—which is closely associated with plaintiffs’ attorneys—claimed that sudden acceleration had resulted in more than 2,000 accidents, at least 650 injuries, and 23 fatalities among the car models under investigation. 

Twenty-five years ago, sudden acceleration fears focused on the Audi 5000. At the time, most experts concluded that the drivers were mistakenly pushing the accelerator when they thought they were applying the brakes. Not surprisingly, pushing an accelerator accelerates a car. But in November 1986, the CBS television program 60 Minutes featured a mom who had run over her kid in her Audi. To illustrate the Audi menace, the CBS program also showed an Audi—rigged with a hidden canister of compressed air—lurching out of control.

By 1989, Audi was a plaintiff in 120 sudden acceleration lawsuits claiming damages amounting to $5 billion. Finally, in 1989, the Canadian government issued a report blaming the sudden acceleration on “driver error.” Two months later, a NHTSA report found the cause to be “pedal misapplication,” a euphemism for driver error. CBS asserted that it did not need to correct its reporting, dismissing the NHTSA report as “an opinion.” The Audi episode subsequently spurred most automakers to install brake transmission interlock devices which require that brakes be depressed when shifting gears out of park, forcing drivers to focus on depressing the brake. Reports of unintended acceleration declined shortly thereafter, bolstering the contention that most incidents involved driver error.

And now we have out-of-control Toyotas. NHTSA has received reports linking 52 deaths and 38 injuries since 2000 to sudden unintended acceleration of Toyota vehicles. Last fall, Toyota recalled millions of cars to fix their gas pedals. Department of Transportation Secretary Ray LaHood further stoked public anxiety when he testified at a congressional hearing in February, "My advice is, if anybody owns one of these vehicles, stop driving it, take it to the Toyota dealer because they believe they have the fix for it.” LaHood quickly withdrew his remark saying he had “obviously misspoken” and what he was trying to say was that Toyota owners should get their automobiles fixed as soon as possible. 

Then last week, Californian James Sikes claimed that he drove his Prius for 34 miles as it accelerated to more than 90 miles per hour despite trying to brake it. A media firestorm erupted, but a week later neither federal investigators nor Toyota technicians have been able to reproduce what Sikes claims had happened. An independent check by the automotive publication Edmunds.com also found that applying the brakes or putting the car in neutral will bring a Prius to a halt. Further doubt has been cast on Sikes’ account after an onboard self-diagnostic system revealed that the brakes and the accelerator on his Prius had been alternately pumped 250 times during the alleged runaway event.

For the sake of argument, let’s assume that the reported cases of sudden acceleration are for real and not being cobbled together by greedy drivers and unscrupulous plaintiffs’ lawyers seeking jackpots from playing civil jury roulette. How dangerous is driving a Toyota? First, consider that last year highway fatalities in the U.S. fell to 33,963, which is the lowest number of traffic deaths since 1954. Taking the number of miles traveled into account, the 2009 traffic fatality rate is the lowest ever at 1.16 deaths per 100,000,000 vehicle miles traveled. Nevertheless, this means that on average 93 people per day died in traffic accidents in the U.S. last year. Assuming that 52 people really have died in Toyota sudden acceleration events over the past decade that would net out to 0.015 people killed per day. Thus the 2009 daily rate of traffic deaths was 6,200 times higher than deaths from sudden acceleration incidents. To get a sense of the risks we run, the daily traffic death rate also compares to the 20 people per day who die from taking non-steroidal anti-inflammatory drugs (NSAIDs) like aspirin, mostly to manage the symptoms of arthritis. In other words, you are 1,300 times more likely to die from taking aspirin or other NSAID than from a sudden acceleration accident.

And what about the cost? Toyota estimates that the accelerator recall repairs will cost $1.1 billion. This means that Toyota is spending over $21 million per alleged sudden acceleration fatality. The National Safety Council calculates that the average economic cost of motor vehicle fatalities is $1.3 million per death. Even using a measure that includes quality of life variables and people’s willingness to pay to reduce their health and safety risks, the total cost adds up to $4.2 million per motor vehicle death. And who knows how many millions or billions more Toyota will end up paying once the trial lawyers get finished?

To get a sense of the safety trade-offs involved in spending $1.1 billion to prevent sudden acceleration events, consider enhanced seat belt reminder systems. Such systems chime every 30 seconds for five minutes to remind drivers and passengers to buckle up. A rough estimate is that it would have cost $1.4 billion ($140 a piece) to equip the 10 million vehicles sold last year with the system. Studies show that enhanced seat belt reminders annoy people enough such that they increase their seat belt usage by 5 percent. Each percent increase in seat belt usage is estimated to save 250 lives per year, so an overall 5 percent increase would save an estimated 1,250 lives compared to five lives per year saved by preventing Toyota sudden acceleration events.

Safety panics can and do mislead regulators and consumers about real safety priorities. Bottom line: Do yourself a favor, buckle up—it will greatly improve your chances of surviving an automobile accident, whether it's caused by intentional acceleration, unintentional acceleration, or "pedal misapplication."

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is available from Prometheus Books.

Inflation: The Unspeakable Crisis

Michael Kinsley at the Atlantic is worried that more people aren't worried about inflation, and is sharp on what sucks about it:

A stable currency is firm ground on which you can build a life. Inflation turns life into Through the Looking-Glass: you have to run faster and faster to stay in the same place. Saving is for suckers, and money needs to be spent sooner rather than later. Planning even a year or two ahead becomes nearly impossible.

....if we are doomed to repeat this particular bit of the recent past [our last scary bout of double digit inflation in the late 70s], the press has failed in its self-imposed obligation to be the “first draft of history.”

According to the considerable discussion of inflation on the Web, my alarm is misguided. Every economist I admire, from Paul Krugman and Larry Summers on down, is convinced that inflation will remain low for as long as we can predict.....  Krugman has charged that inflation fearmongering is a nefarious Republican plot..... 

This time, inflation will be a lot harder to stop before it turns into hyperinflation. Whether Obama navigates these shoals successfully will be a big factor in his historic reputation. And journalists will be kicking themselves (and other people will be kicking journalists) for missing a disaster story on the level of Hurricane Katrina, if not 9/11 itself.

In short, I can’t help feeling that the gold bugs are right. No, I’m not stashing gold bars under my bed. But that’s only because I lack the courage of my convictions.

That final zinger hurts. Those with reasonable doubts as to the stability of this whole freakin' system are in the unenviable position of, if struggling to be "prudent," making lots of big decisions that are going to seem really short-sighted, depending on whether or not things go seriously awry. That is, going gold will make you either King of the World or the nuttiest of chumps. Well, that's what hedging is all about, I suppose, but most hedging is done within the ol' dominant paradigm. Gold seems more like a "all bets are off" bet.

