Category Archives: Economics

While Hucksters Lead Us Into the Economic Abyss

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This piece from Freakonomics should scare the you-know-what out of anyone in this country with an ounce of sense:

If you follow the economic policy debate in the popular press, you would be excused for missing one of our best-kept secrets: There’s remarkable agreement among economists on most policy questions.  Unfortunately, this consensus remains obscured by the two laws of punditry: First, for any issue, there’s always at least one idiot willing to claim the spotlight to argue for it; and second, that idiot may sound more respectable if he calls himself an economist.

How does one fight the pundits? Well, some economists are trying to do it by regularly polling their counterparts of all ideologies about various issues and reporting on their findings:

Their “Economic Experts Panel” involves 40 of the leading economists across the US who have agreed to respond on the economic policy question du jour.  The panel involves a geographically and ideologically diverse array of leading economists working across different fields.  The main thing that unites them is that they are outstanding economists who care about public policy.  The most striking result is just how often even this very diverse group of economists agree, even when there’s stark disagreement in Washington. 

So what did they find? Among other things:

Let’s start with Obama’s stimulus. The standard Republican talking point is that it failed, meaning it didn’t reduce unemployment. Yet in a survey of leading economists conducted by the University of Chicago’s Booth School of Business, 92 percent agreed that the stimulus succeeded in reducing the jobless rate. On the harder question of whether the benefit exceeded the cost, more than half thought it did, one in three was uncertain, and fewer than one in six disagreed.

Or consider the widely despised bank bailouts. Populist politicians on both sides have taken to pounding the table against them (in many cases, only after voting for them). But while the public may not like them, there’s a striking consensus that they helped: The same survey found no economists willing to dispute the idea that the bailouts lowered unemployment.

The sad thing is this is literally the equivalent of a sick person being surrounded by doctors who know what's wrong with him, but rather than hear a proper diagnosis from a trained expert he only hears a prescribed cure from a bunch of drunken snake oil salesmen. When it comes to our economy isn't it about time we start hearing from the doctors directly?

Foreclosing the AARP Crowd

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The economic meltdown this country has been living through for the last four or five years has been especially cruel to those citizens who probably won't have time to make up for their losses once the economic recovery begins to pick up steam. If life's hard for those who are in their 30s and 40s, imagine what it's like for someone in his 50s or 60s, trying to figure out how to rebuild the nest egg that was obliterated by the market crash, long term unemployment, an underwater mortgage or all of the above. That's what makes this item so disheartening:

According to AARP:

  • About 600,000 people who are 50 years or older are in foreclosure.
  • About 625,000 in the same age group are at least three months behind on their mortgages.
  • About 3.5 million — 16 percent — are underwater, meaning their home values have gone down and they now owe more than their homes are worth.

AARP said that over the past five years, the proportion of seriously delinquent loans held by older Americans grew more than 450 percent.

If We Only Knew

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Four years after the economy melted down there's still a serious lack of understanding among the general populace as to the root causes of the collapse. It's not that the causes aren't well documented, they're just complex and opaque, and that's probably just as well as far as those driving the economic train are concerned. 

The latest example of this disconnect between economic cause and effect is the movement to blame seemingly every municipal deficit on public employees, their benefits and their unions. Obviously exploding pension obligations play a role in putting stress on the cities' or states' coffers, but those obligations were far from the only reason the municipalities started to bleed red ink. Thomas Ferguson explains in his article on AlterNet (h/t to Fec for the pointer):

What has driven cities and towns to the brink is not demands from their workforce but the collapse of national income and the ensuing fall in tax collections. Or, in other words, the Great Recession itself, for which Wall Street and the financial sector are principally to blame. But many powerful interests have jumped at the opportunity to use the crisis to eviscerate what’s left of the welfare state, roll back unionization to pre-New Deal levels, and keep cutting taxes on the wealthy. The litany of horror stories that now fills the media is ideal for their purposes…

At a time when cities and states are taking hatchets to services and manically raising fees and fares, the group’s analysis merits a closer look and a much, much wider audience.

