Yves Smith on Krugman on Jobs

by Dollars and Sense

From the fantastic Yves Smith at Naked Capitalism:

Krugman on the Need for Jobs Policies

Paul Krugman has a good op-ed tonight on how Germany has fared versus the US in the global financial crisis. Recall that there was much hectoring of Germany early on, for its failure to enact stimulus programs. German readers were puzzled, since Germany has a lot of social safety nets that serve as automatic counter-cyclical programs. As an aside I visited a few cities in Germany on the Rhine and Danube in June (unfortunately in heavy book writing mode, and so did not get to see as much as I would have liked) and it was remarkable how there were no evident signs of the downturn: no shuttered retail stores, no signs of deterioration in public services, stores and restaurants looked reasonably busy (although I had no idea of what norms there might be).

Krugman holds Germany up as an example of the merits of employment oriented policies (which had been the norm in America prior to the shift to "markets know best" posture (and more aggressive anti-union policies) inaugurated by Reagan:

Consider, for a moment, a tale of two countries. Both have suffered a severe recession and lost jobs as a result—but not on the same scale. In Country A, employment has fallen more than 5 percent, and the unemployment rate has more than doubled. In Country B, employment has fallen only half a percent, and unemployment is only slightly higher than it was before the crisis.

Don't you think Country A might have something to learn from Country B?

This story isn't hypothetical. Country A is the United States, where stocks are up, G.D.P. is rising, but the terrible employment situation just keeps getting worse. Country B is Germany, which took a hit to its G.D.P. when world trade collapsed, but has been remarkably successful at avoiding mass job losses. Germany's jobs miracle hasn't received much attention in this country—but it's real, it's striking, and it raises serious questions about whether the U.S. government is doing the right things to fight unemployment....

Germany came into the Great Recession with strong employment protection legislation. This has been supplemented with a "short-time work scheme," which provides subsidies to employers who reduce workers' hours rather than laying them off. These measures didn't prevent a nasty recession, but Germany got through the recession with remarkably few job losses.

Should America be trying anything along these lines? In a recent interview, Lawrence Summers, the Obama administration's highest-ranking economist, was dismissive: "It may be desirable to have a given amount of work shared among more people. But that's not as desirable as expanding the total amount of work." True. But we are not, in fact, expanding the total amount of work—and Congress doesn't seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn't we be considering other measures, if only as a stopgap?

Now, the usual objection to European-style employment policies is that they're bad for long-run growth—that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there's something to be said for American-style "free to lose" labor markets, in which employers can fire workers at will but also face few barriers to new hiring.

Yves here. Krugman does Germany an injustice by failing to contest US prejudices about European (particularly German) labor practices. If German labor practices are so terrible, then how was Germany an export powerhouse, able to punch above its weight versus Japan and China, while the US, with our supposedly great advantage of more flexible (and therefore cheaper) labor, has run chronic and large current account deficits? And why is Germany a hotbed of successful entrepreneurial companies, its famed Mittelstand? If Germany was such a terrible place to do business, wouldn't they have hollowed out manufacturing just as the US has done? Might it be that there are unrecognized pluses of not being able to fire workers at will, that the company and the employees recognize that they are in the same boat, and the company has more reason to invest in its employees (ignore the US nonsense "employees are our asset," another line from the corporate Ministry of Truth).

A different example. A US colleague was sent to Paris to turn around a medical database business (spanning 11 timezones). She succeeded. Now American managers don't know how to turn around businesses without firing people, which was not an option for her. I submit that no one is willing to consider that the vaunted US labor market flexibility has produced lower skilled managers, one who resort to the simple expedient of expanding or contracting the workforce (which is actually pretty disruptive and results in the loss of skills and know-how) rather than learning how to manage a business with more foresight and in a more organic fashion because the business is defined to a large degree around its employees.

Read the original post.

Labels: fiscal stimulus, Germany, jobs, Paul Krugman, unemployment, Yves Smith

 

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11/13/2009 03:52:00 PM 0 comments

 

Laura Tyson: Second Stimulus May Be Needed

by Dollars and Sense

Bloomberg is reporting that Obama administration economic advisor Laura Tyson said in a speech in Singapore that a second stimulus package may be needed. (More on this by Edward Harrison of Credit Writedowns; see the Bloomberg story below.) Given that the original stimulus package assumed that the unemployment rate wouldn't get above 8% (it's now 9.5%, and will surely be in the double digits soon, and for a while), it seems like an understatement when Tyson says that the original stimulus is "a bit too small."

