I learn from NPR this am that a penny contains 1.7 cents worth of copper. I'm stoking up the furnace as I write!
On an unrelated topic, I'm waiting to see if Krugman is playing by Obama rules. Several times in past columns he has raked Obama over the proverbial coals for using Republican-sounding talking points in criticizing Clinton's health-care proposals and in calling for a fix for social security. Of course, Obama has never implied that any Republican candidate had a health-care plan that was preferable to Clinton's. Clinton, on the other hand, has said that she and McCain (and presumably Sinbad and Cheryl Crowe) have, while Obama has not, crossed the "commander-in-chief threshold." This is really inexcusable. Don't you think, Paul?
Friday, March 14, 2008
Thursday, March 13, 2008
An Epidemic of Administrators
The increasing bureaucratization of education has now reached the tipping point where faculty represent less than half the full-time professional staff at Title IV institutions. I have not seen any data to be able to project when more than half of faculty time will be devoted to unproductive administrative duties, but what I noticed here is that that point will not be too far off in the future.
U.S. Department of Education. 2008. Employees in Postsecondary Institutions, Fall 2006, and Salaries of Full-Time Instructional Faculty, 2006-07, NCES 2008-172 (Institute of Education Sciences National Center for Education Statistics).
http://nces.ed.gov/pubs2008/2008172.pdf
Wednesday, March 12, 2008
That Talented Mr. Dorman
In the age of Google, our main competition is with ourselves, or, more precisely, with those who share the same name. In that context, I find myself several rungs below the esteemed Peter Dorman, professor of things ancient and Egyptian at the University of Chicago. Now his fame is destined to spread further, as he accepts the presidency of the American University in Beirut. From what I can see from afar, AUB’s star will also rise from its association with this highly accomplished archaeologist. My hat (the one in the photo) is tipped to both of them.
The Other Risk
All eyes are currently on US financial markets, where the Fed has offered to sink half its portfolio into mortgaged-based securities. And it is true that there is a risk that the spreading credit crunch could cause great economic trauma. But don’t forget about the dollar. It is now trading at over 1.55 to the Euro after another sharp bump, and no one thinks it has touched bottom. There is a second path to chaos: a potential run on the dollar. The two risks are related — the crunch could trigger a run — but not the same.
Update: Make that 1.56 to the Euro....and counting.
The nice thing about the Fed exchanging treasuries for MBS is that it is not expansionary monetary policy and need not be seen as inflationary. The not so nice thing is that $400B, the amount said to be in play, is tiny compared to the $10T or so in anticipated losses stemming from the collapse of the housing bubble. If fiddling with its portfolio is not enough and Plan B is for the Fed to flood the markets with money, expectations of inflation could be reignited, with further risks to the dollar.
So there are two abysses facing the US economy and not much policy space between them.
Update: Make that 1.56 to the Euro....and counting.
The nice thing about the Fed exchanging treasuries for MBS is that it is not expansionary monetary policy and need not be seen as inflationary. The not so nice thing is that $400B, the amount said to be in play, is tiny compared to the $10T or so in anticipated losses stemming from the collapse of the housing bubble. If fiddling with its portfolio is not enough and Plan B is for the Fed to flood the markets with money, expectations of inflation could be reignited, with further risks to the dollar.
So there are two abysses facing the US economy and not much policy space between them.
Tuesday, March 11, 2008
A Functionalist Theory of Bubbles
I’ve been reading Eric Janszen’s interesting piece in last month’s Harper’s, “The next Bubble: Priming the Markets for Tomorrow's Big Crash.” He compares the dot.com and housing bubbles as part of a general theory of why the US economy is so bubble-prone. Reading it is like sitting next to a caustically witty financial analyst at a bar; he’s had one too many and is shredding his life’s work, and for you it’s prime entertainment.
So what’s his theory? In a nutshell, he says that the US is now in the hands of its FIRE brigade — finance, insurance and real estate. They own the politicians and control economic policy. Bubbles are their stock in trade. These guys get rich and leave the rest of us with the tab. To save our economy from certain ruin in the wake of one bubble, we have to pump up the next one. This is how the housing bubble inflated after tech bubble popped. And where do we turn after housing goes bust? Janszen predicts alternative energy (including nuclear) as the new new new thing.
I like anyone who builds a worldview around bubblesome finance. Nevertheless, putting on my skeptical academic hat, I think he has slipped into the dangerous waters of functionalism, believing that social or economic events happen because they are needed to happen. There is a longstanding critique of such reasoning, but I’ll spare you. The point is that functionalist explanations don’t really explain. For instance, Janszen’s article doesn’t explain why some economies are more bubble-prone than others, nor does it offer a reason why efforts of insiders to inflate a new sector will necessarily succeed.
As my loyal legions know, I think there is a structural factor behind US asset price inflations during the last 15 years or so, capital account recycling. I’m hoping to get a few hours in the coming weeks to put this into its proper algebraic form. This is how we become convincing in my business. As Groucho almost said, “Who are you going to believe, my model or your own eyes?”
Speaking of quotes, I like this one by Janszen: “Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.” Amen brother.