Inflation is a looming crisis we at Reason have not been ignoring: see lots of examples.

‘You Cut Spending’

In 1999, a year after winning a second and final term as Republican governor of New Mexico, Gary Johnson became the most prominent politician in the United States to call for legalizing marijuana. He also said straightforwardly that he had used pot himself in the past. As he explained in a reason interview the following year, the admission was a reaction to Bill Clinton’s infamous statement about never inhaling. “Come on!” Johnson said. “I needed to be honest about this, so it was something that I volunteered.”

In 2010 Johnson is hoping to gain notoriety for a different, though related, reason. At a time of deep and convulsive popular discontent with the economy and the politicians attempting to manage it, Johnson has launched a profile-raising 501(c)4 nonprofit organization called the Our America Initiative, pushing limited-government solutions to economic, environmental, social, and international issues. If in the process he happens to tap into the growing Tea Party sentiment and palpable Republican hunger for new leadership, well, Johnson won’t complain. As Politico reported in December 2009, the former governor “is doing little to knock down the idea that he may be looking toward a 2012 presidential run.” While ending the drug war remains a central concern (Johnson was a featured speaker at the Marijuana Policy Project’s annual dinner in January), the tanned triathlete is hoping to deliver the kind of broad-based critique of big government that proved such an unlikely success in 2008 for the less telegenic Ron Paul.

Johnson, 57, exudes a distinctive Mountain West mix of adventurousness and pragmatism. He’s an avid skier, cyclist, and rock climber who has scaled Mount Everest (losing a chunk of toe from frostbite in the process). He founded a construction company that peaked at 1,000 employees—largely, he claims, on the strength of showing up on time and hitting project deadlines. He has an A-to-Z list of unkind things to say about his New Mexico successor, Bill Richardson; tells amusing stories about his long-ago drug use (Johnson has been alcohol- and drug-free for well over two decades); and is one of the few politicians who brags about how compassionately he fires people. If it’s hard to imagine him heading up the Republican Party in 2012, it’s certainly no crazier than a septuagenarian Austrian-economics aficionado turning out the youth vote in 2008 or a Republican nobody winning Ted Kennedy’s old seat in 2010.

reason Editor in Chief Matt Welch and reason.tv Editor Nick Gillespie sat down with Johnson in January. A version of this interview can be seen at reason.tv.

reason: What were your big accomplishments as governor of New Mexico?

Gary Johnson: I think I really did a good job when it came to controlling the growth of state government. I vetoed 750 bills while I was governor of New Mexico. I vetoed thousands of line items as governor of New Mexico, almost more than the other 49 governors in the country combined.

I cut the annual rate of growth in spending in half, from 10 percent to 5 percent. I would have liked to have cut actual spending, but that wasn’t going to happen.

New Mexico is 2-to-1 Democrat. I got elected as a Republican. I think I did a great job of showing people that government doesn’t have to spend money to make you happy, that government really needs to be providing a level playing field.

reason: What was one of the areas that you cut spending or got government out of business altogether?

Johnson: Really, it was across the board. Over an eight-year period in New Mexico while I was governor, the number of state employees, excluding education, went from 13,000 to 12,000, so there was a 1,000-person reduction in state government over an eight-year period. That had never happened before. Since I’ve left office, my successor has taken that number from 12,000 to 16,500. No area of state government has been improved, and yet there have been that many more employees added at a cost of, back of my napkin, a couple hundred million bucks, factoring in benefits.

reason: What’s your message on economic policy? 

Johnson: Well, stop the spending. Deficits are out of control, and that’s going to have a major impact on all our lives. Strong dollar rather than weak dollar.

reason: Would you have voted against the TARP bailout?

Johnson: Absolutely. 

reason: And the stimulus package?

Johnson: Yes.

reason: Drugs?

Johnson: I think that we should legalize marijuana. It’s never going to be legal to smoke pot, become impaired, get behind the wheel of a car. It’s never going to be legal for kids to smoke pot. But let’s tax it, let’s regulate it, let’s control it.

reason: So make it like alcohol.

Johnson: Make it like alcohol. Look, I haven’t had a drink in 22 years. Best decision I ever made in my life. Would this country be better off if no one drank? Yes, it would be, but we tried that; it doesn’t work. I don’t want to tell anybody that they can’t have as many drinks as they want every single night of the week as long as they don’t get behind the wheel of a car.

With regard to all the other drugs, we need a shift in the way we look at drug use. Let’s look at drug use as a health problem first, not as a criminal justice problem. Half of what we spend on law enforcement, half of what we spend on the courts, half of what we spend on the prisons is drug-related. By bringing about a rational drug policy, we’d be freeing up a lot of resources for real crime. Drug disputes would get played out with courts rather than with guns. So it would make this country a much better place overnight.

reason: You were one of the first politicians to stake out this position in the United States. Describe a bit how that played out in your political career. Are you still in a lonely position? Is this the third line of cocaine on the plate of American politics?

Johnson: It is going to change. I believe that the issue is at a tipping point nationally. We’ve had a vote during the last general election in Massachusetts to decriminalize marijuana by a vote of 65 to 35 percent. Wherever medical marijuana has been on the ballot, it’s passed overwhelmingly. A Gallup poll just a couple months ago suggests that 44 percent of the population of this country believes that marijuana should be legal. It’s never been that high. People armed with just a little bit of knowledge on this topic move to a more rational position, rather than “lock ’em up.”

reason: It’s been a pretty lonely position within Republican politics, certainly. So have been your stances against the Iraq war and the Afghanistan occupation. Talk a little bit about that and how you fit into the Republican conversation.

Johnson: Well, I’m putting this to the test. I believe in a strong national defense. But it’s my belief that neither Iraq nor Afghanistan poses a threat to national security and we shouldn’t be involved in either area. Before we went into Iraq, I made the statement that we had the surveillance capability to see if Iraq would have rolled out any weapons of mass destruction, that we could have gone in and surgically dealt with that situation militarily, but if we got involved in Iraq that we would be engaged in a civil war to which there would be no end. And I’m afraid that that’s come to pass.

I think Afghanistan is the same kind of situation. Osama bin Laden said, “I hope America gets involved militarily in Afghanistan, that we can bankrupt them the same way that we bankrupted the Soviets.” And that’s exactly what’s happening. I’m afraid in Afghanistan that more men and women are going to lose their lives and we will have spent a whole lot more money in a situation that ultimately we’re not going to make a difference in.

reason: So have you talked with Republicans about that?

