I suppose that this is almost too obvious to point out. Almost.
The NYT felt the need to present at length the unanswered complaints from Representative John Kline about a bill eliminating federal subsidies for private lenders in the college student loan program. The article concludes with Mr. Kline calling the bill “job-killing legislation.”
Of course legislation that eliminates waste will kill some jobs. Suppose we had 10,000 government bureaucrats who did absolutely nothing but pass sheets of paper back and forth among themselves. If Congress passed a bill eliminating these jobs, then it would be job-killing legislation. However, this would generally be seen as good for the economy since it would free up these resources for productive uses. The same logic applies to waste in the financial sector supported by government subsidies. The NYT should have made this point.
This of course is the converse of the argument made for stimulus spending: if we’re going to spend tax money to create jobs, let’s try to make sure that the jobs produce something that we need.
I may have posted something here on the subject of small business employment in the US. It’s a common refrain that small businesses account for a disproportionately high share of new jobs. What is nearly always left unsaid is that small businesses also account for a disproportionately high share of job losses, and that net new jobs from small businesses are about the same rate as from big businesses.
Via Paul Krugman, we haven an interesting paper from CEPR on the subject of small business employment as a share of total employment, comparing the US to European countries. The results are pretty surprising. Here’s the conclusion:
… Despite our national self-image as a nation of small businesses and entrepreneurs, the United States small-business sector is proportionately not as large an employer as the small-business sectors in the rest of the world’s rich economies. One interpretation of these data is that self-employment and small-business employment may be a less important indicator of entrepreneurship than we have long thought. Another reading of the data, however, is that the United States has something to learn from the experience of other advanced economies, which appear to have had much better luck promoting and sustaining small-business employment.
One plausible explanation for the consistently higher shares of self-employment and small-business employment in the rest of the world’s rich economies is that all have some form of universal access to health care. The high cost to self-employed workers and small businesses of the private, employer-based health-care system in place in the United States may act as a significant deterrent to small start-up companies, an experience not shared by entrepreneurs in countries with universal access to health care.
Here’s an example (there are more graphs in the paper).
Matthew Rose, WSJ (excerpted):
AAA, n., obsolete. A rhetorical device used to dupe buyers into purchasing securities backed by shacks dressed as houses, and to secure the highest possible spot in telephone directories. Common usage: AAA Septic Drainage and Mortgage Backed Security Services.
BAILOUT, n. First known use: Noah. Novel regressive taxation scheme whereby vast sums of capital are transferred from those citizens who didn’t participate in the illusory Bacchanalia of the housing bubble to those who did and weren’t clever enough to get out in time.
BANK, GOOD, n., archaic. Sober, conservative, risk-averse institutions designed to midwife customers’ capital and enable prudent lending to deserving businesses and consumers. See Capra, F., the Bailey Building & Loan Association.
BANK, BAD, n. 1. Everyone else. 2. Especially Goldman Sachs.
CREDIT-DEFAULT SWAP, n. loose translation from the original Latin “ubi mel ibi apes,” or “where there’s honey there are bees.” 1. A complex financial instrument vital to the functioning of a modern economy in the way it spreads risk among consenting parties. (Greenspan, A., pre-Sept. 2008.) 2. A complex financial instrument that nearly destroyed modern capitalism (Greenspan, A., post-Sept. 2008).
CREDIT LINE, n. A set amount of borrowed money available only to those who don’t need it.
CREDIT-RATING FIRMS, n. Firms that do scant rating of people with scant credit.
DEFICIT, n. For the party in power, at worst a minor irritant and at best a precondition for economic growth. For the minority, the gravest threat to the stability of the Republic.
TOO BIG TO FAIL, idiom. Banks, insurance companies, car companies, presidential approval ratings, Fed chairmen seeking second terms, other people who think they should be Fed chairman, the reputations of people who’d be responsible for letting things fail. Antonym: TOO BORING TO SAVE.
via Barry Rithotz
Here’s a nice graph, courtesy of Brad DeLong, of household incomes going back 40 years or so. These are inflation adjusted (for some definition of inflation). Click for a bigger version.