Meanwhile, today's New York Times reports that France's stimulus focused on "shovel-ready" projects, many of which are well underway already. The article has pictures of work being done on the Grand Commune at Versailles. "As it turns out, France's more centralized, state-directed economy—so often criticized in good times for smothering entrepreneurship and holding back growth—is proving remarkably effective at deploying funds quickly and efficiently in bad times."

Here's that Bloomberg article:

Obama Adviser Says U.S. Should Mull Second Stimulus

By Shamim Adam

July 7 (Bloomberg) -- The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was "a bit too small," said Laura Tyson, an outside adviser to President Barack Obama.

The current plan "will have a positive effect, but the real economy is a sicker patient," Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

Tyson's comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect. The government is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest in almost 26 years.

Obama said last month that a second package isn't needed yet, though he expects the jobless rate will exceed 10 percent this year. When Obama signed the first stimulus bill in February, his chief economic advisers forecast it would help hold the rate below 8 percent.

Unemployment increased to 9.5 percent in June, the highest since August 1983. The world's largest economy has lost about 6.5 million jobs since December 2007.

Worse Than Forecast

"The economy is worse than we forecast on which the stimulus program was based," Tyson, who is a member of Obama's Economic Recovery Advisory board, told the Nomura Equity Forum. "We probably have already 2.5 million more job losses than anticipated."

Republicans, including House Minority Leader John Boehner of Ohio, seized on the latest labor numbers to attack the Obama administration's handling of the economy.

Even Democrats have bemoaned the pace of the package's implementation. House Majority Leader Steny Hoyer, a Maryland Democrat, said on "Fox News Sunday" June 5 that congressional Democrats are "disappointed" stimulus funds weren't distributed faster.

"The money is just really starting to come out in more significant amounts now," Tyson said. "The stimulus is performing close to expectations but not in timing."

Package Affordable

Tyson, 62, later told reporters that the U.S. can afford to pay for a second package, even as the fiscal deficit soars. She said the budget shortfall is "likely to be worse" than the equivalent of 12 percent of gross domestic product that the administration forecast for 2009 and the 8 percent to 9 percent it projected for next year.

The professor at the University of California's Walter A. Haas School of Business downplayed worries from China and other countries with dollar reserves that the U.S. will let inflation soar as the deficit expands.

"The concern is that the U.S. will have to inflate away its debt. I do not think that is a valid concern," she said. "The Federal Reserve is not going to let the U.S. government inflate away its debt."

The U.S. needs to communicate its determination to reduce the annual shortfall once the economy recovers, she said.

While unemployment is worsening, other data have shown the economy is improving. U.S. manufacturing shrank last month at the slowest rate since August, according to the Institute for Supply Management's factory index, and a measure of pending home sales advanced in May for a fourth month.

Tyson said the U.S. should shift away from its dependence on consumption to grow, and promote expansion through investment and exports. The dollar will need to weaken in the longer term to promote export-led growth, she said.

Read the original article.

Labels: fiscal stimulus, France, Laura Tyson, stimulus package, Versailles

 

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7/07/2009 03:19:00 PM 0 comments

 

Incomes Surge, Wages and Salaries Fall

by Dollars and Sense

This is entirely due to the administration's one off $250 payments to various groups receiving government benefits like Social Security; otherwise, the figures were noteworthy because they document that workers received their first quarterly drop in wages in 50 years. Also: savings increased to an almost unheard-of (well, not for more than a decade) 7%, which sits uneasily with the green shoots notions of recovery, dependent as they are on a sustained revival in consumer spending and, especially, in housing. From the Financial Times:

US incomes surge as stimulus kicks in

By Alan Rappeport in New York
Financial Times
Published: June 26 2009 14:16 | Last updated: June 26 2009 15:33

Personal income in the US surged in May thanks to an infusion of government stimulus funds, while consumers raised their spending modestly as confidence about the state of the economy continues to improve.

