Economics Newswire
Recent economics/ finance news, analysis and commentary from around the internet
Bain, Barack and jobs. Paul Krugman, NY Times.
So Mr. Romney’s claims about the Obama job record aren’t literally false, but they are deeply misleading. Still, the real fun comes when we look at what Mr. Romney says about himself. Where does that claim of creating 100,000 jobs come from?
Well, Glenn Kessler of The Washington Post got an answer from the Romney campaign. It’s the sum of job gains at three companies that Mr. Romney “helped to start or grow”: Staples, The Sports Authority and Domino’s.
Mr. Kessler immediately pointed out two problems with this tally. It’s “based on current employment figures, not the period when Romney worked at Bain,” and it “does not include job losses from other companies with which Bain Capital was involved.” Either problem, by itself, makes nonsense of the whole claim.
On the point about using current employment, consider Staples, which has more than twice as many stores now as it did back in 1999, when Mr. Romney left Bain. Can he claim credit for everything good that has happened to the company in the past 12 years? In particular, can he claim credit for the company’s successful shift from focusing on price to focusing on customer service (“That was easy”), which took place long after he had left the business world?
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The economic crisis. Joseph Stiglitz, Vanity Fair.
Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.
The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.
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How the wealthy slash their income taxes. Amy Fontinelle, Investopedia.
Many of the strategies that millionaires and billionaires use to reduce their taxes are perfectly legal and available to everyone, but taxpayers with modest incomes may not have the resources to take advantage of these techniques.
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Raise taxes on rich to reward true job creators. Nick Hanauer, Bloomberg.
Since 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.
One reason this policy is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, I go out to eat with friends and family only occasionally.
It’s true that we do spend a lot more than the average family. Yet the one truly expensive line item in our budget is our airplane (which, by the way, was manufactured in France by Dassault Aviation SA), and those annual costs are mostly for fuel (from the Middle East). It’s just crazy to believe that any of this is more beneficial to our economy than hiring more teachers or police officers or investing in our infrastructure.
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Recipe for middle class jobs. Conor Dougherty, Wall Street Journal.
One consequence of the economy’s shift away from production toward brain work is that companies are constantly seeking new ways to break down high-value intellectual tasks into smaller, cheaper bits. Much the same way that assembly lines created millions of new jobs by reducing mass production to a sum of tasks, employers in Austin and elsewhere are constantly breaking down higher-skill jobs to “create new middle-skill, middle-income specialties,” according to a recent report by the McKinsey Global Institute.
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Is America following Japan? The Economist.
Between 1994 and 2008 American GDP grew 3% a year while Japan’s grew 1.1%. That sounds dismal, but be sure you use the right benchmark. Japan’s potential growth slowed dramatically in the mid 1990s. As the chart at right illustrates, Japan’s working-age population at that time began a long decline, shrinking 0.4% per year over the period while America’s grew 1.2% according to the OECD. That 1.6 point differential can explain most of the difference in growth. Japanese productivity growth averaged a perfectly respectable 2.1% from 1994 to 2008, the same as America’s. At the time it was a disappointment because it was a sharp deceleration from prior decades. In retrospect, though, it may have been inevitable given that Japan had, technologically, almost caught up to America. (An overregulated and inefficient service sector made it difficult to close the remaining gap.)
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Hunting the rich. The Economist.
In general, this newspaper’s instincts lie with small government and against ever higher taxation to pay for an unsustainable welfare state. We reject the notion, implicit in much of today’s debate, that higher tax rates on the wealthy are justified because of the finance industry’s role in the crunch: retribution is a poor rationale for taxation. Nor is the current pattern of contribution to the public purse obviously “unfair”: the richest 1% of Americans pay more than a quarter of all federal taxes (and fully 40% of income taxes), while taking less than 20% of pre-tax income. And knee-jerk rich-bashing, like Labour’s tax hike, seldom makes for good policy. High marginal tax rates discourage entrepreneurship, and no matter how much Mr Obama mentions “millionaires and billionaires”, higher taxes on them alone cannot close America’s deficit.
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Why this crisis differs from the 2008 version. Francesco Guerrera, Wall Street Journal.