KQED’s Forum had a semi-interesting hour yesterday called Election in Japan. Their description:
After 50-plus years of nearly unbroken rule, Japan’s conservative Liberal Democratic Party met defeat by the more liberal Democratic Party in the recent election. With record joblessness and an aging population, what challenges and opportunities might the new Japanese government face?
Host: Michael Krasny
- Daniel Okimoto, chairman of the Sterling Stamos Global Institute and director emeritus of the Shorenstein Asia-Pacific Research Center
- Michael Zielenziger, journalist, visiting scholar at UC Berkeley’s Institute of International Studies and author of “Shutting Out the Sun: How Japan Created Its Own Lost Generation”
- Sheila Smith, senior fellow for Japan studies at the Council on Foreign Relations
However, you’ll no doubt have noticed the red-flag phrase “record joblessness and an aging population” in the program’s description. Conveniently, Dean Baker (who else?) knocked down similar nonsense a day earlier. It’s a pity that Krasny and his guests didn’t read it, or any of the many other posts Baker has done on the general subject.
This is very fashionable to say in all the news coverage on Japan (a “worrying rise of the world’s oldest population,” A), but it’s not clear what it means. The concern is that Japan will not have a large enough workforce to support its dependent elderly population. There is no evidence of that problem at present, when the unemployment is a historically high (for Japan) unemployment rate of 5.7 percent.
As a more general issue, a relative decline in the size of the labor force would simply mean that the least productive jobs go unfilled. This could mean, for example, that jobs held by the pushers who shove people into Tokyo’s overcrowded subways may go unfilled. There may be fewer people working as parking lot attendants, custodians in office buildings and convenience store clerks. As an offset, this densely populated country, with very high land prices, will become less densely populated and have lower land prices. It will also be much easier for Japan to reduce its greenhouse gas emissions and other pollutants. It is difficult to see where the crisis lies.
Of course one reason that Japan has such an old population is that its life expectancy is so long. At 82.1 years its life expectancy at birth is four years longer than that of the United States. It is also worth noting that, despite a debt to GDP ratio of more than 180 percent, its annual interest burden is less than that of the United States.
James Galbraith in the Washington Monthly, reviewing David Wessel’s In Fed We Trust: Ben Bernanke’s War on the Great Panic.
Thus, in the phrase that forms the second subtitle of this book, “the Federal Reserve became the fourth branch of government.” And the system survived.
Or did it?
The first question is: Did the system actually survive? It is true that checks still clear, that incipient runs on small banks and money markets were stopped, that neither the dollar nor the euro collapsed, and that the major commercial banks were not nationalized. But does all this add up to survival of finance capitalism as we knew it? Can we expect, with moderate passage of time, that households will resume borrowing, banks will resume lending, and that before long we will pick up the pattern of our economic lives as before?
Or does the fact that the Federal Reserve was prompted, in the heat of the crisis, to issue trillions of direct loans to private institutions fundamentally strip away the capitalist character of the system? Are we left with a system of large institutions of doubtful solvency, state dependent, unable to function without an implicit public guarantee, and therefore also needing government approval for their actions? If so, how is this system different from that in, say, the People’s Republic of China? Wessel notes that Chinese observers described the result as “socialism with American characteristics.” It’s not necessarily a joke.
You remember back in December we looked at a graph of the then-collapsing Baltic Dry Index? Just out of general interest, here’s an update. (Click it for a larger view.)
I’ve had a post from Matthew Yglesias lying around for several months. I’m not sure what to make of it all, except that much of our impression of economic “progress” for the last decade or so is illusory, most intriguingly productivity. This has implications beyond my depth.
The post comes from a presentation by Michael Mandel of Business Week.