Johnson: Yes, yes, yes.

reason: Because there is a group of Republicans who were consistently against the wars, but it doesn’t seem to be that popular in the party, even though a majority of Americans think these wars are misguided. 

Johnson: Well, I’m putting this to the test right now with Our America Initiative, getting out, being able to speak on these issues, and finding out if there is more broad-based support than what politically would seem to be the case.

reason: You have a tab on your site called “The Environment.”

Johnson: Well, we all care about the environment. When it comes to clean air and clean water, I don’t think there’s any compromise. I have accepted for the sake of argument Bjorn Lomborg’s argument that global warming is happening, that it’s caused by humans. But now what should we do? What we’re currently doing is way overblown. The effects of global warming are way overblown. And the amount of money that we’re looking to spend on the problem is really, really misdirected. Look at the cap-and-trade legislation—that now appears to be going nowhere, thank goodness. A 25 percent tax is really wrongheaded. I think that would just kick the economy’s rear end.

reason: So what’s your idea for producing the results you want to see?

Johnson: We want to see lower carbon emissions. I think that’s probably a good idea. So looking forward, technologically, this is going to happen. The government certainly could provide incentive for technologies moving forward. But the government shouldn’t be involved in actual development of those technologies.

reason: What about taxes?

Johnson: My own personal interaction with taxes is, you raise taxes and legislators spend those taxes. I know there’s talk about taxes to reduce the deficit. Well, I don’t believe it. It doesn’t happen. Legislators spend every bit of money that they have. And when it comes to our federal government, they’re spending money that we don’t have. The debt is $12 trillion, due to double in the next 10 years, $55 trillion in unfunded federal mandated liability.

reason: So do you keep taxes where they are, and then you just cut spending?

Johnson: You cut spending. You cut spending. 

reason: What would you cut first?

Johnson: My experience was never about targeting any area of government to reduce. It was looking at every single line item in the state budget and making a determination of whether or not it was really making a difference. And again, I want to say I was wildly successful in looking at that and, from a common-sense standpoint, reducing it wherever possible.

reason: In New Mexico, you privatized or competitively contracted for a lot of services.

Johnson: New Mexico had over 600 prisoners housed out of state. We were under a federal consent decree regarding our prisons and how they should be run. I ended up, as a result of a legislature that was not wanting to address this issue, privatizing over half of the state’s prisons. Comparing apples to apples, the private side produced the same goods and services for two-thirds the price. And they’re still in place.

I always say that if we could rationally approach and reform our drug laws, it’ll be a lot easier to shut down the private prisons than the public prisons. There’s more interest in keeping prisons alive and functioning and full by the public side, not the private side.

reason: The current political moment seems pretty fluid, dynamic, interesting. What do you think about the Tea Party movement?

Johnson: I think it’s interesting. I think if I weren’t doing OurAmericaInitiative.com that I’d just be one of the masses in the Tea Party movement with the signs “Stop the Spending” and “No Taxes.” 

reason: Who did you support in 2008?

Johnson: Ron Paul.

reason: What did you like about Ron Paul’s message?

Johnson: Well, limited government, and a history of really saying no to spending. Really having a history of articulating what government should and shouldn’t do. I was really heartened by his support. Statistically, I think it ended up to be about 9 percent of the Republican vote, but it was a strong 9 percent.

reason: Why are you a Republican?

Johnson: Early on it was about spending for me. It was about making the first real money that I made in my life and recognizing that I was going to have to pay more than 50 percent of what I earned in state and federal taxes. I really thought Republicans were first and foremost about spending and reducing spending.

reason: Do you feel that way after the first decade of the 21st century?

Johnson: Well, I couldn’t be more upset that we ran up record deficits with Republicans having held control of Congress and the White House. And yet those deficits are looking paltry compared with what’s happening today. That’s part of my anger and reason for speaking out: believing that what I have to say on the issues isn’t being articulated anywhere.

reason: Who are some of your political heroes?

Johnson: I thought I had a whole bunch of them until I got involved in the process, and then I found out that there just aren’t principled individuals involved in politics. Not that I didn’t make a lot of really good political friends or find a lot of individuals to be very principled in what it is they’ve done. But for the most part, I’ve been disillusioned on political heroes. This notion of actually doing what you say you’d do, that’s the rare breed.

reason: Let’s talk a little bit about your personal history. You had dreams of becoming a professional skier.

Johnson: Right.

reason: What happened to those dreams?

Johnson: I just wasn’t as fast in reality on skis as I was in my mind on skis. But I gave it a shot. 

reason: You ended up starting an enormously successful construction company.

Johnson: Well, I started out in 1974 as one-person handyman and over a 20-year period grew that business to employ over 1,000 people. I sold it in 1999. I found that being governor of New Mexico was not a plus for business. At the time we had about 500 employees, and when we sold the business nobody lost their job, and the business has gone on to new heights, as I hoped it would. I think it ended up well for everyone.

reason: Does your business experience give you any particular insight into politics?

Johnson: I think so. The insight for me is that government needs to provide a level economic playing field. I would rue the fact that I would sign legislation in New Mexico giving a huge tax incentive to the film industry. I’m going to sign this piece of legislation because it will grow the film industry, but do you all recognize that we could be doing this for every business in New Mexico by doing the same tax cuts for everybody? I would have preferred to have done that.

reason: You climbed Mount Everest. What year was that?

Johnson: 2003. Left office, and actually got to the top of Mount Everest.

reason: So it’s all been downhill since then?

Johnson: (Laughs) It was a great experience. It was a fabulous experience.

reason: What drove you to do that?

Johnson: You know, I’ve got a goal to climb the highest mountain on each continent in the world. I’ve had the good fortune of doing four of them, and barring some sort of catastrophic injury, I will make it to the top of all these summits. There’s no rush to do it, but I just thought that would be a great way to see the planet. 

Bonus Reason.tv video: Click below to watch Gary Johnson discuss his vision for a truly free America.

The Permanent State Bailout

A little more than a year ago, Reason ran a cover story on "Failed States: After a long spending binge, governors go begging for a handout. It won't be their last." Today the Wall Street Journal has an article titled "States Hope for a Rich Uncle: Governors lobby Washington for more money as stimulus aid runs out." Excerpt from the latter:

As the poet sang, there's joy in repetitionStrapped states, facing up to $180 billion in budget deficits in the next fiscal year, are going hat in hand to Washington.

California wants $6.9 billion in federal money for the next fiscal year, and Republican Gov. Arnold Schwarzenegger says he'll have to eliminate state health and welfare programs without it. Illinois, facing a $13 billion deficit that equals roughly half of the state's operating budget, has what it dubs a stimulus team and a group in Washington pressing for additional state aid. [...]