Starting from the most obvious: The two crises had completely different origins.
The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector’s breakdown that caused the recession.
The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.
That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators.
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Fed to hold rates “exceptionally low” through mid-2013. Binyamin Applebaum, New York Times.
The Federal Reserve on Tuesday said that the risk of a downturn in the nation’s economy had increased, and that it was prepared to use additional policy tools, including extending its period of exceptionally low interest rates, until at least 2013.
The Fed’s announcement was eagerly awaited by investors who have responded to grim economic tidings in recent weeks by driving down global markets.
The economy grew only 0.8 percent during the first half of the year. The work force is shrinking. State and local governments are cutting back. And fiscal policy is immobilized by partisanship, leading Standard & Poor’s to remove the United States from its list of risk-free borrowers.
That has left investors to hope that the Fed would consider new steps to help the economy.
The central bank has held its benchmark short-term interest rate near zero since December 2008, flooding the financial system with the nearest thing to free money. It has promised after each of its meetings since late 2008 to keep interest rates near zero “for an extended period,” which Mr. Bernanke defined earlier this year as meaning a period of at least several months.
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S&P cuts US debt rating for first time. Binyamin Applebaum, New York Times.
The company, one of three major agencies that offer advice to investors in debt securities, said it was cutting its rating of long-term federal debt to AA+, one notch below the top grade of AAA. It described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances.
“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” the company said in a statement.
The Obama administration reacted with indignation, noting that the company had made a significant mathematical mistake in a document that it provided to the Treasury Department on Friday afternoon, overstating the federal debt by about $2 trillion.
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The legend of Margaret Thatcher. Bruce Bartlett, New York Times.
While Mrs. Thatcher is a towering figure in British political history, well deserving of admiration, the conservative legend about her time in power is at odds with the facts. In this legend, she was even more aggressive than Reagan in cutting taxes and the welfare state. But that is not true.
As this table shows, taxes as a share of the gross domestic product in Britain actually increased sharply during Mrs. Thatcher’s first seven years in office before falling in the later years. Even at the end, they were significantly higher than they were when she took office. Spending also rose during her first seven years before falling in Mrs. Thatcher’s later years.
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Fed official: biggest banks put “future of capitalism” at risk. Zachary Roth, Yahoo News.
“So long as the concept of a [systemically important financial institution, or SIFI] exists, and there are institutions so powerful and considered so important that they require special support and different rules,” declared Hoenig, who is known as a hawk on monetary policy, “the future of capitalism is at risk and our market economy is in peril.”
That’s because, he argued, the existence of banks that are understood to be “too big to fail” distorts the functioning of the free market. “For capitalism to work, businesses, including financial firms, must be allowed, or compelled, to compete freely and openly and must be held accountable for their failures,” Hoenig said. “Only under these conditions do markets objectively allocate credit to those businesses that provide the highest value.”
The financial reform legislation passed by Congress almost a year ago was intended to ensure that banks could never again grow so large that a collapse could threaten the global financial sector, forcing taxpayers to come to the rescue.
But things haven’t worked out that way. “Now, with their bailout costs amounting to billions of taxpayer dollars, SIFIs are larger than ever,” Hoenig said.
Hoenig proposed rules that would prevent banks that take deposits from making trades–a shift away from the financial supermarket concept that has proliferated since the 1990s.
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The GOP’s Ayn Rand problem: politics and religion don’t mix. Aaron Task, Daily Ticker.
Nearly 30 years after her death, Ayn Rand is arguably more popular than ever and is a major force in Republican politics.
But Republicans don’t really get Rand’s philosophy and “wouldn’t be electable,” if they really adhered to it, according to Yaron Brooks, president of the Ayn Rand Institute.
First, Rand was a true laissez faire capitalist who believed in “no government regulation, controls or intervention,” Brook says. “Nobody in the Republican party has that true vision of a separation of economics from state, just like we separate church from state.”
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Your well-paid middle class job is in danger. Ruth Mantell, Market Watch.