Its starting point will be familiar to anyone who recalls the debate over financial “reform” of the last few years. In the bad old days of pre-2008 deregulated finance, bankers started pedaling hot new “structured finance” products that they claimed were perfect for the needs of clients who had thrived for decades using cheaper, plain vanilla bonds and loans. The new marvels – swaps and other forms of so-called “derivatives” whose values changed as other securities they referenced fluctuated in value – were often complex and frequently not priced in any actual market. Their buyers thus had difficulty understanding how they really worked or how they might be hurt by purchasing them...

The result, for years now, has been literally billions of dollars of losses for cities, states, and other local authorities, including school boards and state college loan agencies. Locked in by the termination fees, they can stay in the swaps and pay and pay as the banks’ payments to them dwindle. Or they can buy their way out of the swaps at preposterous prices – Morgenson indicated that New York State recently paid $243 million dollars to get out of some swaps, of which $191 million had to be borrowed.

One of the common themes found in almost every accounting of the financial meltdown has been the complexity of the financial products that Wall Street used, without oversight, to reap billions, if not trillions, of dollars in profits while setting the economy up for a massive fall. Who really knew what mortgage backed securities and credit default swaps were before the crisis? Very few people knew what they were, and even fewer understood how they worked, and that's why when it came time to start assessing blame it became a whole lot easier to point the finger at moderate-to-low income homeowners who took a too-good-to-be-true deal on their mortgages and then failed to make good. It was easy to blame them, the first dominoes, because the average person could understand what they did wrong. On the other hand the financial Masters of the Universe were happy to let the little guys take the fall while they hid behind the opaque curtain of financial shenanigans they'd hung around the rest of us.

And the banks' shenanigans were quite possibly intentional and coordinated. From Matt Taibbi at Rolling Stone (again h/t to Fec):

The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime…

USA v. Carollo involved classic cartel activity: not just one corrupt bank, but many, all acting in careful concert against the public interest. In the years since the economic crash of 2008, we've seen numerous hints that such orchestrated corruption exists. The collapses of Bear Stearns and Lehman Brothers, for instance, both pointed to coordi­nated attacks by powerful banks and hedge funds determined to speed the demise of those firms. In the bankruptcy of Jefferson County, Alabama, we learned that Goldman Sachs accepted a $3 million bribe from J.P. Morgan Chase to permit Chase to serve as the sole provider of toxic swap deals to the rubes running metropolitan Birmingham – "an open-and-shut case of anti-competitive behavior," as one former regulator described it.

Now let's be clear – if the banks' actions and the extent of their screwing of us were more easily understood we would probably have such a huge popular outcry against them that even our Wall Street-coddling Congress and Obama administration would be forced to go after their friends. As it is the average Joe is too busy trying to keep food on the table to pay much attention to this stuff, and quite frankly it's just easier to blame the deadbeat down the street than to try and figure out how guys in the pink ties and cuff links took him and the rest of us to the cleaners. Sadly the denizens of Wall Street continue to reap the rewards of their corrupt system while the rest of us get to eat cake.

If we only knew.

People vs. People

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Fec points to a piece at Naked Capitalism that takes the unions and President Obama to task for creating the environment that led to voters in two California cities, San Jose and San Diego, voting overwhelmingly to cut city employees' pensions:

This is not a Republican initiative – the San Diego Mayor is a Democrat.  And pension cuts like this are happening nationally, mostly with full support from voters in the Republican Party and a good chunk of the Democratic Party as well.  The union representing city workers, of course, went to the courts rather than pursuing a strategy of engagement with the public.  These unions will probably end up losing the fight, because they have no ability to persuade voters that they represent anything but a self-interested group of insiders.

The states and localities suffering from budget crises are having problems because Wall Street blew up the economy, and in many cases, ensnared these municipalities in extremely bad deals.  The wealth of taxpayers was and is being transferred to banks.  In 2008, the choice before Bush, and then Obama, was clear.  They could hand taxpayer resources to Wall Street and oversee a series of budget crises in states and localities, with the opportunity for later privatization of public assets and the breaking of public sector unions.  Or Bush, and then Obama, could crack down on Wall Street, and make sure that bailout monies went to states and localities, and, with record low interest rates, spur tremendous investment in new energy, infrastructure, and education initiatives.  It was a choice.  Bush picked Wall Street.  Obama also picked Wall Street, with public sector unions supporting Obama like turkeys cheering on Thanksgiving.