But in Congress, members are balking at further subsidies amid an election-year outcry over the U.S. deficit and federal involvement in the economy. [...]

"Our demand for services continues to grow, especially with underemployment and high unemployment—and we expect this trend to continue as we enter what is expected to be a slow-growth recovery," said Anna Richter Taylor, a spokeswoman for Democratic Gov. Ted Kulongoski of Oregon. [...]

President Barack Obama said last month he was concerned about the potential for state and local government layoffs "because we haven't re-upped" money for states. Christina Romer, chairwoman of the White House Council of Economic Advisers, called for more help for states in a speech last week.

Do not cry for the beleaguered governors. As that last quote indicates, the White House will figure out a way to shovel enough money to protect those unionized public sector jobs. The fact that a U.S. president is concerned about government layoffs on the state level speaks volumes about how far we've gone, and how far we have left to go down. We are out of money, and people who are out of money cannot afford expensive make-work for inefficient laborers.

Second, as our "Failed States" story detailed, statehouses doubled their spending during the good times last decade. If they had merely kept spending growth at the rate of population+inflation growth, they'd have plenty of money left over for the demand in services precipitated by the recession. Since almost no one in this country is serious about cutting spending growth, fiscal irresponsibility on the state level has become a federal problem, and unless the political process intervenes, will become a federal entitlement.

She's onto somethingWhat's perhaps most depressing of all is that this story, and all the related stories that we link to here every day, indicate more than anything else one overriding fact: We are not even within radar contact of facing reality on this stuff. States have known they were screwed for more than two years now, and yet last year they downsized payroll by less than one percent. Meanwhile, the most brilliant economic minds of Generation Obama, instead of saying "Gee, that whole stimulus thing led to results that were worse than our worst-case scenario about what would happen if we didn't pass the stimulus," are warning that "failure to take additional targeted actions to jump-start job creation would lead to slower recovery and higher unemployment for an extended period." Meanwhile, the opposition guy who has announced a plan to balance the budget in FIFTY-TWO FREAKING YEARS is being treated like a semi-dangerous radical by his own party.

I hear Mexico's nice....

How Government Spending Harms Private Investment

Writing at Investors Business Daily, Independent Institute economist Robert Higgs argues that government intervention in the economy is strangling private sector investment:

The current investment drought does not simply reflect the housing bust that followed the residential investment boom that peaked in 2005. To be sure, real residential investment fell tremendously, by almost 53% from 2005 to 2009, with especially rapid declines the past three years. Yet real nonresidential investment also fell greatly last year, by 18% from its 2008 peak.

Even real investment in equipment and software — a category only loosely connected to the housing boom and bust — declined last year by 17% after occupying a high plateau during the preceding three years. Business firms have also fled from inventory investment, trimming their holdings by an unprecedented $125 billion in 2009 after lopping off $35 billion in 2008.

Federal government spending, meanwhile, has raced ahead. From 2007 to 2009, government purchases of newly produced final goods and services — the federal government's "contribution" to GDP — increased by over 13% in constant dollars.

Unfortunately, while private investment is the engine of economic growth, government spending (despite what generations of Keynesian economists have asserted) is the brake. To understand this negative relationship, we need only scrutinize how the federal government's spending is determined: namely, by political processes devoid of economic rationality.

In this light, we can appreciate that enhanced government spending does not bulk up the economy, nor merely crowd out worthwhile private activity. Instead, it undercuts, penalizes and distorts everything that private parties attempt to do to create wealth. Ham-fisted government regulations and additional taxes are known killers of economic growth.

Read the whole thing here. And click below to watch Higgs and Reason.tv’s Nick Gillespie discuss the decline of classical liberalism in America.

One Good Reason to Keep Income Tax Returns as Totally Freaking Annoying as Possible.

Over at the Wall Street Journal, Reason alum Ryan Sager writes about the connection between ease-of-payment and increased levels of taxation.

If our priority is to experience as little pain from taxes as possible, we could go down the road California is on with its ReadyReturn program, available to people with income only from wages and only one employer. From the 60,000 people who used it to file prefilled returns in the 2008 tax year, it got Saddam Hussein levels of support: 99% said they’d use it again.

If our goal is to hold onto a little more of our money, though, remember: Swearing’s been shown to alleviate pain. So, bear down, swear away, and don’t get plucked any more than absolutely necessary.

Whole thing, which summarizes research on the matter, here.

Reason.tv flashback as April 15 approacheth like a Leviathan waking hungry from a long slumber (if sea monsters do in fact sleep), take a coupla minutes to remember some "tax facts to make your head explode":

Five Lies About the American Economy

The ongoing recession has raised a troubling question for otherwise resurgent Keynesian economists: How can the American economy keep getting worse under the intensive care of an interventionist economic team almost universally praised for its brilliance? The answer may be that the Obama administration is dealing with a fictional economy, one that bears little resemblance to the economy the rest of us inhabit. And when the difference between fact and fiction becomes too apparent, they just make stuff up. Herewith, five big lies the administration loves to tell and the mainstream media (with some notable exceptions) love to repeat:

1. Bold government action staved off a Depression, saving or creating 1.5 million jobs.

“Just remember,” Treasury Secretary Tim Geithner said on November 1, 2009, “a year ago today, last year, you had markets around the world come to a stop. Economic activity just stopped, came to a standstill, like flipping a switch.”

Geithner implies that the American business climate improved substantially in the first year of the Obama administration. In fact, nearly every indicator, from employment to freight transport to rents to retail sales to real estate, has headed steadily south. In some cases, such as unemployment, the numbers have been far worse than the Obama economic team’s worst-case projections. In others, such as real estate, the weakness of the market is masked by expensive government support, including but not limited to the unkillable First-Time Homebuyer Credit, an assault on loan underwriting standards (see Lie No. 2) by the Federal Housing Authority and the government-run mortgage giants Fannie Mae and Freddie Mac, and the completely opaque $75 billion Home Affordable Modification Program (HAMP).

The $787 billion in stimulus spending authorized by the American Recovery and Reinvestment Act of 2009 is now best known for its inflated and unsupportable job creation numbers. At press time, Council of Economic Advisers Chairwoman Christina D. Romer (who, confusingly, made her academic reputation proving that fiscal stimulus did not help the U.S. economy during the Great Depression and World War II) was giving the stimulus credit for 1.5 million American jobs in 2009. All efforts at checking her claims, however, have turned up very different numbers. The Associated Press, the Boston Globe, the L.A. Weekly, and local papers around the country have failed to find actual jobs to match up with those being reported at Recovery.gov. The administration’s only concession to this reality has been rhetorical: After claiming that hundreds of thousands of jobs had been “created” early in 2009, the Council of Economic Advisers turned to the phrase “saved or created” by mid-year. In December the Obama administration again changed its measure to jobs “funded” by the stimulus.