The ongoing movement of jobs to countries where labor is cheaper, plus the development of new technologies, may mean fewer opportunities for some well-paid positions in the U.S. over the next decade, said Larry Katz, an economist at Harvard University.
“Employment growth has stopped, or even declined, among many middle-class jobs that are high wage” and don’t require a college degree, Katz said.
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Workers’ share of national income plummets to record low. Zachary Roth, Yahoo News.
Why are workers taking home such a reduced share of the pie? Opinions differ, but many experts think that the trend has to do with a number of factors, including a decline in the bargaining power of labor, and increased competition from foreign workers. Similarly, over the last year or so, U.S. companies have made record profits, while unemployment has stayed high and wages have barely risen.
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The Bitcoin triples again. Jack Hough, Smart Money.
The world’s fastest-gaining currency has tripled in price again. Last week, SmartMoney reported that the Bitcoin had exploded from an exchange rate near zero to more than $10 in about a year, making it one of the top-returning assets of any kind. On Wednesday the currency topped $30. If returns like those seem otherworldly, perhaps its because Bitcoin is a world unto itself. To recap, it’s is a purely online currency with no intrinsic value; its worth is based solely on the willingness of holders and merchants to accept it in trade. In that respect, it’s not so different from fiat currencies like the dollar or Euro, but whereas governments back such money, Bitcoins lack central control.
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Failure to lift US debt ceiling risks fresh crisis. Glenn Hutchins, FT.
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The 2% economy. Rana Foroohar, Time.
But the bottom line is that the 2% economy is reshuffling the deck on everything from the debt debate to job growth to the likely outcome of the 2012 elections. Here in the U.S., there won’t be many winners.
To understand why, a little math is in order. When the economy grows faster, tax receipts go up too. That can make a big difference in the debt picture. For example, if the economy grew steadily at, say, 3.9% — which the Fed, in its own moment of irrational exuberance back in February, predicted it might for the year — our national debt (including Social Security and other entitlements) would decline over the next decade from roughly 100% of GDP to a relatively svelte 83%. No more excruciating conversations about cutting Grandma’s health benefits or squeezing another five kids into already overcrowded classrooms. If, on the other hand, we grow at 1.8% over the next 10 years, debt rises to 144% of GDP. That makes us Greece.
Read more: http://www.time.com/time/magazine/article/0,9171,2075364,00.html#ixzz1OQCB4BrC
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The US postal service nears collapse. Devin Leonard, Businessweek.
The USPS is a wondrous American creation. Six days a week it delivers an average of 563 million pieces of mail—40 percent of the entire world’s volume. For the price of a 44¢ stamp, you can mail a letter anywhere within the nation’s borders. The service will carry it by pack mule to the Havasupai Indian reservation at the bottom of the Grand Canyon. Mailmen on snowmobiles take it to the wilds of Alaska. If your recipient can no longer be found, the USPS will return it at no extra charge. It may be the greatest bargain on earth.
It takes an enormous organization to carry out such a mission. The USPS has 571,566 full-time workers, making it the country’s second-largest civilian employer after Wal-Mart Stores (WMT). It has 31,871 post offices, more than the combined domestic retail outlets of Wal-Mart, Starbucks (SBUX), and McDonald’s (MCD). Last year its revenues were $67 billion, and its expenses were even greater. Postal service executives proudly note that if it were a private company, it would be No. 29 on the Fortune 500.
The problems of the USPS are just as big. It relies on first-class mail to fund most of its operations, but first-class mail volume is steadily declining—in 2005 it fell below junk mail for the first time. This was a significant milestone. The USPS needs three pieces of junk mail to replace the profit of a vanished stamp-bearing letter.
During the real estate boom, a surge in junk mail papered over the unraveling of the postal service’s longtime business plan. Banks flooded mailboxes with subprime mortgage offers and credit-card come-ons. Then came the recession. Total mail volume plunged 20 percent from 2006 to 2010.
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Don’t worry, be wealthy: easiest time ever to make millions, author Seibold says. Stacy Curtin, Yahoo Finance.
And here’s the really good news. If you want to make your millions, there is no better time than now, says Steve Siebold, author of the new book How Rich People Think. In the next five years, he predicts the United States will see more self-made millionaires emerge than in any other time in history.