So what’s his theory? In a nutshell, he says that the US is now in the hands of its FIRE brigade — finance, insurance and real estate. They own the politicians and control economic policy. Bubbles are their stock in trade. These guys get rich and leave the rest of us with the tab. To save our economy from certain ruin in the wake of one bubble, we have to pump up the next one. This is how the housing bubble inflated after tech bubble popped. And where do we turn after housing goes bust? Janszen predicts alternative energy (including nuclear) as the new new new thing.
I like anyone who builds a worldview around bubblesome finance. Nevertheless, putting on my skeptical academic hat, I think he has slipped into the dangerous waters of functionalism, believing that social or economic events happen because they are needed to happen. There is a longstanding critique of such reasoning, but I’ll spare you. The point is that functionalist explanations don’t really explain. For instance, Janszen’s article doesn’t explain why some economies are more bubble-prone than others, nor does it offer a reason why efforts of insiders to inflate a new sector will necessarily succeed.
As my loyal legions know, I think there is a structural factor behind US asset price inflations during the last 15 years or so, capital account recycling. I’m hoping to get a few hours in the coming weeks to put this into its proper algebraic form. This is how we become convincing in my business. As Groucho almost said, “Who are you going to believe, my model or your own eyes?”
Speaking of quotes, I like this one by Janszen: “Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.” Amen brother.
Monday, March 10, 2008
The Ultimate Bailout, Round 2
Round 1 has seen the world’s central banks picking up the slack from private investors and keeping the dollar afloat in the face unrelenting US current account deficits. Now we are hearing the first murmurs of Round 2, a coordinated move by some or all these same players to backstop crumbling US credit markets.
In very broad outlines, here is how Round 1 looks: Over the course the 1990s the US began to run increasingly large current account deficits, which then further swelled during the Bush years, peaking at nearly 7% of GDP in 2006 before falling back a percent or so.
Financing the deficit was not difficult during the go-go years of the ‘90s bull market, as private investment poured in from around the world. In the wake of the dot.com collapse of 2000-01, however, it became increasingly difficult to recycle dollars through private channels. Central banks, and to a lesser extent sovereign wealth funds, stepped forward to do the job. These entities now finance essentially the entire payments gap, largely by using their dollar accumulations to purchase US treasury bills. Acquisition of other assets, as when China tries to acquire an oil company or Dubai goes in for a money center bank, attracts headlines but as yet account for a small fraction of this recycling.
The willingness of these public entities (it may be a stretch to call funds under the control of Gulf monarchies “public”, but economic language is not especially nuanced) to hold dollar assets prevents the dollar from falling even faster, and more broadly, than it has and serves to keep US interest rates far lower than they would be otherwise. The growth in foreign dollar reserves alone last year was approximately $900B, in excess of the entire US financing requirement. It would be going too far to claim that this extraordinary level of support is motivated by a desire to sustain the US economy; certainly other interests are at play, but the effect has been to enable US consumption to exceed production by a substantial margin, year after year. Given the scale of the enterprise, you might call this not a bailout but an international payments sump pump.
Now we face a new crisis: because of large developing writedowns in the housing market and the opacity of investment instruments that bundled low-value mortgages in ostensibly high-value securities, a credit crunch is enveloping US markets. Banks and equity funds, desperate to safeguard what remains of their capital base, are pulling out of markets for a variety of loans: for business investment, for certain forms of municipal investment finance, for college students borrowing to pay tuition. This credit retrenchment, according to Larry Summers, constitutes “the most serious....economic and financial stresses that the US has faced in at least a generation, and possibly much longer.” (Thanks to Brad Setser for this.)
The Federal Reserve has created a term auction facility (TAF) which will extend up to $200B to banks, while accepting mortgage-backed securities as collateral. Effectively, this represents an infusion of $200B in demand for the most troubled assets. Dean Baker thinks this simply socializes the losses of the rich after years in which their profits were hoarded by an elite few. Even so, the biggest fear has been that the Fed intervention will prove to be too small relative to the size of the markets to make a difference. This is precisely Paul Krugman’s point, seconded by Setser. So does this mean that there is no defense against a financial meltdown?
Think again about where the financial clout now lies. After years of accumulating treasuries, foreign central banks now have a far larger stash of securities than the Fed. (The Fed’s holdings of treasuries stand at about $800B, less than a year’s accumulation abroad.) The Fed can play with its portfolio, selling some treasuries and effectively buying mortgages, but between them the dollar-soaked central banks of China, Japan, the Gulf states, Brazil et al. have an even larger portfolio to deal from. Hence the potential for these entities to step into the market and buy assets at risk.
Will this be Round 2? If it is true that the Fed is no longer big enough for the job, it’s hard to see an alternative. The US, even in financial tatters, is too big to fail, and it is not difficult to imagine that rescue discussions are already under way. It’s not a sure thing, but a coordinated global move could restore enough demand to keep mortgage and other bubbly assets afloat yet a few more quarters or even years into the future. This would buy more time for the adjustments needed to address the true underlying problem, massive ongoing US current account deficits. I could even imagine a quid pro quo in which support for US markets is tied to a set of policies to rebalance the US position, although it would not likely take a public or transparent form. (Whether those policies would actually do the job is another matter, of course.)
We are in highly speculative territory here, and I could be way off the mark. But maybe not, and if the second phase of the global bailout begins to take form in the next few weeks, tell everyone you heard it here first.