Of all the government interventions since the start of the real estate decline, only one—the rescue effort for too-big-to-fail Wall Street players, which predates Obama—has had a measurable effect. The Troubled Asset Relief Program, the Federal Reserve’s promiscuous use of discount windows and dollar-destroying low interest rates, and the Treasury Department’s open wallet for incompetent financial institutions have cumulatively ensured the survival of the biggest, failiest financial institutions, including such devourers of the commonweal as Citigroup, which managed to lose $7.6 billion in the fourth quarter of 2009 despite an infusion of tens of billions of taxpayer dollars over the year. 

2. “No one wants banks making the kinds of risky loans that got us into this situation in the first place.”

President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take “third and fourth” looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place. 

Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama’s guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.

Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.

3. The economic crisis is a “subprime crisis.” 

“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited,” Federal Reserve Chairman Ben Bernanke said in May 2007, “and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

To understand how Bernanke could be so wrong on something so important (see Lie No. 4), note that the real estate bust was not a problem with self-identified “subprime” loans (mortgages that are made to borrowers with bad credit and not backed by Fannie Mae and Freddie Mac). In fact, the rapid expansion in subprime lending was a late phenomenon that occurred in the last 18 months of a decade-long real estate bubble. Subprime defaults are actually slightly below their worst-ever historic records, and the explosion of subprime defaults that began in 2005 was accompanied or slightly preceded by a statistically equal explosion in prime defaults. 

How is this possible? The period going back to the mid-1990s has seen a massive increase in mortgages that look prime (and are backed by Fannie and Freddie) but in fact feature dangerously low down payments, tricky interest-only and adjustable rate mechanisms, and other inadvisable debt schemes. Late in 2008, Fannie Mae admitted in a footnote that its portfolio had for years been stuffed with alt-A, negative amortization loans, and other junk debt.

Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. Fannie, Freddie, the Department of Housing and Urban Development, the Federal Housing Administration, and all other federal real estate concerns have been working since the 1990s to increase the loan-to-value ratio of mortgages. They have succeeded: Americans now own a smaller percentage of their homes than at any other time in history.

4. Ben Bernanke is a heroic leader.

“The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and the world has ever faced,” Obama said when nominating Bernanke for a second term as Fed chairman. “As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.” 

Seconding that emotion, Time anointed Bernanke its 2009 Person of the Year, swooning over the Fed chairman’s cranial power, his “tired eyes,” and such bold action as lowering interest rates to zero and paying banks to keep deposits in the Fed’s vaults—none of which has translated into noticeable economic health during the last two years. (See Lie No. 5.) “He wishes Americans understood that he helped save the irresponsible giants of Wall Street only to protect ordinary folks on Main Street,” Time wrote. 

Alas, no sooner had the year turned than Bernanke’s reality distortion field began to fail. His reappointment, though inevitable, turned out to be a bigger challenge than expected, with a left-right Senate coalition rising up to make hay out of Bernanke’s abundantly documented record of wrong bets and absurd predictions. Had Bernanke limited himself to defending fictions about his own career, he might have stayed out of trouble. Yet he continues to maintain, in one of many examples, that former Fed Chairman Alan Greenspan’s artificially low interest rates in the early part of Decade Zero did not contribute to the real estate bubble. The hapless banking chief’s performance may have been summed up best by the financial blogger Mish Shedlock: “Bernanke did not get a single thing right.”

5. The worst is behind us.

“Here is what I know,” Larry Summers, Obama’s top economic adviser, told ABC in December. “We were talking about Depression; we were talking about the financial system collapsing. Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be.” 

Shortly after Summers made that comment, third-quarter GDP numbers were revised downward substantially. (They have traveled from 3.5 percent to 2.8 percent to 2.2 percent so far.) Former Fed Chairman Paul Volcker told Der Spiegel in December 2009, “You know, people get very technical about these things. We had a quarter of increased growth, but I don’t think we are out of the woods.” In January regional unemployment rates, which had shown some signs of improvement, began moving up again. The unwinding of consumer and homeowner credit continues. Christmas spending turned out to be only slightly higher (around 1 percent, according to MasterCard’s Spending-Pulse unit) in 2009 than in 2008—when, according to Summers and others, the United States was flirting with depression and financial collapse. The only good news: a return to GDP growth in the second half of 2009, based largely on inventory investment and nonresidential fixed investment, not a return to demand or underlying growth.

But the truly dire evidence is in real estate, the market that drove both the bubble and the bust. A record 7.6 percent of U.S. homeowners are at least 30 days late on payments, according to Equifax, and delinquencies continue to rise at an increasing pace. About 1.2 million loans out there are in limbo: The borrower is in serious default, but the bank has not started the foreclosure process. Another 1.5 million are in the early stages of the foreclosure process, but the banks haven’t yet taken possession of the homes. By a conservative estimate, there may be 3 million to 4 million foreclosed homes coming onto the market in the next few years. This is the inevitable, and salubrious, reaction to many years of real estate inflation, and it will continue to happen no matter how hard the government pretends it can control economic outcomes. See Lie No. 1.

Contributing Editor Tim Cavanaugh (bigtimcavanaugh@gmail.com) writes from Los Angeles.

The Right to Work

The people of Louisiana must sleep soundly knowing that their state protects them from ... unlicensed florists.

That's right. In Louisiana, you can't sell flower arrangements unless you have permission from the government. How do you get permission? You must pass a test that is graded by a board of florists who already have licenses. To prepare for the test, you might have to spend $2,000 on a special course.

The test requires knowledge of techniques that florists rarely use anymore. One question asks the name of the state's agriculture commissioner—as though you can't be a good florist without knowing that piece of vital information.

The licensing board defends its test, claiming it protects consumers from florists who might sell them unhealthy flowers. I understand the established florists' wish to protect their profession's reputation, but in practice such licensing laws mainly serve to limit competition. Making it harder for newcomers to open florist shops lets established florists hog the business.

Other states are considering adopting Louisiana's licensing law, but before any do, I hope that the law will be stricken. The Institute for Justice, a public-interest law firm, has challenged the licensing in court, saying it violates liberty and equal protection, and so is unconstitutional.

"One of the most fundamental tenets of the American dream is the right to earn an honest living without arbitrary government interference. What could be more arbitrary than saying who can and who cannot sell flowers?" IJ President Chip Mellor says.

Others states have their own sets of ridiculous licensing rules. In Virginia, you need a license to be a yoga instructor. Florida threatened an interior designer with a $25,000 fine if she didn't do a six-year apprenticeship and pass a test, at a cost of several thousand dollars. Fortunately, the Institute for Justice got that law overturned.