“This is the easiest time to become a millionaire in America than I have ever seen by far and I think the wealthy see that an that is why they are getting wealthier,” he tells Aaron in the interview above. “But, on the other side, anyone has the chance to become a millionaire in America, more right now than ever before.”
Why? Because this country has got lots of problems that are in dire need of solutions.
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Employment data may be key to the President’s job. Binyamin Applebaum, New York Times.
No American president since Franklin Delano Roosevelt has won a second term in office when the unemployment rate on Election Day topped 7.2 percent. Seventeen months before the next election, it is increasingly clear thatPresident Obama must defy that trend to keep his job.
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Monopoly lost: Atlantic City’s rise and fall. Wayne Parry, AP.
Four years ago, some Atlantic City casino customers were shelling out $1,000 for a brownie sprinkled with edible gold dust in a Baccarat crystal they could take home.
Nowadays, some wait until 11 p.m. to eat so they can get a steak dinner for $2.99.
At the beginning of 2007, Atlantic City’s 11 casinos were at the top of a wave of prosperity. Starting with the 1978 opening of Resorts, the nation’s first casino outside Nevada, Atlantic City for years was the only place to play slots, cards, dice or roulette in the eastern half of the United States. The cash kept pouring in, the busloads of visitors kept coming and the revenue charts went one way: straight up.
And then, they didn’t. Now, battered by competition from casinos all around it, Atlantic City is in a fight for its very survival.
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US wealthy exit Swiss bank accounts: study. Reuters.
Wealthy U.S. individuals have already pulled most of their money from Swiss private banks and could exit altogether as a global clampdown on tax evasion and banking secrecy benefits onshore rivals, a report showed.
Boston Consulting Group (BCG) data showed U.S. clients have withdrawn almost completely from Swiss banks since 2006, particularly since an extended tax dispute between U.S. authorities and UBS (UBSN.VX)(UBS.N), Switzerland’s largest bank.
North American assets held in Swiss private banks fell to just 2 percent of the total in 2010 from 18 percent just four years earlier, the BGC report showed on Tuesday.
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America’s vanishing middle class: a tale of two economies. Jeff Stibel, Harvard Business Review.
The job growth problem is even more nuanced than that. It turns out that the hiring we are seeing is at the extreme ends of the spectrum. To ensure strong profits, corporations are cutting out the middle layers of management — the middle-class. In their place, they are hiring at the very low end and promoting at the high end. Senior management compensation is up nearly 25% this year ($9M for the average S&P 500 CEO), to levels higher than in pre-recession days, according to executive compensation research firm Equilar.
On the other side, we have job growth coming in at the bottom of the pyramid, mostly minimum wage and temporary positions. Take last month’s job creation, for example. Out of the 260,000 jobs created in April, a whopping 60,000 jobs came from one company: McDonald’s. There is nothing wrong with flipping burgers for a living, but it will not pull us out of a recession.
Meanwhile, middle-class jobs are declining at an alarming rate. Middle income jobs have been falling rapidly for some time and now represent well less than half of all jobs in the US. New numbers from the Bureau of Labor Statistics suggest that these middle income jobs have been replaced by low-income jobs. This has left 17 million college-educated Americans with jobs well below their educational levels. If the middle-class are filling the jobs available for the less educated, then the poorest Americans will largely be left jobless. The question we need to start asking is not “how do we add jobs to the economy?”; rather, it is “how do we create middle-class jobs to rebuild our economy?”
Without middle-class jobs, our society will enter into a “Stagnant Age” of two classes: rich and poor. And with two-thirds of our GDP coming from consumer spending — and most of that coming from the middle-class — we will be left with a shrinking economy.
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Unemployment: the new norm. Jeremy Greenfield, FINS.
A chorus of economists and labor market observers say that the “natural” or “structural” rate of unemployment has shifted up, meaning that Americans looking for work should get used to having a harder time finding it. The unemployment rate is currently 9% and could take until 2016 to reach the natural rate.