In very broad outlines, here is how Round 1 looks: Over the course the 1990s the US began to run increasingly large current account deficits, which then further swelled during the Bush years, peaking at nearly 7% of GDP in 2006 before falling back a percent or so.
Financing the deficit was not difficult during the go-go years of the ‘90s bull market, as private investment poured in from around the world. In the wake of the dot.com collapse of 2000-01, however, it became increasingly difficult to recycle dollars through private channels. Central banks, and to a lesser extent sovereign wealth funds, stepped forward to do the job. These entities now finance essentially the entire payments gap, largely by using their dollar accumulations to purchase US treasury bills. Acquisition of other assets, as when China tries to acquire an oil company or Dubai goes in for a money center bank, attracts headlines but as yet account for a small fraction of this recycling.
The willingness of these public entities (it may be a stretch to call funds under the control of Gulf monarchies “public”, but economic language is not especially nuanced) to hold dollar assets prevents the dollar from falling even faster, and more broadly, than it has and serves to keep US interest rates far lower than they would be otherwise. The growth in foreign dollar reserves alone last year was approximately $900B, in excess of the entire US financing requirement. It would be going too far to claim that this extraordinary level of support is motivated by a desire to sustain the US economy; certainly other interests are at play, but the effect has been to enable US consumption to exceed production by a substantial margin, year after year. Given the scale of the enterprise, you might call this not a bailout but an international payments sump pump.
Now we face a new crisis: because of large developing writedowns in the housing market and the opacity of investment instruments that bundled low-value mortgages in ostensibly high-value securities, a credit crunch is enveloping US markets. Banks and equity funds, desperate to safeguard what remains of their capital base, are pulling out of markets for a variety of loans: for business investment, for certain forms of municipal investment finance, for college students borrowing to pay tuition. This credit retrenchment, according to Larry Summers, constitutes “the most serious....economic and financial stresses that the US has faced in at least a generation, and possibly much longer.” (Thanks to Brad Setser for this.)
The Federal Reserve has created a term auction facility (TAF) which will extend up to $200B to banks, while accepting mortgage-backed securities as collateral. Effectively, this represents an infusion of $200B in demand for the most troubled assets. Dean Baker thinks this simply socializes the losses of the rich after years in which their profits were hoarded by an elite few. Even so, the biggest fear has been that the Fed intervention will prove to be too small relative to the size of the markets to make a difference. This is precisely Paul Krugman’s point, seconded by Setser. So does this mean that there is no defense against a financial meltdown?
Think again about where the financial clout now lies. After years of accumulating treasuries, foreign central banks now have a far larger stash of securities than the Fed. (The Fed’s holdings of treasuries stand at about $800B, less than a year’s accumulation abroad.) The Fed can play with its portfolio, selling some treasuries and effectively buying mortgages, but between them the dollar-soaked central banks of China, Japan, the Gulf states, Brazil et al. have an even larger portfolio to deal from. Hence the potential for these entities to step into the market and buy assets at risk.
Will this be Round 2? If it is true that the Fed is no longer big enough for the job, it’s hard to see an alternative. The US, even in financial tatters, is too big to fail, and it is not difficult to imagine that rescue discussions are already under way. It’s not a sure thing, but a coordinated global move could restore enough demand to keep mortgage and other bubbly assets afloat yet a few more quarters or even years into the future. This would buy more time for the adjustments needed to address the true underlying problem, massive ongoing US current account deficits. I could even imagine a quid pro quo in which support for US markets is tied to a set of policies to rebalance the US position, although it would not likely take a public or transparent form. (Whether those policies would actually do the job is another matter, of course.)
We are in highly speculative territory here, and I could be way off the mark. But maybe not, and if the second phase of the global bailout begins to take form in the next few weeks, tell everyone you heard it here first.
That Multi-Talented Ben Stein
Ben Stein, who writes a column on “economics” for the New York Times, also displays his credentials in “science” in the forthcoming film “Expelled”. Stein, we are told, interviews believers in “intelligent design” who say they have been denigrated by the scientific and educational establishment. We know that Stein has been the brunt of quite a bit of criticism, especially from Brad DeLong, but his grasp of economics is not inferior to his chops as an evolutionary biologist.
My favorite howler from this article was the following Stein quote: “there’s just a lot of people who don’t believe that big science and Darwinism should have a stranglehold on academic life....” Yes, big science is the problem. We need small, innovative start-up sciences that aren’t tied down by, you know, peer-reviewed journals and experimental protocols. Biology, geology, they’re just cruising on their legacy market share. With a good business plan and access to the right angels, a neo-biblical venture could be really competitive.
My favorite howler from this article was the following Stein quote: “there’s just a lot of people who don’t believe that big science and Darwinism should have a stranglehold on academic life....” Yes, big science is the problem. We need small, innovative start-up sciences that aren’t tied down by, you know, peer-reviewed journals and experimental protocols. Biology, geology, they’re just cruising on their legacy market share. With a good business plan and access to the right angels, a neo-biblical venture could be really competitive.
Pay Toilets Under Capitalism and Socialism
So, just back from a week in Italy I have yet again had the experience of having to pay to use toilet facilities in publicly owned entities in Europe, in this case, bus and train stations, where attendants sit at the entrance collecting the fees, but not obviously doing anything. This was also how it was in the old Soviet Union. However, toilets are universally free everywhere in the US, although I remember ones in hotels in the 1950s that one had to put coins in to get into the stalls (but not the urinals), meaning that I suppose there was gender discrimination back then (something to mention two days after International Womens' Day, celebrated big time in Italy).