I'm rooting for IJ because licensing interferes with the freedom to make a living, harms consumers by limiting competition, and protects established firms. It's an old story. Established businesses have always used government to handcuff competition. Years ago, small grocers tried to ban supermarkets. A&P was going to "destroy Main Street," the grocers cried. Minnesota legislators responded to their lobbying by passing a law that forbade supermarkets to hold sales. Consumers were hurt.

OK, while licensing of florists, interior designers, and yoga teachers is ridiculous, what about more important professions, like law? Surely people need protection from people who would practice law without a license. Again, I say no. Lawyers' monopoly on helping people with wills, bankruptcies, and divorces is just another expensive restraint of trade.

David Price recently spent six months in a Kansas jail because he wrote a letter on behalf of a man who was wrongly accused of practicing architecture without a license. When Price refused to promise never to "practice law" again, a judge sent him to jail.

All he did was write a letter. Price didn't misrepresent his credentials. However, he did save a man from paying $3,000 to a lawyer. Perhaps that was his real offense.

Some of the most famous lawyers in American history, including Thomas Jefferson, Abraham Lincoln, and Supreme Court Justice Benjamin Cardozo, had no license from the state. Their customers decided whether they were worthy of being hired.

Competition is better than government at protecting consumers from shoddy work. Furthermore, licensing creates a false sense of security. Consider this: When you move to a new community, do you ask neighbors or colleagues to recommend doctors, dentists, and mechanics even though those jobs are licensed? Of course. Because you know that even with licensing laws, there is a wide range of quality and outright quackery in every occupation. You know that licensing doesn't really protect you.

A free competitive market for reputation protects consumers much more effectively than government can. Today, online services like Angie's List (www.angieslist.com) make it even easier for consumers to get better information about businesses than government licensing boards will ever provide. We do need protection from shoddy businesses. But it's freedom and competition that produce the best protection.

John Stossel is host of Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. To find out more about John Stossel, visit his site at johnstossel.com.

COPYRIGHT 2010 BY JFS PRODUCTIONS, INC.
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As Congress Gets Set to Yap & Maybe Even Ban Some Earmarks, Check Out Where DC Insiders Party on Your Dime

Earmark reform is all the rage for the minute in D.C. these days. That's all well and good. As legislation snakes through Congress and gets more watered down than the booze at a frat-house rush party, check out this just-released Reason.tv party that explains how earmarks get done and how Washington insiders have been partying hearty on your dime for lo these many years.

The Myth of the Recovery

The economic headlines sure look better than they did a year ago. Gross domestic product (GDP) is finally growing again, rising by 2.2 percent in the third quarter of 2009, with an early estimate of 5.7 percent for the fourth. The fourth quarter number will probably be revised down, but it will still likely mark the fastest growth since 2003. The unemployment rate, after a nosedive, leveled off in the last few months of the year, and the stock market has regained 40 percent of its value after a March 2009 low. Four of the five largest bailed-out banks have either repaid the government or received permission from the Treasury Department to do so in the near future. Inflation slowed to a standstill in November after 10 months of increasing consumer prices. Construction of new homes and apartments increased in 2009 from 2008 levels, the first annual growth in housing starts since 2005.

“The Recovery Act has created jobs and spurred growth,” President Barack Obama said in a December speech trumpeting the success of his economic policies. “We are in a very different place today than we were a year ago.” Lawrence Summers, director of the White House National Economic Council, concurs. “Everybody agrees that the recession is over,” Summers said that same month on ABC’s This Week.

But a closer look reveals those appealing numbers sit on a dangerously shaky foundation. Economic growth in 2009 was largely dependent on a historic level of government spending that even the president acknowledges is unsustainable in the long term. The root problem of mortgage delinquencies has yet to be worked out. Bank lending is sparse amid ongoing uncertainties surrounding regulatory reform. As a result, manufacturers and small businesses continue to struggle with limited credit. All that translates into historic job losses and a bleak outlook for meaningful growth in 2010 and 2011.

Worst of all, many of the core problems in the housing, banking, manufacturing, and service sectors are being perpetuated and exacerbated by the very federal programs the president credits with jump-starting economic growth. Instead of confronting the roots of the crisis head on, as Obama has repeatedly boasted of doing, his administration and the Democratic Congress have kicked the can down the road, postponing the day of reckoning for real estate, the auto industry, and the toxic mortgage-backed securities that were at the heart of the economic meltdown. These unsolved problems will keep looming over the economy until they’re finally addressed.

Government Domestic Product

The much-noted “jobless recovery” is not just a problem. It’s an anomaly. Not since the post–World War II recession in 1945 has unemployment risen this quickly: five percentage points in the 24 months after the downturn began in December 2007.

To put that in perspective, it took 43 months for unemployment to hit its peak during the 1979–82 recession. In 2009 alone the economy shed a staggering 3.9 million jobs. And though the headline unemployment rate stabilized at 10 percent during the final months of the year—17.3 percent if you include part-time workers—initial jobless claims for January 2010 jumped at a rate not seen since the previous August. It’s not at all clear the worst is behind us. 

The gains on Wall Street have been goosed largely by government spending and guarantees, not the usual private sector–funded growth. And federal spending cannot continue indefinitely without deficits and debt service spiraling out of control. John Silvia, chief economist for Wells Fargo, says, “We have seen a recovery, but it’s driven primarily by federal spending and special federal projects. The character of this recovery is very different than we’re used to.”

Consider that 37 percent of the third-quarter GDP growth was due to motor vehicle purchases, which were stimulated almost entirely by the Cash for Clunkers program. “The third quarter was really just a lot of Cash for Clunkers spending that won’t be sustained in the foreseeable future,” Silvia says. (Final statistics for fourth quarter spending were not available at press time.)

The car scheme, an attempt to jump-start the bankrupt auto industry, offered consumers a government-funded credit of up to $4,500 if they traded in their gas guzzlers for more eco-friendly vehicles. But since most participants probably were already planning to buy a new car, the program essentially shifted future demand for automobiles to the third quarter of 2009. Instead of continuing to grow, car sales dropped 34 percent immediately after the program ended. Figure 1 shows U.S. auto sales in 2009 largely following the 10-year average month-to-month change until the Cash for Clunkers credit jolted demand, followed by a subnormal drop.

Another 20 percent of third-quarter GDP growth came from new residential investments, propped up largely by the First-Time Homebuyer Credit. The credit was first offered in 2008 as a federally backed no-interest loan of up to $7,500, paid back over 15 years. The February 2009 stimulus package extended the program to September, increased the maximum to $8,000, and eliminated the repayment requirement. With the free cash giveaway set to expire at the end of the third quarter, builders and buyers rushed to close on homes, concentrating larger than normal residential investment into third-quarter GDP. Due to the “success” of the program, the credit has been extended again until April 2010. But the program has only helped individual buyers and sellers, not the housing market as a whole.