But if the gains from Internet Decade productivity growth didn’t go to labor and didn’t go to capital, then where did they go? His thesis is that it largely didn’t exist at all. The extra money went into increased costs of health care (while wages have been flat, “total compensation” has gone up because employer-side health insurance premiums are higher) but health care isn’t actually dramatically better than it was ten years ago. Mandel doesn’t put it this way, but you can understand the situation as real, but modest, productivity gains being essentially offset by the decreasing productivity of the health care sector. Instead of really growing, we’ve just been borrowing from foreigners who were willing to invest on the theory that America was going to produce awesome innovations in the IT and biotech sectors that never really panned out.
Herewith three of Mandel’s slides:
If I were more ambitious, or at least had more time on my hands, I’d look for data going back a little farther, 1950, say, or at least 1970. Stories about productivity growth have had great explanatory value. If they’re wrong, then we need new explanations.
This is a whole lot longer than I’d ordinarily be willing to quote entirely, but I feel justified because Ms Smith is obviously channeling me here.
Seriously, it’s a long, depressing list, and I can’t find anything in it to disagree with.
I don’t believe in market calls, and trying to time turns is a perilous game. But most savvy people I know have been skeptical of this rally, beyond the initial strong bounce off the bottom. It has not had the characteristics of a bull market. Volumes have been underwhelming, no new leadership group has emerged, and as greybeards like to point out, comparatively short, large amplitude rallies are a bear market speciality.
In addition, this one has had some troubling features. Most notable has been the almost insistent media cheerleading, particularly from atypical venues for that sort of thing, like Bloomberg. Investors who are not at all the conspiracy-minded sort wonder if there has been an official hand in the “almost nary a bad word will be said” news posture. Tyler Durden has regularly claimed that major trading desks have been actively squeezing shorts. There have been far too many days with suspicious end of session rallies.
The fall in the markets overnight, particularly the 5.8% drop in Shanghai, seems significant in combination with other factors:
More bank woes. We may be two thirds of the way through the losses, but it could also be as little as half. And despite the stress test baloney, the banking system is undercapitalized by a large margin. Even if the remaining writedowns are smaller in absolute terms than what is, past, they dig deeper into depleted equity bases. Colonial Bank, a $25 billion bank taken out last Friday, was deemed well capitalized until recently. We noted its much bigger neighbor, $140 billion Regions Bank, similarly deemed to be well capitalized, has effectively said it is insolvent How many other banks are broke save thanks to overly permissive accounting? And as we have noted before, the IMF in a study of 124 banking crises, found that regulatory forbearance, which is econ speak for letting the halt and lame limp along rather than taking them out, is far more costly, both in terms of lost growth and size of the ultimate bank recapitalization, than earlier action.
Consumers tapped out. The lousy retail sales report was a reminder of a rather central fact most have chosen to forget.
Foreclosures set to rise. We are not having a housing bounce. Some markets may be close to a bottom, but foreclosures grind on. Even if some local markets are at their nadir, there is so much overhang, between continuing mortgage stress and pent up sales, that much appreciation near term is unlikely. The record of past severe financial crises is that real estate takes over five years to bottom.
Fed in a box. Some e-mail chat pointed out a key fact: the term structure of US funding has gotten very short term. We have become in some ways like a massive bank, borrowing short and lending long. This means the idea of allowing rates to rise on the short end, which has to happen unless we stay in Japanese ZIRP land indefinitely, will be more disruptive than the Fed seems to appreciate.
More AIG losses, I am told more AIG losses are in the offing. There is still unused money out of the total alloted to the rescue, so any eruptions here may not require further official action, but it would have a bad impact on the collective mood, and further taint any efforts to shore up the financial system.
Lack of political leadership. The health care fiasco is going to be a defining event for Obama, in a negative way. His inability to respond effectively to simply absurd distortions of his plan and of the record of public supported programs overseas (including that many are government funded but still privately run, for instance) may dispel the illusion that he is or can be an effective leader. His banking policy, which is vital to recovery, became hostage to Geithner and Summer’s deep loyalty to the industry, and his lack or interest in rocking any boats. All Team Obama has done on the banking front is write a lot of blank check, hold some bogus “stress tests” in lieu of doing the real thing, and raise a stink on a few symbolic issues to try to paper over the failure to embark on real and badly needed reforms.