So, anybody got any explanations for this curiosum?
So, anybody got any explanations for this curiosum?
Saturday, March 8, 2008
It’s Getting Worse on the Financial Front
No one has mentioned this grim report from yesterday’s New York Times, so allow me to bring it to your attention. It should be read from beginning to end to get a sense of the scale and scope of the disruption. It’s especially not a good sign that there is an uptick in the perceived risk of a U.S. government default.
For superb background reading, take a look at this paper by Greenlaw, Hatzius, Kashyap and Shin. It’s low tech; in fact much of it reads like a macro principles text of the future, after the flow of funds and balance sheet analysis will have been integrated into the core model. Some readers will note that the authors make a structural case for Minsky cycles, one that does not depend directly on psychological postulates. All of this, plus an informed (but probably conservative) estimate of the contribution the credit crunch (“deleveraging”) will make to an overall economic slowdown.
For superb background reading, take a look at this paper by Greenlaw, Hatzius, Kashyap and Shin. It’s low tech; in fact much of it reads like a macro principles text of the future, after the flow of funds and balance sheet analysis will have been integrated into the core model. Some readers will note that the authors make a structural case for Minsky cycles, one that does not depend directly on psychological postulates. All of this, plus an informed (but probably conservative) estimate of the contribution the credit crunch (“deleveraging”) will make to an overall economic slowdown.
Friday, March 7, 2008
How to Save Social Security
Do you remember when we could save Social Security by funding retirement in the stock market. Here is what the Wall Street Journal reports about the U.S. Pension Benefit Guaranty Corp.'s decision to invest in the stock market.
Silva, Lauren and Martin Hutchinson. 2008. "Pension Guarantor's Bad Bet." Wall Street Journal (21 February): p. C 14. http://online.wsj.com/article/SB120356297487082117.html?mod=todays_us_money_and_investing
"The U.S. Pension Benefit Guaranty Corp.'s decision to boost its investment in equities and alternative assets looks like poor risk management. The liabilities of this government guarantor of corporate pensions increase sharply in economic downturns, when companies file for bankruptcy and offload their under-funded pension plans onto it. So equities, which tend to fall in downturns, and alternative investments, which can become illiquid, may represent a doubling of risk for the pension agency, rather than a hedge. Pension Benefit Guaranty, established in 1974, has been funded primarily by corporate premiums. It had built up a surplus of $9.7 billion by 2000, but two factors caused it to run a deficit since 2002. First, several large bankruptcies, particularly in the airline sector, burdened it with large, unfunded pension liabilities. Second, bond yields dropped. That lowered the discount rate used to calculate the present value of its future pension obligations, meaning that from an accounting perspective, they increased rapidly."
"The agency's new investment plan -- to increase its allocation to equities to about 45% from about 25%, and allocating 10% to alternative investments -- also looks poorly timed. Making such a move after a lengthy bull market and a period of low interest rates and high speculative activity can lead to low returns, even over 20 or 30 years."
Silva, Lauren and Martin Hutchinson. 2008. "Pension Guarantor's Bad Bet." Wall Street Journal (21 February): p. C 14. http://online.wsj.com/article/SB120356297487082117.html?mod=todays_us_money_and_investing
"The U.S. Pension Benefit Guaranty Corp.'s decision to boost its investment in equities and alternative assets looks like poor risk management. The liabilities of this government guarantor of corporate pensions increase sharply in economic downturns, when companies file for bankruptcy and offload their under-funded pension plans onto it. So equities, which tend to fall in downturns, and alternative investments, which can become illiquid, may represent a doubling of risk for the pension agency, rather than a hedge. Pension Benefit Guaranty, established in 1974, has been funded primarily by corporate premiums. It had built up a surplus of $9.7 billion by 2000, but two factors caused it to run a deficit since 2002. First, several large bankruptcies, particularly in the airline sector, burdened it with large, unfunded pension liabilities. Second, bond yields dropped. That lowered the discount rate used to calculate the present value of its future pension obligations, meaning that from an accounting perspective, they increased rapidly."
"The agency's new investment plan -- to increase its allocation to equities to about 45% from about 25%, and allocating 10% to alternative investments -- also looks poorly timed. Making such a move after a lengthy bull market and a period of low interest rates and high speculative activity can lead to low returns, even over 20 or 30 years."
Thursday, March 6, 2008
The Downward Spiral of Manufacturing
This article says that a small shoe manufacturer failed because the exit of shoe manufacturers left the industry with too few suppliers for the plant to survive.
Supposedly, the most efficient businesses are supposed to survive, but that works only if there is adequate infrastructure.
Aeppel, Timothy. 2008. "U.S. Shoe Factory Finds Supplies Are Achilles' Heel." Wall Street Journal (2 March). http://online.wsj.com/article/SB120450124543206313.html
Howard Shaffer's factory for making high-end custom shoes, relied on computer imaging to fit customers from around the U.S. and Canada remotely, turning out shoes for $450 or more a pop.
"Having spent the previous decade setting up plants in China to manufacture shoes for big U.S. brands, he thought he knew how to revive the moribund U.S. footwear industry: use heavy automation run by a handful of skilled workers instead of relying on large numbers of low-paid Chinese laborers."