A Wells Fargo survey found that 56 percent of home-buyers who purchased a home in the second or third quarter of 2009 did so because of the special tax incentive. Such federal jiggering not only steals demand from the future, distorting growth numbers; it skews recovery in the real estate market. Housing prices are up in 2010 from a year ago, but that is because the government is giving away money to buy homes. The $8,000 giveaway pushes up the costs of all homes, not just the ones purchased with the credit, because sellers have raised their prices in anticipation of a buyer armed with stimulus cash. The credit suggests an increase in demand that isn’t really there.

The growth in the housing market that the White House brags about is inherently unsustainable. Home prices would not be up without the government’s support, and they will decline once the support is removed. That’s one reason Congress extended the First-Time Homebuyer Credit, even though it only puts off the inevitable and creates more problems. This skewed demand creates the possibility that homes will be constructed by builders who mistakenly believe the market is reviving, when in fact it is only Uncle Sam subsidizing a buying spree until the money runs out.

Overall, government support accounts for roughly 77 percent of economic growth in the third quarter of 2009, according to my analysis of Commerce Department statistics. This means that non-Washington GDP growth was closer to 0.34 percent from July to September 2009, instead of 2.2 percent. 

It could be even worse. When one aspect of GDP grows significantly, it lifts other components that might not otherwise rise; this is known in economics as the “slingshot effect.” Without the temporary, distorting aid of Obama’s programs, the economy might have seen continued negative growth. Even Christina Romer, chairwoman of the White House Council of Economic Advisers, admitted in a statement accompanying the release of the third-quarter numbers that without the extraordinary government intervention, “real GDP would have risen little, if at all.”

This is not real growth. It’s the national equivalent of a credit-card buying spree, with the bills—in the form of debt service and unfunded liabilities—to be paid off later. It is a faux recovery.

The president is betting that private-sector consumption will take over for fiscal stimulus as the main economic driver in 2010 and beyond. This gamble fails to take into account the ways in which the band-aid rescue programs are delaying efforts to address the economy’s deeper problems.

As Goes Housing, So Goes the Economy

Like unemployment and GDP growth, the housing market seemed to show green shoots in early 2010. Housing starts were up 22 percent from January 2009, and the Internal Revenue Service estimated that 1.4 million taxpayers used the First-Time Homebuyer Credit to buy a new house between February and September of 2009.

But there is still significant rot at the roots. Tom Zimmerman, a managing director at the commercial banking giant UBS, predicts troubles ahead. “The housing market has a lot of wood to chop to get through this cycle,” Zimmerman said in October 2009 at an American Enterprise Institute event. “We’re not over by any means in terms of the negative part of the housing market.”

One of the looming negatives is the continued rise of mortgage delinquencies. Going into 2010, one-third of all homeowners owed more on their homes than they were worth. This phenomenon has led to record levels of home abandonment. Coupled with high unemployment and ballooning adjustable rate mortgages, banks are seeing defaults rapidly rising (see Figure 2). If delinquencies continue to rise at their current rate, we could see more than $300 billion in delinquent mortgages by the summer of 2010. The most recent housing data shows 6.25 percent of U.S. mortgages are 60 or more days past due, up 58 percent from a year ago. Why keep paying for your home if you’re going to lose money on the investment? 

Some analysts will counter that the trend lines are improving, since the growth in people falling behind on their mortgage was only 7.6 percent from July to September, down from 14 percent in the second quarter. But Wells Fargo’s Silvia disagrees. “Delinquencies and foreclosures traditionally lag the economic cycle,” he says. “We’re likely to see delinquencies continue for the next three to six months. In some areas it might be nine months to a year.” 

A possible reason for the delayed reaction is the high concentration of delinquencies in a few areas of the country. According to the Federal Reserve Bank of New York, as of September 2009, 31 percent of homes in foreclosure are located in five states: California, Florida, Nevada, Arizona, and New Jersey. This concentration creates massive headaches for banks trying to recover losses on mortgages gone bad, since what they need most of all is for the foreclosed homes to sell. Not only is selling difficult in areas with high foreclosure rates, but when a market appears prices tend to be disproportionately low—even considering the homebuyer credit—meaning less money recovered by banks.

These numbers, bad as they are, still don’t reflect the full depth of the toxic mortgage problem. In most states, the mortgage holder can legally foreclose on a home once the homeowner is more than 120 days late on payments. But banks and other mortgage owners have refrained from pushing delinquents into foreclosure. While the number of homes delinquent for 90 days or more increased by 2.9 percent in 2009 over the previous year, the number of foreclosures increased only 1.3 percent. 

This divergence is a historical anomaly, according to Molly Boesel, senior economist for the property information and analytics firm First American CoreLogic. Delinquency and foreclosure rates traditionally track. “These mortgages should be moving through the process, but they are being held up for various reasons,” Boesel says. 

One reason is that many banks and mortgage servicers don’t have the capacity to digest the foreclosures fast enough. But the main reason is that some mortgages from this pool have been modified or refinanced to keep the delinquent homeowner under the same roof. The bulk of mortgage alterations have been funded through the White House’s $75 billion Home Affordable Modification Program (HAMP). By the end of 2009, 130,000 mortgages had been refinanced through HAMP, and more than 700,000 other mortgages were being processed.

The chief problem with this approach is that the average redefault rate for HAMP participants, according to a September report from the Treasury Department’s Office of Thrift Supervision, is a wretched 50 percent. At the behest of the federal government, banks are lowering their lending standards for their least credit-worthy customers, and the results are predictable. Meanwhile the political pressure to prevent foreclosures continues to increase: states, counties, and cities across the country have ordered foreclosure moratoriums, limiting the legal authority for banks to move against nonpaying homeowners. These laws have merely postponed the inevitable, artificially propping up prices and preventing a real market from emerging in both housing and mortgage finance.

The Obama administration and Congress keep putting off the day when the housing market, the root of the economic crisis, gets cleaned out. It will be difficult for a real economic recovery to take off until they stop.

The Banking Mess

Toxic, mortgage-backed securities are still sitting on banks’ books, waiting for a market to emerge for them. Joe Engelhard, a former Treasury Department official, observes that “the stabilization of the banking sector will not be complete until housing issues are worked out.” With housing losses still mounting, banks are struggling to remain solvent.