Ed Harrison has called him a black Herbert Hoover. If the economy takes another down leg, it will further confirm his inability to do anything other than compromise and try to spin it as success. The confidence game worked when he was a new President, but nice talk and not much action is already wearing thin. We could use someone at the helm who is willing to plot a course and stick with it, and instead what we have is someone long on charisma and short on resolve.
It’s nice to hear a story like this and then find that Dean Baker has dealt with it before I even got out of bed.
NPR did a segment this morning asking whether the U.S. economy would likely develop to be more like Europe’s. At one point it presents the comment of the employee of a German software company, that he wished Germany’s economy was “more dynamic.”
While the media frequently repeat lines like this, it is not clear what they mean. The productivity experience of Europe and the United States over the last quarter century has been comparable. If small business is viewed as the key measure of dynamism than the United States lags badly.
A much larger share of the workforce is employed in small businesses in most European countries than in the United States. This could reflect the fact that many potential small entrepreneurs in the United States don’t want to take the risk of going without health insurance.
A variation on a Dean Baker theme that bears repeating. Once you start noticing them, you’ll hear warnings about the hazards of a slowdown in population growth all over the place.
Some time back I reviewed Herman Daly’s 1997 Beyond Growth for a local wood-chip-based publication. In it, Daly argues (I oversimplify) for a move from quantitative to qualitative growth. It’s still useful; check it out.
This time the problem child is South Korea, which the Post tells us will have the oldest population on the planet by 2050. They may not have enough people to work as valet parkers at restaurants or the mid-night shift at convenience stores. This sounds very scary. Just imagine, a low unemployment rate and high wage; what a disaster!
The decline in South Korea’s saving rate, which is the main issue in the story, turns out to be much less of a story when you read through it. According to the article, one reason for the low saving rate is the large amount of money that Koreans spend on education in the form of private schools, tutors, and other expenditures to ensure that children do well in school.
In GDP accounts, education spending by households is counted as consumption. In reality, it is a form of investment. More educated workers are more productive workers. If the next generation of South Koreans all have the equivalent of medical degrees or PhDs, they will not have to worry about their lack of saving.
There’s more, of course; this is the last graf.
… All of this doesn’t necessarily mean that socialized medicine, or even single-payer, is the only way to go. There are a number of successful health-care systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.
No, I am not kidding. The Washington Post (Fox on 15th Street) applauded the big profits at Goldman, which will mean bonuses in the tens of millions of dollars for top performers. Goldman is able to make these payouts because it won with the bets that it made with taxpayers’ money. We all know what would have happened if Goldman lost on these bets.
(If you answered something like bankruptcy and unemployed managers, you obviously know nothing about modern economics.)
We need to be reminded of this from time to time. Dean Baker does the reminding today.
… There had been some debate in the 90s about whether small businesses were responsible for a disproportionate share of job creation. While this is true, small businesses are also responsible for a disproportionate share of job loss. Most small businesses only survive a few years. As a result, small businesses on net, create new jobs at roughly the same rate as larger businesses. …
Via Barry Ritholtz. This should be fun.
Way back when, I mentioned there was a surprise coming S&P’s way. Since it is now out there officially, I can discuss it publicly.
After the brouhaha with McGraw Hill began, I was contacted by numerous people — mostly readers emailing words of support. But a few West Coast lawyer types seemed to be asking lots of questions, and revealing little.
I poked around with some law firms in California, and started to pick up the rumor that California Public Employees’ Retirement System (CalPERS) was going to drop the bomb on S&P, Moody’s and Fitch. No one would say anything on the record, but it was clear that litigation was being considered as an option against the Ratings Agencies.
Here is the money quote:
The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied…”
“The ratings agencies no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible,” according to the CalPERS suit.
Now, here comes the fun part: CalPERS doesn’t give a rat’s ass about the money. Sure, the financial instruments at hand (Cheyne Finance, Stanfield Victoria Funding and Sigma Finance) have defaulted on their payment obligations. The losses to Calpers are ~$1 billion.