A trade magazine catering to the factory-automation industry pronounced him "Progressive Manufacturer of the Year" in 2005, picking tiny Otabo for an award that usually goes to a large multinational.
"But now, he is throwing in the towel on that venture, too. He closed his factory over the weekend, and is shifting the bulk of his operations to China."
"What killed his U.S. factory isn't just competition from Asia's cheap labor, he says. It is the lack of infrastructure needed to make a factory tick, a problem that has bedeviled the few remaining independent shoemakers in the U.S. Finding technicians to fly in on short notice to fix shoe machines was a constant and growing challenge, Mr. Shaffer says, because the number of U.S. companies that make and service machines has dwindled. The suppliers of shoelaces, leather, and other basic materials insisted that he buy in batches far larger than made sense for a small-scale producer."
"Consider what happened with his supplier of outsoles, which form the bottom part of the shoe. Mr. Shaffer initially found a domestic supplier to provide what he needed at a reasonable price. But a glitch developed about a year ago. One Otabo style required an outsole with two types of polyurethane sandwiched together -- a tough bottom layer that resists wear and a spongy inner layer that makes the shoes more comfortable. It is a more complex process, Mr. Shaffer says, "and so after three years of supplying us, they said they just can't do it that way anymore"."
"David Murphy, chief executive of closely held Red Wing Shoe Co. in Red Wing, Minn., an iconic American boot maker that has kept a large manufacturing operation in the U.S., says even a larger-scale company like his, with annual sales of more than $400 million, has to worry about the shoe industry's withering infrastructure."
"Almost 99% of the 2.4 billion shoes purchased in the U.S. every year are imported, 86% of them from China. The problem of obtaining components is especially acute when it comes to materials uniquely designed for shoes, as opposed to generic items such as cardboard boxes that are used by a wide array of manufacturers. This is one reason why Red Wing prepares its own shoe leather, says Mr. Murphy. Mr. Murphy notes he just got a call from a small custom shoe producer in northern Minnesota who often turns to Red Wing for supplies. "They were having trouble getting shoe laces," he says."
Supposedly, the most efficient businesses are supposed to survive, but that works only if there is adequate infrastructure.
Aeppel, Timothy. 2008. "U.S. Shoe Factory Finds Supplies Are Achilles' Heel." Wall Street Journal (2 March). http://online.wsj.com/article/SB120450124543206313.html
Howard Shaffer's factory for making high-end custom shoes, relied on computer imaging to fit customers from around the U.S. and Canada remotely, turning out shoes for $450 or more a pop.
"Having spent the previous decade setting up plants in China to manufacture shoes for big U.S. brands, he thought he knew how to revive the moribund U.S. footwear industry: use heavy automation run by a handful of skilled workers instead of relying on large numbers of low-paid Chinese laborers."
A trade magazine catering to the factory-automation industry pronounced him "Progressive Manufacturer of the Year" in 2005, picking tiny Otabo for an award that usually goes to a large multinational.
"But now, he is throwing in the towel on that venture, too. He closed his factory over the weekend, and is shifting the bulk of his operations to China."
"What killed his U.S. factory isn't just competition from Asia's cheap labor, he says. It is the lack of infrastructure needed to make a factory tick, a problem that has bedeviled the few remaining independent shoemakers in the U.S. Finding technicians to fly in on short notice to fix shoe machines was a constant and growing challenge, Mr. Shaffer says, because the number of U.S. companies that make and service machines has dwindled. The suppliers of shoelaces, leather, and other basic materials insisted that he buy in batches far larger than made sense for a small-scale producer."
"Consider what happened with his supplier of outsoles, which form the bottom part of the shoe. Mr. Shaffer initially found a domestic supplier to provide what he needed at a reasonable price. But a glitch developed about a year ago. One Otabo style required an outsole with two types of polyurethane sandwiched together -- a tough bottom layer that resists wear and a spongy inner layer that makes the shoes more comfortable. It is a more complex process, Mr. Shaffer says, "and so after three years of supplying us, they said they just can't do it that way anymore"."
"David Murphy, chief executive of closely held Red Wing Shoe Co. in Red Wing, Minn., an iconic American boot maker that has kept a large manufacturing operation in the U.S., says even a larger-scale company like his, with annual sales of more than $400 million, has to worry about the shoe industry's withering infrastructure."
"Almost 99% of the 2.4 billion shoes purchased in the U.S. every year are imported, 86% of them from China. The problem of obtaining components is especially acute when it comes to materials uniquely designed for shoes, as opposed to generic items such as cardboard boxes that are used by a wide array of manufacturers. This is one reason why Red Wing prepares its own shoe leather, says Mr. Murphy. Mr. Murphy notes he just got a call from a small custom shoe producer in northern Minnesota who often turns to Red Wing for supplies. "They were having trouble getting shoe laces," he says."
Roach & stagnation
In his recent New York Times op-ed piece, Steven Roach says:
The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.
But why is it excessively "accommodative monetary policy"?
Without this kind of monetary policy in the late 1990s, the US economy would likely have stalled in 1996 or 1997 or thereabouts. The short period of close-to-full employment at the end of the decade would not have happened. Without this kind of monetary policy, the recession in 2001 would likely have been deeper and longer, with even more negative impact on workers. It seems like the US economy cannot have half-decent growth of demand without "excessively accommodative monetary policy"!