Now voters are making their own choice.  Once again, this is a direct consequence of how Barack Obama has led the Democratic Party and redefined liberalism, into a party and an ideology that is defined by wage cuts, foreclosures, debt, and acceptance of dramatic political and economic inequality.  Voters don’t want to pay for a government and for government workers who they perceive as out of step with their interests.

Maybe. Another consideration is that people tend to not like seeing people that they perceive to be peers, or even worse, people lower in class benefiting at their own expense:

Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.

In keeping with the notion of “last-place aversion”, the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the “rich” but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

It's awfully hard for the average person not to be resentful of a public employee, someone who is ostensibly your employee, pulling in a livable wage and "Cadillac" benefits while everybody else has watched their IRA evaporate in the heat of the Great Recession. It's even harder to accept that their taxes might have to go up to cover deficits that are caused in part by those benefits, so it's not surprising at all that people would vote to cut those same benefits.

Sure, the "macro" politics described in the Naked Capitalism piece played a role in creating the environment that led to the recent votes curtailing public pensions, but it would a mistake to ignore the role of "micro" politics in these results. Let's face it – people don't like seeing their neighbors doing better than they are.

Is Wealth Distribution a Problem?

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Dilbert creator Scott Adams has an interesting thought over at his blog:

Suppose you could snap your fingers and instantly reduce the huge disparity in income distribution across the globe. Would you do it?

Many of you will probably say yes. You'd take some of the "extra" money from the rich and use it to help the needy. But suppose I put one condition on this magic power of yours. Suppose the only thing you can do by magic is reduce by half the wealth of the top 1% while knowing the money would be transferred to no one. The money would simply cease to exist. The rich would have half as much, while everyone else remained the same. Would you use your powers then?

Of course he's right that burning half of Person A's money doesn't make Person B's life any better, but it's ludicrous to say that taking some of Person A's money and giving it to Person B wouldn't help make Person B's situation more comfortable. On the other hand giving Person B the money doesn't guaranatee he'll be any happier – money can't buy happiness and all that – but you can almost guarantee that Person B won't be any better off if Person A keeps all the money and helps engineer a system that insures that Person B won't have a chance to earn more money this year, next year and the years beyond.

Adams seems to be addressing the whole Occupy Wall Street – The 1% vs. The Rest of Us phenomenon, and focusing on the actual income disparity between the two groups in the process. That's a mistake. The real issue people have is with a system that appears rigged to insure that wealth continues to flow disproportionately to the already wealthy, and often to the detriment to those they employ. 

How can people not be enraged by a situation where executives garner huge financial rewards by running their companies for short term stock gains, without an eye towards long term health, and then walk away as their companies lay of thousands of employees in order to avoid bankruptcy? How can they not be disgusted by an economic/governmental system that rewards the executives who mismanaged their massive financial institutions to the point that it almost crashed the world economy? How can they not want to find a way to redistribute money from hedge fund managers who made their billions by not giving a flip about the common weal as they played with the economy like it was their own private bingo game?

Isn't it funny how you don't hear anyone complaining about how much the local car dealer, community banker, or restauranteur is making? No one cares because they can see what that person is contributing to the community, but that's not the case with the vast majority of the 1%, because most of them are perceived as leaches on the economy rather than contributors to it. That's probably not a fair assessment across the board, but in this world perception is reality and that's the perception many folks have of the 1% and that's why Adams' argument won't hold much water with the 99%.

Money Is an Illusion

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Daniel Suelo is a guy in Utah who gave up money in 2000 and started living in caves, eating roadkill, dumpster diving and living off the generosity of friends and strangers. Some would classify him as homeless, but are you truly homeless if you call your home a cave and live there on purpose? In watching the video below I was struck, as I always am by stories like this, that people who document these stories often fail to point out that although their subjects are living off the grid they are still dependant on the grid. Where did the dumpster come from that he's diving into? Some person or company who's living on the grid of course.