But that’s not what’s going on here: These Left Coasters want their pound of flesh. They don’t care for the Ratings Agency folks, and consider them a blight on the investment landscape.
The goal of the litigation (as I see it) isn’t to make the rating agencies pay a financial penalty; rather, it is to publicly try them just as the regulatory rules are being rewritten. I also predict that CalPERS is going to attempt to not just win, but humiliate these agencies, call them out in the most embarrassing way possible, trash the senior executives, and make things very uncomfortable in general for these firms.
Not to mention ½ of 1% of GDP.
USA Today listed several items that gave readers a basis for assessing the size of the $1 trillion health care bill being debated in the House. It would have been useful to compare the cost to projected GDP over the decade.
GDP is projected to be approximately $190 trillion over the next decade. This means that the cost will be approximately 0.5 percent of projected GDP. By contrast, the combined cost of the Iraq and Afghan wars have been close to 1.0 percent of GDP. This means that the health care bill will cost approximately half as much as the Iraq War.
Dean Baker’s nut graf:
… The total loss in demand is around $1,350 billion. The annual stimulus in the bill approved in February was around $300 billion. $300 billion in stimulus is not nearly enough to fill a $1,350 billion shortfall in demand. …
Robert Reich’s post (here yesterday) has gotten a lot of play in the econoblogosphere. Here’s a sampling.
First up: Felix Salmon:
This is related to Mohamed El-Erian’s “new normal” idea — while previous recessions were part of economic cycles within a certain economy, what we’re going through right now is a painful disruption from that economy to something else. I fear that the flat or declining median wages, however, might well survive the transition — at least so long as unemployment continues to remain as high as it is now. Which is one reason not to worry overmuch about inflation: if consumer spending accounts for 70% of the economy, and consumers don’t have any money, it’s really hard for prices to rise very quickly.
Followed by Mark Thoma: Don’t Expect a Quick Recovery
One of the reasons I’ve argued this recovery will be slow is that we cannot simply bounce back to where we were before the problems started as we could in some past recessions. We need to move resources out of housing, out of finance, and out of autos, and those resources need to find productive employment elsewhere in new or growing industries, and that is not very likely until things improve. Consumers need to save more and consume less, as they are starting to do, and this too will require adjustment. So does this mean we should expect a U-shaped recovery instead of a V-shaped recovery? Robert Reich says it’s neither, this is an X-recovery.
Calculated Risk isn’t quite so pessimistic, but then again not exactly upbeat.
Eventually the economy will start growing again … but I think the “recovery” will be very sluggish.
Kevin Drum: The New Economy?
For many years it’s looked as if we were getting closer and closer to an economy in which there flatly wasn’t enough unskilled work left to keep employment at normal levels. Stagnant median wages were the canary in the coal mine, with permanently higher unemployment coming in the future. But I dunno: maybe the future is now.
I’ll write more about this later so that everyone can tell me where I’m wrong. At least, I hope I’m wrong. We’ll see.
And links from Josh Marshall and John Cole.
I don’t exactly have a fair and balanced reading list. But I’m not hearing anyone jump up and shout, “Green shoots!”
Robert Reich. Don’t you have the sneaking suspicion (if not the outright conviction) that he’s right?
The so-called “green shoots” of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.
Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.
That’s where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.
Personally, I don’t buy into either camp. In a recession this deep, recovery doesn’t depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.
Problem is, consumers won’t start spending until they have money in their pockets and feel reasonably secure. But they don’t have the money, and it’s hard to see where it will come from. They can’t borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water — owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can’t are hunkering down, as they must.
Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can’t be built on replacements. Don’t expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don’t rely on exports. The global economy is contracting.
My prediction, then? Not a V, not a U. But an X. This economy can’t get back on track because the track we were on for years — featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere — simply cannot be sustained.
The X marks a brand new track — a new economy. What will it look like? Nobody knows. All we know is the current economy can’t “recover” because it can’t go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.