What's the problem? To my mind, it's the way that the distribution of income and wealth have steadilyly tilted to the right (since 1980 or so), with the rich getting richer (and richer and richer...) and the rest of us facing stagnant or even falling incomes. This has led to a stagnation of mass consumption (absent expansion of credit) or what I've termed the "underconsumption undertow."
Just as a strong swimmer can beat an undertow, an economy can enjoy demand growth, roughly in step with its potential growth, despite an underconsumption undertow. (For the mathematical condition that must be met for this to happen, see my 1994 RESEARCH IN POLITICAL ECONOMY article.) This can happen due to private nonresidential fixed investment, as happened in the late 1990s. It can happen due to investment in housing and credit-based expansion of consumer spending, as has happened in the post-2001 period until recently. It can also happen due to increased luxury spending, as has happened since about 1980 or so, accelerating in recent years. With stagnant underlying consumer spending (sans credit expansion) in place, all of these props but perhaps the last (i.e., increasingly luxury spending) require what Roach calls "excessively accommodative monetary policy."
The problem is that relying on any of these props makes the economy increasingly unstable, i.e., prone to collapse. Fixed nonresidential investment is notoriously less stable than consumer spending. So is luxury spending -- since, after all, it's not really needed. Housing investment is also unstable, fluctuating more than most. And credit-based consumption spending leads to the accumulation of debt, which is hard to sustain. In a time when the Federal government's purchases (G) were shrinking as a percentage of GDP, these private-sector sources of instability become increasingly important.
(Federal G shrank relative to GDP from 1991 to the present, with an up-tick about 2001 to 2004 which did not cancel out the over-all trend. The up-tick partly reflects the increase in military spending. State & Local purchases are ignored because those governments behave more like consumers, varying purchases with tax revenues.)
So the general growth story that the US has followed as a way to deal with the underconsumption undertow has been to use "excessive monetary accommodation" to pump up bubbles, not just financial but real ones (based in spending on goods and services). This has lead to what the late Hyman Minsky called "financial fragility" -- plus real fragility. The fragility has led to recessions.
As Roach notes, the 2001 recession and the current one (if it ends up being classified using that term) both involved bubbles popping: underlying instability came to the top. He then suggests that infrastructural investment (and if the US is lucky, export growth) can fill the gap. Hopefully, it will be "green" investment. My friend Julio adds the Clintonesque point that the government could invest in "human capital" (i.e. education). That's fine, but I would add in basic research, public health, reconstruction after disasters (think New Orleans), and the like. Then, the government should not try to fund these investments out of a balanced budget but instead by using credit. After all, corporations don't run balanced capital budgets.
The increased role of government sure fits with the normal tendency of capitalism that results from what Engels calls the contradiction between socialized production and private appropriation (of profits). That is, all else constant, this contradiction drives the capitalist state to play a bigger and bigger role (at least until things have settled down, the way they did in (say) the 1950s). It socializes private losses.
But what about raising (after tax) wages, to strike a direct blow at the underconsumption undertow? In theory, this could make bubbles unnecessary to stable growth. This kind of solution seems totally forgotten. That's likely because it involves reversing the ongoing one-sided class war.
--
Jim Devine
The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.
But why is it excessively "accommodative monetary policy"?
Without this kind of monetary policy in the late 1990s, the US economy would likely have stalled in 1996 or 1997 or thereabouts. The short period of close-to-full employment at the end of the decade would not have happened. Without this kind of monetary policy, the recession in 2001 would likely have been deeper and longer, with even more negative impact on workers. It seems like the US economy cannot have half-decent growth of demand without "excessively accommodative monetary policy"!
What's the problem? To my mind, it's the way that the distribution of income and wealth have steadilyly tilted to the right (since 1980 or so), with the rich getting richer (and richer and richer...) and the rest of us facing stagnant or even falling incomes. This has led to a stagnation of mass consumption (absent expansion of credit) or what I've termed the "underconsumption undertow."
Just as a strong swimmer can beat an undertow, an economy can enjoy demand growth, roughly in step with its potential growth, despite an underconsumption undertow. (For the mathematical condition that must be met for this to happen, see my 1994 RESEARCH IN POLITICAL ECONOMY article.) This can happen due to private nonresidential fixed investment, as happened in the late 1990s. It can happen due to investment in housing and credit-based expansion of consumer spending, as has happened in the post-2001 period until recently. It can also happen due to increased luxury spending, as has happened since about 1980 or so, accelerating in recent years. With stagnant underlying consumer spending (sans credit expansion) in place, all of these props but perhaps the last (i.e., increasingly luxury spending) require what Roach calls "excessively accommodative monetary policy."
The problem is that relying on any of these props makes the economy increasingly unstable, i.e., prone to collapse. Fixed nonresidential investment is notoriously less stable than consumer spending. So is luxury spending -- since, after all, it's not really needed. Housing investment is also unstable, fluctuating more than most. And credit-based consumption spending leads to the accumulation of debt, which is hard to sustain. In a time when the Federal government's purchases (G) were shrinking as a percentage of GDP, these private-sector sources of instability become increasingly important.