However, most of the monthly rise was the result of Federal benefit transfers and lower taxes. Americans, still facing rising job cuts and falling home prices, have been hoarding most of the additional funds, lifting the savings rate to a 16-year high in May.

Households are reverting to a more sustainable spending path vis-à-vis income that allows scope for paying down debt and adding to savings,” said Joshua Shapiro, chief US economist at MFR.

Official figures showed on Friday that incomes jumped by 1.4 per cent last month, or $167.1bn, beating economists' expectations and doubling the previous month’s revised rise of 0.7 per cent.

Read the rest of the article

Labels: baillout, financial crisis, fiscal stimulus, personal income guarantee, savings and loan crisis

 

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6/27/2009 10:41:00 AM 0 comments

 

Two Views of the Crisis

by Dollars and Sense

A brief, clear comparison from Simon Johnson on the Baseline Scenario blog:

There are two views of the global financial crisis and—more importantly—of what comes next. The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond. The second is quite unofficial—no government official has yet been found anywhere near this position. Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold.

The official view is that a rare and unfortunate accident occurred in the fall of 2008. The heart of the world’s financial system, in and around the United States, suddenly became unstable. Presumably this instability had a cause—and most official statements begin with “the crisis had many causes”—but this is less important than the need for immediate and overwhelming macroeconomic policy action.

The official strategy, for example as stated clearly by Larry Summers is to support the banking system with all the financial means at the disposal of the official sector. This includes large amounts of cash, courtesy of Federal Reserve credits; repeated attempts to remove “bad assets” in some form or other, and—the apparent masterstroke—regulatory forbearance, as signaled through the recent stress tests.

But most important, it includes a massive fiscal stimulus implying, when all is said and done, that debt/GDP in the United States will roughly double (from 41% of GDP initially, up towards 80% of GDP).

Not surprisingly, funneling unlimited and essentially unconditional resources into the financial sector has buoyed confidence in both that sector and at least temporarily helped shore up confidence in financial markets more broadly.

And now, in striking contrast to the dramatic action they call for on the macroeconomic/bailout front, the official consensus claims relatively small adjustments to our regulatory system will be enough to close the case—and presumably prevent further recurrence of problems on this scale. If the exact causes and presumed redress are lost in mind-numbingly long list of adjustments, so much the better.

This is, after all, a crisis of experts—they deregulated, they ran risk management at major financial firms, they opined at board meetings—and now they have fixed it.

Maybe.

The second view, of course, is rather more skeptical regarding whether we are really out of crisis in any meaningful sense. In this view, the underlying cause of the crisis is much simpler—the economic supersizing of finance in the United States and elsewhere, as manifest particularly in the rise of big banks to positions of extraordinary political and cultural power.

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution. At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs. More likely, the Mother of All Bailouts is storing up serious problems for the near-term future.

We’ll double our national debt (as a percent of GDP), and for what? To further entrench a rent-seeking set of firms that the government determined are “too big to fail,” but will not now take any steps to break up or otherwise limit their size.

We need to disengage from a financial sector that has become unsustainably large (see slides before and after #19; the cross-country data should be handled with care). We can do this in various ways; there is no need to be dogmatic about any potential approach—if it works politically, do it. But the various current proposals for dealing with this issue—both from the administration and the leading committees of Congress—would make essentially zero progress.

As moving in this direction does not seem imminent, the probable consequences or—if you prefer—collateral damage looks horrible. You can see it as higher taxes in the future, lower growth, a bigger drag on our innovative capacity, fewer startups, and less genuinely productive entrepreneurship. Plenty of people will be hurt, and they are starting to figure this out—and to think harder about what needs to be done and by whom.

“Small enough to fail” may well prevail eventually—at least sensible ideas have won through in past US episodes—but it will take a while. The official consensus always seems immutable, right up until the moment it changes completely and forever.

Go to the original blog for links, including the slides he mentions.