That nitpick aside I found one concept from the video to be thought provoking: when Suelo gave up money he declared that money was an illusion and the writer of his story asks, "When your house is worth $500,000 one day and $300,000 the next day where did that $200,000 go?" Indeed it seems like an illusion. 

They may be on to something. Watching PBS' excellent Frontline four-part series Money, Power and Wall Street it's hard not to think of money as an illusion when you hear about the creation of financial vehicles out of thin air. Rather than confuse ourselves trying to understand crazy things like synthetic collateralized debt obligations let's think of something as simple as our houses. We each believe our house is worth a certain amount of money; our local government believes it's worth a certain amount of money based on the (hopefully informed) opinion of a professional assessor; if we have a mortgage the bank believes it's worth a certain amount of money based on the opinon of its appraiser; rarely do these three values match, and so the true value of our house is merely an illusion.

But a house isn't money, it's an asset that is bought, sold and valued using money as a measurement. How could money, an actual dollar, be an illusion? Obviously that piece of fine paper it's printed on is not an illusion, but you could argue that what that piece of paper is worth is an illusion. Sure, we know that a dollar is worth 1/150,000 of a certain house (according to the appraiser), or that it's worth one candy bar, but that's today and that's because we think that our dollar will be worth roughly the same amount tomorrow as it is today. We trust that our government will not print one quadrillion dollars overnight and thus make that dollar in our pocket worth a penny tomorrow. That's a trust shared by all of us and all it takes is one violation of that trust for the perceived value to evaporate. So really a dollar is merely a token representing our collective opinion of the trustworthiness of our financial system – if that's not illusory I'm not sure what is.

Will Winston-Salem, Greensboro and High Point Punch Above Their Weight?

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An interesting piece in Foreign Policy makes the case that "middleweight" cities, those with populations between 150,000 and 10 million people, will drive the economic recovery in the U.S.:

It is America's large cities, and particularly the broad swath of middleweights, that will be the key to the U.S. recovery and a key contributor to global growth in the next 15 years. Large cities in the United States will contribute more to global growth than the large cities of all other developed countries combined. We expect the collective GDP of these large U.S. cities to rise by almost $5.7 trillion — generating more than 10 percent of global GDP growth — by 2025. While New York and Los Angeles together are expected to grow at a compound annual rate of 2.1 percent between 2010 and 2025, the top 30 middleweights (measured by GDP) are expected to outpace them with a growth rate of 2.6 percent.

What is behind the clout of middleweights in the United States? For a start, there are simply more of them than in other developed regions. Of more than 600 middleweight cities around the developed world, the United States is home to 257 of them…

For cities like our three here in the Triad, there's no magic formula for reinvention or reinvigoration:

While slowing population growth and mobility will make it harder for U.S. cities to sustain rapid population growth rates, cities that want to grow their GDP will need to pay attention to attracting and supporting expanding populations. Many observers argue that it is the mix of local industries in a city that determines its ability to grow. This is true — but to a much lesser extent than often assumed. Our analysis suggests that the mix of sectors explains only about one-third of the above-average growth of America's most rapidly growing cities. (Emphasis mine).

Even when narrowing our focus to the strongest performing cities, again there is no single path to success — no unique blueprint that all urban leaders should pursue. The cities that outperform their peers simply find ways to make the most of the economic opportunities they face, get lucky, or both. Some cities have been able to reinvent themselves; many others make the most of their endowments or their location.

This is sobering news for those folks working in economic development. The Triad's cities have been forced to reinvent themselves thanks to the rapid decline of their traditional industries – tobacco, textiles and furniture – and they seem to have started to find their footing with industries like biotech, nanotech, logistics, etc. That's the good news, but this study makes the point that the effect of the growth in these sectors will be muted if they aren't accompanied by an influx of people. It seems like a bit of a "chicken and egg" thing to me – you need good jobs to attract people, and you need good people to attract good jobs – but as the authors point out there's also a need for a bit of good luck to be in the mix and maybe that's what turns the egg into a chicken.