(Federal G shrank relative to GDP from 1991 to the present, with an up-tick about 2001 to 2004 which did not cancel out the over-all trend. The up-tick partly reflects the increase in military spending. State & Local purchases are ignored because those governments behave more like consumers, varying purchases with tax revenues.)
So the general growth story that the US has followed as a way to deal with the underconsumption undertow has been to use "excessive monetary accommodation" to pump up bubbles, not just financial but real ones (based in spending on goods and services). This has lead to what the late Hyman Minsky called "financial fragility" -- plus real fragility. The fragility has led to recessions.
As Roach notes, the 2001 recession and the current one (if it ends up being classified using that term) both involved bubbles popping: underlying instability came to the top. He then suggests that infrastructural investment (and if the US is lucky, export growth) can fill the gap. Hopefully, it will be "green" investment. My friend Julio adds the Clintonesque point that the government could invest in "human capital" (i.e. education). That's fine, but I would add in basic research, public health, reconstruction after disasters (think New Orleans), and the like. Then, the government should not try to fund these investments out of a balanced budget but instead by using credit. After all, corporations don't run balanced capital budgets.
The increased role of government sure fits with the normal tendency of capitalism that results from what Engels calls the contradiction between socialized production and private appropriation (of profits). That is, all else constant, this contradiction drives the capitalist state to play a bigger and bigger role (at least until things have settled down, the way they did in (say) the 1950s). It socializes private losses.
But what about raising (after tax) wages, to strike a direct blow at the underconsumption undertow? In theory, this could make bubbles unnecessary to stable growth. This kind of solution seems totally forgotten. That's likely because it involves reversing the ongoing one-sided class war.
--
Jim Devine
Wednesday, March 5, 2008
Bubblicious, Continued
Stephen Roach is almost right. No doubt an avid reader of EconoSpeak, he has come to see that the US has slid into the condition of a bubble economy, and that the post-bubble landscape has the potential to be chronically depressive. His article is constructed around a comparison between the US today and Japan in the wake of its own debubblization. The big difference, of course, is that Japan was and remains a major creditor nation, while the US is storming new depths in external debt.
This matters a lot. Leaving Japan aside for another day, we should note that the broad relationship between US bubbles – stocks, mortgages, creative credit packages, and the currency itself – are ultimately derived from the recycling of dollars exiting the country through the current account deficit. These returning capital inflows purchase assets that support, directly or indirectly, the ability of US consumers to enjoy consumption in excess of production. The moral of the story: the US economy, steadily drawing down its privileges from decades of producing the world’s key currency, is able to maintain otherwise impossible external deficits, and these in turn impose low or even negative savings rates. (For details, read this.)
So Roach has it backwards when he says
Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments. Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption. Yet that’s precisely what got the United States into this mess in the first place — pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt.
Trying to solve the underlying cause of the current account/bubble dependency problem by allowing consumption to collapse is killing the patient to cure the disease. He then partially contradicts himself and gets it right when he immediately adds
A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.
Investments in infrastructure, need we point out, also support consumption, especially if they are financed by an enlargement of public debt, but they do it the right way.
His other suggestion, a weaker dollar, is reasonable as far as it goes, but it would be an exaggeration to call it a policy. There is no magic wand anyone in the US can wave to make the dollar go down: it requires accommodation from those whose currencies have to rise. Moreover, the problem at the moment is that exchange rate flexibility is grossly uneven and doesn’t correspond to trade flows. Nearly all the burden of adjustment is being placed on the dollar-euro exchange rate. This is a big problem for Europe, particularly since the RMB is tied to the dollar. So the EU racks up an ever-bigger deficit with China: how does this help the US? A dollar initiative has to be multilateral, like the Plaza Accord of old. Failing that, or as an inducement to cooperation, the US can begin to explore unilateral options to manage its current and capital accounts.
Sectoral strategies can also play a big role. Emergency action to reduce oil consumption, and therefore imports, should be high on the agenda. We can dust off perfectly reasonable ideas that were shelved at the end of the 1970's, beginning of course with much more aggressive fuel economy standards and support for residential insulation. For more particulars see organizations like ACEEE. The general point is that expenditure-switching is ultimately an investment program.
Incidentally, one of the paradoxes of this election season is the vast gulf that separates the economic pronouncements of the candidates from the actual condition of the country. No one is talking in a coherent way at the moment about the toxic stew of external deficits, bubble finance, and sputtering demand. Creative strategies that could link economic solutions to progress on climate change and other social goals are completely out of the picture. Do we expect sensible policies to just descend on us, like spores from outer space, in 2009?
This matters a lot. Leaving Japan aside for another day, we should note that the broad relationship between US bubbles – stocks, mortgages, creative credit packages, and the currency itself – are ultimately derived from the recycling of dollars exiting the country through the current account deficit. These returning capital inflows purchase assets that support, directly or indirectly, the ability of US consumers to enjoy consumption in excess of production. The moral of the story: the US economy, steadily drawing down its privileges from decades of producing the world’s key currency, is able to maintain otherwise impossible external deficits, and these in turn impose low or even negative savings rates. (For details, read this.)
So Roach has it backwards when he says
Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments. Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption. Yet that’s precisely what got the United States into this mess in the first place — pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt.
Trying to solve the underlying cause of the current account/bubble dependency problem by allowing consumption to collapse is killing the patient to cure the disease. He then partially contradicts himself and gets it right when he immediately adds
A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.