Labels: bailout, banking crisis, banking regulation, Baseline Scenario, deregulation, finance sector, financial crisis, financial regulation, fiscal stimulus, larry Summers

 

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6/23/2009 09:57:00 AM 0 comments

 

Stiglitz On the Fiscal Crisis Of the State

by Dollars and Sense

From Common Dreams:

Fiscal Plan Fails both Markets and Taxpayers

by Joseph E. Stiglitz

Let's be clear: President Barack Obama inherited an economy in freefall and could not possibly have turned things around in the short time since his election. Unfortunately, what he is doing is not enough.

The real failings in the Obama recovery program lie not in the stimulus package -- though it is too heavily weighted toward tax cuts, and much of it merely offsets cutbacks by states -- but in its efforts to revive financial markets. America's failures provide important lessons to countries around the world that are or will be facing increasing problems with their banks:

* Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
* Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health.

* Confidence is important, but it must rest on sound fundamentals. Policies must not be based on the fiction that good loans were made, and that the business acumen of financial-market leaders and regulators will be validated once confidence is restored.
* Bankers can be expected to act in their self-interest on the basis of incentives. Perverse incentives fueled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
* Socializing losses while privatizing gains is more worrisome than the consequences of nationalizing banks. American taxpayers are getting an increasingly bad deal. In the first round of cash infusions, they got about 67 cents in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). But in the recent cash infusions, it is estimated that Americans are getting 25 cents, or less, for every dollar. Bad terms mean a large national debt in the future.
* Don't confuse saving bankers and shareholders with saving banks. America could have saved its banks, but let the shareholders go, for far less than it has spent.
* Trickle-down economics almost never works. Throwing money at the banks hasn't helped homeowners: foreclosures continue to increase. Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important. One of the reasons we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
* Lack of transparency got America's financial system into this trouble. Lack of transparency will not get it out. The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks' bad assets. But this will not establish ''market prices,'' as the administration claims. Banks' losses have already occurred, and their gains must now come at taxpayers' expense. Bringing in hedge funds as third parties will simply increase the cost.
* Better to be forward looking than backward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity.

There is no "mystique" in finance: The era of believing that something can be created out of nothing should be over. Short-sighted responses by politicians -- who hope to get by with a deal that is small enough to please taxpayers and large enough to please the banks -- will merely prolong the problem.

An impasse is looming. More money will be needed, but Americans are in no mood to provide it -- certainly not on the terms that we have seen The well of money may be running dry, and so, too, may be America's legendary optimism and hope.

Labels: fiscal policy, fiscal stimulus, Joseph Stiglitz

 

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3/24/2009 07:21:00 PM 0 comments

 

Foreign Firms Want Piece of Stimulus Pie

by Dollars and Sense

With Congress doling out $787 billion in stimulus money, foreign firms figure that no one will mind if they get some of it. And they'll probably only take 40% or so out of the country. All you need to win is a U.S. subsidiary, some well-placed lobbyists, and a dream.

From the Washington Post:

Spain's Prince Felipe and his wife, Princess Letizia, visited New York and Washington last week on an unusual mission for one of Europe's most glamorous celebrity couples: to drum up business for Spanish companies from the U.S. economic stimulus package.

"Only by working together with U.S. businesses and government, as well as coordinating our needs and priorities, can we get our countries, and world, back on track," Felipe said at a Manhattan business luncheon, which also featured former vice president Al Gore.

U.S. firms are not the only ones hoping to cash in on the $787 billion stimulus program. Foreign nations and companies are stepping up their lobbying efforts in Washington and in state capitals, hoping to gain vital business in hard times. Hundreds of foreign-owned companies, many of them with significant operations in the United States, are selling their expertise in clean energy, high-speed transit and other technologies that undergird key aspects of President Obama's stimulus efforts.
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Meanwhile, foreign companies, trade ministries and business groups are proceeding cautiously for fear of stoking nationalistic objections from U.S. lawmakers and their constituents. Lobbyists and consultants hired by the companies are warning them to proceed carefully and to emphasize that any contracts would lead to jobs in the United States rather than overseas.

...

But such firms are admittedly nervous about the idea of publicly angling for U.S. stimulus money, fearing the kind of political uproar that erupted in 2006 over plans by a United Arab Emirates-owned company to take over management of six U.S. seaports. In recent weeks, some lawmakers have objected to the revelation that billions of dollars in bailout money for American International Group ended up in the vaults of foreign-owned banks to which the company owed money.

...