Residential loans are just part of the problem. Troubled commercial real estate loans totaling about $3 trillion will start coming due during the next few years. Many of these loans, because they were for longer terms, have taken longer to hit the market than the residential loans that blew up in 2007, but they bear disturbingly similar characteristics. Widespread commercial real estate losses in the coming months threaten to destroy any gains Wall Street has seen during the last year. 

This threat has many analysts predicting a rise in the number of banks going belly up. More than 170 banks have failed since the beginning of the recession. To put that in perspective, only three banks failed between July 2004 and December 2007. And the bank closures show no signs of slowing down. In October the feds shut down 20 banks, the most of any month since 1994. Some analysts have predicted that as many as 1,000 banks will have imploded by the time the economy recovers.

The glass-half-full banking results that the administration has been touting have been based largely on government support that masks significant losses. “These banks are going through a terrible, terrible period of loss, but we have nicely disguised it,” says Christopher Whalen, managing director of the financial markets research group Institutional Risk Analytics. “Third-quarter bank profits were short-term, subsidy-supported profits.”

The Troubled Asset Relief Program (TARP) and various Federal Reserve actions have put surviving banks on federal life support, especially if they’re part of the lucky few deemed too big to fail. The bailout policies of the current and last administration have sent a signal to the market that big banks can be trusted, and are therefore worthy of loans at much cheaper interest rates. Cheaper credit means more profits, and bigger surviving banks.

In October the Center for Economic and Policy Research released a study finding that the credit risk guarantee had provided up to $34.1 billion in benefits to the nation’s top 18 banks. The report looked at the gap between the interest rates paid by big banks and those paid by small banks. Adjusting for the fact that big banks normally get better rates, the numbers show that bank profits are largely a product of the too-big-to-fail guarantee. The report estimated that cheap credit accounted for 166 percent of Capital One’s profits over the past year—i.e., the bank really didn’t make any money on its own.

Without this subsidy and the TARP loans, both of which are politically unpopular, many large banks would be in bankruptcy or receivership today. “What happens when you remove those supports?” Wells Fargo’s Silvia asks. “It is problematic.”

Banks are aware of this problem. Interbank lending remains limited as confidence problems continue to plague the financial industry. “There is no grease in the engine in terms of bank credit or trade credit,” CreditRiskMonitor.com CEO Jerry Flum told The Institutional Risk Analyst in October. The goal of the TARP capital injections was to get the lending engine going, but banks have largely been sitting on the money, holding increased excess reserves.

With so much money sitting idle, cash flow is a major concern for banks and their customers. It is unclear when the market will see stability again, and until new operational norms emerge banks are likely to remain tight with their cash. With the administration now promoting the biggest banking regulatory overhaul since the 1930s, the uncertainty will likely continue. Bank analyst Joe Engelhard warns, “The regulation overhaul process has created a cloud of uncertainty for investors and institutions over what the new normal will be for profitability at large banks.”

In December the House of Representatives passed the Wall Street Reform and Consumer Protection Act, creating a permanent bailout fund and legal authority for the government to take over any financial institution, whereas regulators now only have that power over banks. The bill includes requirements that banks keep higher amounts of cash on hand relative to risk, places tight new restrictions on derivative products, and limits executive pay. The legislation also would create a Consumer Financial Protection Agency to strictly regulate products and operating policy, which may end up protecting small businesses and economic growth to death.

All of this is disconcerting to banks trying to get back on their feet. David Parshall, general partner at private equity secondary PEI Funds, warns that badly designed changes could hurt the economy even more than the uncertainty about them. More extensive reporting requirements, tighter capital regulations, and proposed powers to break up banks would all increase the cost of doing business and hobble the recovery, Parshall says. And continuing to waffle on regulatory reform means the markets will waffle as well.

There is a vicious circle here. Uncertainty breeds hoarding, hoarding breeds liquidity problems for manufacturers and small businesses, liquidity problems create unemployment problems, and unemployment hurts the broader market that banks operate in. If none of this changes, the Federal Reserve will likely keep interest rates effectively at zero, which in turn will incentivize banks to build their reserves. All of the above will likely induce the president and Congress to push for more of the unsound lending practices that helped inflate the housing bubble in the first place.

“If we don’t get a turn in unemployment,” Whalen worries, “if we don’t get a recovery in housing and the real economy, then we’re going to see even higher credit loss experience for banks, even after next year. It’ll keep on going.”

Make Today’s Problems Today’s Problems

Whether the economy recovers quickly in 2010, stagnates for a while, or stumbles into the dreaded W-shaped double-dip recession, the policy response will depend on a calculus between short-term and long-term pain. The more Washington kicks the can down the road on spending, housing, and banking, the more long-term troubles the American economy will face. Obviously, giving federal money to consumers can be politically popular, just as bailing out bankrupt states can be politically expedient for politicians who depend on support from public-sector unions. But these short-term gimmicks do not lead to sustainable economic growth. And the president himself has indicated that the free money days might be coming to an end. “It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said in November.

The Congressional Budget Office has projected that by the end of 2019 the U.S. will have nearly doubled its debt to more than $17 trillion, or 82 percent of GDP. And that’s before dealing with the peak of baby boomers draining Social Security and Medicare funds. And it’s not just government capital rapidly draining away. The administration’s political capital took a massive hit in January when an unknown Republican won Teddy Kennedy’s old Senate seat in overwhelmingly Democratic Massachusetts. The president is running out of other people’s money and with it the chance to maintain his Potemkin case that the economy is recovering.

“My guess is that the first two quarters of 2010 are not going to look as good as [2009’s third] quarter,” Joe Engelhard predicts. “We’re probably gonna go sideways for a while.” 

Anthony Randazzo (anthony.randazzo@reason.org) is director of economic research for the Reason Foundation, which publishes this magazine.

The Matt Welch/Harold Meyerson Debate About Unions

Is available for your listening enjoyment here:

Let's take this opportunity to swing through some labor-related headlines, shall we? Many of them were harvested from the valuable Pension Tsunami website, and all come from the past week:

Under thy thumbPoliticians Come and Go, But Public Employees Rule 

Obama Draws Fire for Appointing SEIU's Stern to Deficit Panel

Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash

Procuring the Union Agenda: A White House Plan Would Be the Davis-Bacon Act on Steroids

Public Pensions Are Adding Risk to Raise Returns

Public Pension IOUs Total Nearly $6K per Chicagoan, Study Says

SEIU to Focus on California Races

AFL-CIO Pledges All-out Backing for Democrats in 2010 Elections

Labor On Dems Who Block Health Reform: We'll 'Take Them Out'

My favorite part of yesterday's discussion: The question of why haven't unions done a better job communicating the good work they do?

Economics
All Reason Magazine articles in the "Economics" topic.

 

 

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