Archive for the ‘Economics’ Category

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A Good Idea, But…

Monday, August 30th, 2010

Democrats and Republicans have competing views on how to end this recession. Democrats want more stimulus and government spending to increase demand for goods and services; Republicans want to cut taxes to encourage more spending on consumer goods.

But there is reason to think neither strategy will work.

Over the past 30 years, consumers have been spending more by going into debt assuming that increased value of assets such as homes will keep them solvent. But that created artificially high prices, especially in real estate and real estate-backed securities, that collapsed when the financial crisis hit. Thus, there has been a massive loss of wealth since the beginning of the recession which makes it harder for people and businesses to borrow money and makes it harder to service the debt they have already incurred. Until the level of debt held by individuals is brought into line with current income levels, spending will be sluggish no matter what the government does. According to  some economists, it may take 10 years to work of the excess debt in the economy.

So what to do about the recession? William Galston has the right idea:

A different era … How long will it take our policy makers and political parties to absorb the implications of that stark, undeniable phrase? When they do, they will realize that we have only two strategic options: Either we accept years of sluggish growth and high unemployment, or we shift to a new model that mobilizes the record level of private capital now sitting on the sidelines for public investments that will boost economic activity and employment in the short term, and economic productivity and growth in the long term, while generating rates of return sufficient to interest investors.

This is why we need a national infrastructure bank as the linchpin of a public investment strategy driven by economic analysis rather than congressional politics. Rather than bridges to nowhere, we need a bridge to the future. It’s time for hide-bound appropriators to get out of the way.

Our nation’s infrastructure is old and deteriorating. Now is the time to mobilize capital to rebuild it and put people back to work as well.

But what Galston fails to mention is that conservatives are likely to see a government supported infrastructure bank as more “socialism” since the idea is coming from Democrats.

Why would they be more welcoming toward this idea that any of the others Democrats have floated?

The problem is not a lack of ideas; the problem is Republican intransigence fed by public ignorance.

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Posted in Economics, Governance, Uncategorized | 1 Comment »

Lessons Unlearned

Monday, August 23rd, 2010

Economics professor Teresa Ghilarducci reports:

The shocking story in this week’s Financial Times had this lead: “Call center workers are becoming as cheap to hire in the U.S. as they are in India.” High unemployment in the U.S. has forced down wages for low-paid workers in the U.S. so that in many cases Americans are cheaper to hire than those in a country where most people live on less than $8.00 per day.

She links this story to another about an ongoing strike at a Dr. Pepper/Snapple factory in upstate New York where workers are attempting to prevent cuts in wages and pensions despite healthy company profits.

Unlike other companies that have gotten drastic pay cuts from union members when they opened their books to prove their economic distress—GM, Ford, Chrysler, Goodyear tire company—Dr Pepper Snapple admits they can afford to pay; but they argue (I imagine some with some smugness) that unemployment is so high that competition between desperate workers will boost profits further as workers accept less pay to get and keep a job.

Of course, if you are a free market fundamentalist you will find nothing wrong with this scenario. Workers deserve only those wages that the market will bear. If an increased supply of labor suppresses wages so be it.

But as Ghilarducci argues:

Falling wages is a bad thing, a very bad thing. Even if you are channeling gilded age Jay Gould—who said, “I can hire half of the working class to kill the other half”—you must concede that if workers don’t buy stuff, there is more unemployment, which means even lower wages, leading to more unemployment, in a spiral downward of recession and depression that eventually means you won’t be able buy stuff, no matter how cheap it is.

The only antidote to downward pressure on wages is a strong union movement. But most Americans hate unions and the power of unions has steadily eroded.

We have been through all of this before. Capitalism nearly destroyed itself in the early 20th Century because the business community refused to pay workers enough to create demand for their products. One of the reforms that helped produce mid-20th Century prosperity was laws that protected the right of workers to organize. But anti-union sentiment and globalization have conspired to take that option off the table.

Will capitalism have to learn the hard way again?

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Posted in Economics, Labor | No Comments »

How’s That Radical Socialist Agenda Workin’ for Ya?

Monday, August 2nd, 2010

The polls say that the public thinks government actions, taken over the past two years, to prevent the economy from collapsing were ineffective and unfair. Everybody hates the bailout of the financial industry, the stimulus package was just wasted taxpayer money, and the bailout of the automobile industry was an excessive government intervention in a private enterprise, according to this version of events.

This of course is precisely what Republicans said about these efforts (despite the fact that most of them voted for the bailout of the financial industry.)

Democrats have insisted that strong government action avoided a catastrophe, but somehow it is the Republican version of events that has captured the public “mind”’.

But what about the reality of the situation?

Two respected economists have tried to quantify the effects of the financial bailout and stimulus package.

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years.

“While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective,” they write. […] “When all is said and done, the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most had feared and not nearly as much as if policy makers had not acted at all,”

Zandi is no left wing economics professor. He was an advisor on economic policy to the McCain presidential campaign.

What about the Republican do-nothing approach? Would that have worked? Bender and Zandi write:

It is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government’s fiscal situation in far graver condition. We conclude that [Federal Reserve Chairman] Ben Bernanke was probably right when he said that “We came very close in October [2008] to Depression 2.0.”

As to the government bailout of the auto industry, when President Obama rescued the auto industry last year, Republicans claimed that not only would the government takeover not work and the taxpayer would have to foot the bill  but that this was a socialist agenda designed to destroy capitalism.

But as the Washington Post noted last week, “many of the critics have retreated from their sharpest attacks as they watch the auto industry once again turn a profit.”

In the first quarter of 2010, GM earned a quarterly profit of $865 million, its first since 2007. Chrysler reported an operating profit of $143 million over the same period.

Preliminary figures suggest that auto industry employment in the United States may reverse a decade of decline.  […]  Today, most of the government money is expected to be repaid, but the program’s ultimate cost was estimated by the administration in March to be $24.6 billion. Administration officials predict that the expected loss will fall as the companies in which the United States has an ownership stake grow in value.

General Motors is expected to have a public offering of stock as early as August; Chrysler’s is expected next year. The government investments could be repaid then.

And thousands of people are employed who would have lost their jobs had the government not intervened and the tax payer is much better off than without the intervention.

Of course Republicans are now trying to take credit for the policy. Senator Corker now says:

“The ideas [Republicans] laid out there were followed through,” Corker told the Washington Post. “I take some pleasure out of helping make that contribution.”

There dishonesty is breathtaking.

It is a good thing the adults were in charge last year. It might be a good thing to keep them in charge.

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Posted in Economics, Watching the Conservatives | No Comments »

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