If a foreign firm received a stimulus-related contract, most of the wages and product purchases would stay within the United States. But some portion, perhaps up to 40 percent, could leave the country, trade experts said.

Labels: economic stimulus, fiscal stimulus, stimulus package

 

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3/23/2009 01:34:00 PM 0 comments

 

Christina Romer Defends Fiscal Stimulus

by Dollars and Sense

Romer is chair of the president’s Council of Economic Advisers (and an economic historian at Berkeley). In a talk at the Brookings Institution on Monday, she took on the crowd claiming that Keynesian fiscal stimulus policies failed in the 1930s:

I wrote a paper in 1992 that said that fiscal policy was not the key engine of recovery in the Depression. From this, some have concluded that I do not believe fiscal policy can work today or could have worked in the 1930s. Nothing could be farther from the truth. My argument paralleled E. Cary Brown’s famous conclusion that in the Great Depression, fiscal policy failed to generate recovery “not because it does not work, but because it was not tried.” The key fact is that while Roosevelt’s fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem.

A good omen for fiscal policy.

Alas, her remarks were disappointing on the deeper question of the causes of the crisis:

Most obviously, like the Great Depression, today’s downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions.

Too bad she didn't talk about the steep rise in inequality; stagnant real wages; households’ expanding use of credit to fill the gap between those stagnant wages and rising living costs; excess capacity and overproduction...

Read the whole talk here.

Labels: Christina Romer, fiscal policy, fiscal stimulus, Great Depression, Keynesianism

 

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3/11/2009 11:49:00 AM 0 comments

 

Obama's ($1.7 Trn Deficit) First Budget

by Dollars and Sense

From The Financial Times:

Obama forecasts $1,750bn deficit
By Andrew Ward and Edward Luce in Washington
Published: February 26 2009 11:24 | Last updated: February 27 2009 09:56
Financial Times

President Barack Obama on Thursday unveiled the most expansive blueprint for federal government involvement in the US economy in more than a generation in a ten-year budget outline that showed this year’s deficit quadrupling to $1,750bn.

The document, which lays out ambitious plans to create universal health insurance and adopt an economy-wide carbon permit trading system by 2012, was heavily panned by Republicans.

The budget would see George W. Bush’s tax cuts for the wealthiest expire by 2011 and introduce new tax increases on families earning $250,000 or more to pay for healthcare expansion.

In a sign of intense partisan battles to come, Mitch McConnell, the Republican leader in the Senate, where the US president needs supermajorities of at least 60 votes to push bills through, said: “Unfortunately, at this juncture, while the American people are tightening their belts, Washington seems to be taking its belt off."

The budget also allowed for about $750bn for "financial stabilisation efforts", on top of the $700bn already granted to Wall Street. The potential aid was shown as a net cost of $250bn because the government would anticipate recouping some of the money. Peter Orszag, White House budget director, said there were "no plans" to seek more aid for banks but the measure indicated it was a strong possibility.

The 134-page document outlines a legacy inherited from Mr Bush of what it calls "mismanagement and missed opportunities and of deep, structural problems ignored for too long".

Read the rest of the article

Labels: bailout, Barack Obama, budget, financia crisis, fiscal policy, fiscal stimulus, taxes

 

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2/27/2009 01:45:00 PM 1 comments

 

The Worst May Be Over...

by Dollars and Sense

Markets worldwide are reacting favorably to (from Reuters):


Interbank lending, stimulus provide hope in crisis

Monday, October 20, 2008
By Daniel Trotta

NEW YORK (Reuters) - Interbank lending emerged from deep freeze and Fed chairman Ben Bernanke gave his blessing to a second U.S. government stimulus package on Monday, providing hope the world's financial crisis may be easing.


The three-month Libor rate fell more than one-third of a percentage point, its biggest one-day drop in nine months in one sign that banks may have the confidence to lend to each other again, crucial to reactivating the world economy.


The chairman of the U.S. Federal Reserve told Congress on Monday that another wave of government spending may be needed as the economy limps through what could be an extended period of subpar growth.


Read the rest of the article

Labels: ben, financial crisis bailout, fiscal stimulus, interbank market, Reuters

 

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10/20/2008 11:34:00 AM 0 comments