The so-called natural unemployment rate is somewhere around 7%, according to Mark Vitner, a senior economist at Wells Fargo. Other economists peg the natural unemployment rate somewhere between 5.5% and 7%. They said the figure will be held higher by a skills mismatch in the labor market that has been growing since the 1970s, the recent extension of unemployment benefits and the 2009 minimum wage increase.
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“The risks are enormous”: why Morgenson and Rosner are so worried. Aaron Task, Yahoo Finance.
“We have even more ‘too big to fail’ institutions; more politically interconnected, very deep and wide institutions that could create another systemic event,” says Morgenson, a Pulitzer Prize-winning columnist at The New York Times. “It’s almost as if the situation that brought us to Fannie Mae and Freddie Mac having to be bailed out has now been squared or quadrupled. It’s worse, not better.”
Rosner, an analyst at Graham Fisher, wholeheartedly agrees.
“The risks are enormous” because there’s even more concentration of assets among the biggest banks, which are “too big to analyze and manage,” he says.
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Eurozone expands, at two speeds. Brian Blackstone, Wall Street Journal.
The euro-zone economy expanded at a rate of more than 3% in the first quarter, outpacing the U.S. and adding to the distance between the bloc’s strengthening northern tier and its debt-ridden periphery. The figure underscores several dominant themes in Europe: A wide gap persists between wealthy, globally competitive countries in the north, and moribund economies such as Greece and Portugal that are unable to find new sources of private growth to replace a shrinking public sector. The so-called core of Germany and its neighbors is increasingly decoupling from the debt crisis in Southern Europe and Ireland.
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Inflation hits 2.5 year high, seen peaking. Lucia Mutikani, Reuters.
Gasoline and food prices hoisted U.S. inflation to a 2-1/2-year high in April, but there was little sign of a broader pick-up in consumer prices that would trouble the Federal Reserve. The pace of food and fuel price rises slowed considerably from March, suggesting inflation pressures may be peaking.
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Alan Greenspan “betrayed” Ayn Rand and ruined the economy, says Rand Institute President. Aaron Task, Yahoo Finance.
To many observers, most notably Paul Krugman, the economy’s uneven performance is a sign the government’s response to the crisis of 2008 and its aftermath was insufficient. But Dr. Yaron Brook, president of the Ayn Rand Institute, says the opposite is true: The economy is sputtering because the government’s response was too heavy-handed.
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America’s middle class crisis: the sobering facts. Peter Gorenstein, Yahoo Finance.
Here are just some of the sobering facts:
– There are 8.5 million people receiving unemployment insurance and over 40 million receiving food stamps.
– At the current pace of job creation, the economy won’t return to full employment until 2018.
– Middle-income jobs are disappearing from the economy. The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010.
– Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.
– 17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor’s degree.
– Over the past year, nominal wages grew only 1.7% while all consumer prices, including food and energy, increased by 2.7%.
– Wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010. Government transfers have risen from 11.7% of personal income in 1980 to 18.4% in 2010, a post-war high.
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US economic growth slows to 1.8% in rate in quarter. Catherine Rampell, New York Times.
When the year began, economists expected a more robust growth rate of about 4 percent, only to be barraged by bad report after bad report. Turmoil in the Middle East led to higher oil prices, which had already been climbing because of increased demand in emerging markets like China.Housing sales dropped sharply. Winter blizzards closed businesses and delayed construction, causing investments in nonresidential structures like office buildings to fall 21.7 percent from the previous quarter. Imports, which are subtracted from gross domestic product, surged. Military spending sank.
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IMF bombshell: age of America nears end. Brett Arends, Marketwatch.
According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.
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Poll: to cut deficit, Americans support tax hike on rich. Zachary Roth, Yahoo News.
Seventy-two percent of respondents to a new Washington Post/ABC News poll said they’d support raising taxes on people who make $250,000 or more, while 27 percent said they’d oppose it. Every other approach to deficit reduction received more opposition than support. Just 21 percent backed cuts to Medicare, with 78 percent opposed. The numbers for cuts to Medicaid were little better: 30 percent supportive, 69 percent opposed. Forty-two percent said they’d support a reduction in defense spending, with 56 percent against it.