The Triad's good fortune might be found at the end of the article:

But the landscape is moving. For example, the shift in the global economic balance to rising emerging nations favors urban centers that are well connected to global growth hubs. Cities with airport hubs and ports, business connections (such as electronics value chains), or personal connections (with universities that attract foreign students) will be in a better position to take advantage of the growing emerging market opportunity.

Granted PTI is not an airport hub, but we're right next door to one and our other transportation infrastructure is critical to the east coast. We're also home to lots of universities and large corporations that draw people from around the world. All things considered I like the Triad's chances.

Capitalism and Its Discontents

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This is a very interesting interview with economist Richard Wolff (h/t to Ed Cone for the link).  A couple of excerpts provided below, but I highly recommend reading the whole thing.

Barsamian: There’s a certain market fundamentalism in the U.S. that equates capitalism with freedom.

Wolff: Yes, employers are free, in this system, to stop raising workers’ wages. But their exercise of that freedom has deprived the mass of Americans of a rising standard of living to accompany their rising productivity. Employers have kept all the benefits of the productivity increase in the form of profits. So one sector of our free economy has deprived another sector of its due. It’s the paradox of a democratic society: the freedoms of one group limit the freedoms of another. To face this fact requires a more critical notion of freedom and democracy than the happy, cheerleader mentality we have today.

How do you talk about freedom to the 20 to 30 million Americans who currently have no job? Are they free? They’ve been denied a living through no fault of their own. When 20 million Americans suddenly can’t find jobs, that isn’t a problem of individuals being lazy. That’s the problem of an economic system that isn’t delivering the goods…

Barsamian: You mentioned earlier that, although wages became stagnant in the 1970s, American workers continued to become more productive. So someone has benefited from the past thirty years.

Wolff: Yes, it’s been the best thirty years that employers in this country have ever had. More product was being produced, but employers didn’t have to pay workers more. This was impossible before the 1970s, because the labor shortage meant employers had to keep paying more, which is why we had that wonderful growth period from 1820 to 1970.

So after the 1970s profits went through the roof. What I find funny — because I don’t want to cry — is the story the business community told about these profits. They probably knew they were getting the benefit of stagnant wages and rising productivity, but they developed a kind of folklore that said the reason profits were so big in the 1980s and 1990s was that executives were geniuses. We made folk heroes of Lee Iacocca at Chrysler and Jack Welch at General Electric. They became icons, as if some mystical ability of theirs accounted for the profits.

Every economist who looks at the numbers knows executives didn’t suddenly become geniuses — as if they’d been dumb before. Shifts in the economy enabled them to stop raising workers’ wages yet keep getting more out of them. No mystery there. Of course, there was a reason for this fairy tale about ceos: if the executives could convince everyone that they were responsible for the profit increase, then they could demand higher salaries. 

 

Ken Snowden, UNCG Econ Professor, On the Mortgage Mess

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UNCG Econ Professor Ken Snowden is a co-author of an upcoming book about lessons to be learned from the Great Depression that might be applied to our current mortgage mess.  An excerpt can be found at the Freakonomics blog:

For the past four years, the U.S. has faced a housing crisis that shows no signs of ending.  The situation was similar in June 1933 when the Home Owners’ Loan Corporation was created to address the nation’s last severe mortgage crisis.  Some have suggested that a new HOLC could help resolve the current crisis, but their characterizations of the HOLC have been incomplete.  Our goal here is to summarize recent research that provides a fuller picture of the HOLC and its impact on housing markets in the 1930s.        

Between 1933 and 1936 the HOLC bought and then refinanced one million severely delinquent mortgages, representing roughly one-tenth of the nation’s nonfarm owner-occupied homes.  The total amount refinanced was $3 billion, or about 20 percent of the outstanding mortgage debt on one- to four-family homes in 1933.  A program of similar proportions in 2011 would refinance 7.6 million loans worth $2 trillion.