Investments in infrastructure, need we point out, also support consumption, especially if they are financed by an enlargement of public debt, but they do it the right way.
His other suggestion, a weaker dollar, is reasonable as far as it goes, but it would be an exaggeration to call it a policy. There is no magic wand anyone in the US can wave to make the dollar go down: it requires accommodation from those whose currencies have to rise. Moreover, the problem at the moment is that exchange rate flexibility is grossly uneven and doesn’t correspond to trade flows. Nearly all the burden of adjustment is being placed on the dollar-euro exchange rate. This is a big problem for Europe, particularly since the RMB is tied to the dollar. So the EU racks up an ever-bigger deficit with China: how does this help the US? A dollar initiative has to be multilateral, like the Plaza Accord of old. Failing that, or as an inducement to cooperation, the US can begin to explore unilateral options to manage its current and capital accounts.
Sectoral strategies can also play a big role. Emergency action to reduce oil consumption, and therefore imports, should be high on the agenda. We can dust off perfectly reasonable ideas that were shelved at the end of the 1970's, beginning of course with much more aggressive fuel economy standards and support for residential insulation. For more particulars see organizations like ACEEE. The general point is that expenditure-switching is ultimately an investment program.
Incidentally, one of the paradoxes of this election season is the vast gulf that separates the economic pronouncements of the candidates from the actual condition of the country. No one is talking in a coherent way at the moment about the toxic stew of external deficits, bubble finance, and sputtering demand. Creative strategies that could link economic solutions to progress on climate change and other social goals are completely out of the picture. Do we expect sensible policies to just descend on us, like spores from outer space, in 2009?
Monday, March 3, 2008
Knock ,Knock, Knockin' on Someone's Door
The last time I was out canvassing in a Presidential campaign was 1976; the candidate? - Peter Camejo of the Socialist Workers Party! Ah, Youth! After a 28 year lull, here I am again, tramping the streets of Toledo for Obama.
I'd forgotten the thing I'd most hated about canvassing: the snarling dog held back by its owner at the front door, ready to pounce. Someone tells me she's from Chicago and thinks Ohio's too green to vote for. So you're a global warming skeptic?, I respond. Not even a smile. Next house. Yes, we can!
I'd forgotten the thing I'd most hated about canvassing: the snarling dog held back by its owner at the front door, ready to pounce. Someone tells me she's from Chicago and thinks Ohio's too green to vote for. So you're a global warming skeptic?, I respond. Not even a smile. Next house. Yes, we can!
Saturday, March 1, 2008
Education and the Welfare State
Gamerman, Ellen. 2008. “What Makes Finnish Kids So Smart?” Wall Street Journal (29 February): p. W 1.
The article seems to suggest a type of learning suggestive of the ideology of Mao’s China, where the best had the responsibility of helping the others.
“15-year-old Fanny Salo at Norssi gives a glimpse of the no-frills curriculum. Fanny is a bubbly ninth-grader who loves "Gossip Girl" books, the TV show "Desperate Housewives" and digging through the clothing racks at H&M stores with her friends. Fanny earns straight A's, and with no gifted classes she sometimes doodles in her journal while waiting for others to catch up. She often helps lagging classmates. "It's fun to have time to relax a little in the middle of class," Fanny says. Finnish educators believe they get better overall results by concentrating on weaker students rather than by pushing gifted students ahead of everyone else. The idea is that bright students can help average ones without harming their own progress.”
The article also suggests the value of a welfare state without a heavy hand, unlike the US where we get the heavy hand without the welfare -- at least in education.
The article also mentions the obvious fact that there are fewer disparities in education and income levels among Finns. Also
“Each school year, the U.S. spends an average of $8,700 per student, while the Finns spend $7,500. Finland's high-tax government provides roughly equal per-pupil funding, unlike the disparities between Beverly Hills public schools, for example, and schools in poorer districts. The gap between Finland's best- and worst-performing schools was the smallest of any country in the PISA testing. The U.S. ranks about average.”
The article seems to suggest a type of learning suggestive of the ideology of Mao’s China, where the best had the responsibility of helping the others.
“15-year-old Fanny Salo at Norssi gives a glimpse of the no-frills curriculum. Fanny is a bubbly ninth-grader who loves "Gossip Girl" books, the TV show "Desperate Housewives" and digging through the clothing racks at H&M stores with her friends. Fanny earns straight A's, and with no gifted classes she sometimes doodles in her journal while waiting for others to catch up. She often helps lagging classmates. "It's fun to have time to relax a little in the middle of class," Fanny says. Finnish educators believe they get better overall results by concentrating on weaker students rather than by pushing gifted students ahead of everyone else. The idea is that bright students can help average ones without harming their own progress.”
The article also suggests the value of a welfare state without a heavy hand, unlike the US where we get the heavy hand without the welfare -- at least in education.
The article also mentions the obvious fact that there are fewer disparities in education and income levels among Finns. Also
“Each school year, the U.S. spends an average of $8,700 per student, while the Finns spend $7,500. Finland's high-tax government provides roughly equal per-pupil funding, unlike the disparities between Beverly Hills public schools, for example, and schools in poorer districts. The gap between Finland's best- and worst-performing schools was the smallest of any country in the PISA testing. The U.S. ranks about average.”
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