2.5 Million Jobs IV

From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook

CREATING JOBS THROUGH SHORTER HOURS

Employment Effects of Shorter Hours

If the workweek is shortened with no loss in pay, what effect will it have on unemployment? There is no firm answer nor can specific estimates be calculated reliably.

The answer depends in good part on how much the workweek is shortened, how and when it is done, how widely the reduction is applied—and on what other economic developments accompany it. Hours reduction will not take place in a vacuum; its effects necessarily are linked to whatever else is occurring before, during and after the reduction.

No one seriously considers it a magic solution to unemployment or the sole answer by itself. Its strongest advocates claim only that it is but one tool although a fundamental one.

There also are different views on whether its principal value is as a defensive or holding measure— one which prevents increased unemployment—or whether it is equally important as a stimulus, one which generates additional employment.

There is wide recognition, particularly at the individual plant level, that shortening of hours will help prevent layoff of more workers (“cutting hours means less cutting of men”). How effectively it does this depends largely on productivity changes and trends in demand.

The extent to which it will lead to hiring of additional workers is a more complex question. It depends on such factors as management attitudes and its judgment about future needs for labor, the level and trend in demand for the company’s products, the nature of its labor requirements and availability of appropriate types of workers in the area or elsewhere.

But under the most typical and likely circumstances, a company reducing its workweek by several hours ordinarily will have to immediately hire additional workers to provide those hours of work if it wants to maintain approximately the same output or service as before.

The longer-run effects then hinge on productivity movements and whether demand for its products increases sufficiently to enable savings from economies of increased production to finance continued payment to workers. In principle, the combination of the new hiring by this and other companies will build aggregate worker income and, in turn, demand for the products.

The pivotal question, of course, is to what extent, by serving to maintain and often to increase employment, shorter hours will be the dynamic new ingredient needed to bolster demand and increase it to the point where more and more companies have to expand employment further and thereby carry along an accelerating rate of economic and employment growth.

Although no reliable answers can be offered, some rough statistical estimates may be useful to show the potential magnitude and significance of hours reduction in relation to current unemployment levels.

Consider the most recent data available at the time of this calculation. Total employment of non-agricultural wage and salary workers in mid-1962 was 51.3 million (not counting the self-employed, domestic servants or unpaid family workers). Many of these workers (11.2 million) were on workweek schedules under 40 hours for various reasons. This left 40.1 million on workweeks of 40 hours or longer.

For every hour cut from the workweek of this fulltime wage and salary workforce, the number of new employees required to provide the same national total workhours is roughly one million. If 2.5 hours were cut from the workweek, the number of additional employees needed at a 37.5-hour week to maintain the same total workhours would be 2.7 million.

There obviously are many practical limitations in such calculations. It would not be feasible, for example, to reduce hours in all non-agricultural industries uniformly or at the same time.

There also are many factors affecting the actual number of new hires likely to take place immediately upon reduction of hours. The number of new hires would be reduced, for instance, to the extent that some companies made up lost hours by putting involuntary part-timers back on fulltime or by working present employees overtime. Another limitation on hiring is that reduced hours of present employees are not always directly replaceable by new employees. Much would depend on the extent to which work needed in the reduced hours coincided with the skills and geographical location of idle labor. Other significant factors also are involved, some making for even greater hiring. To the extent that new hiring occurs, for example, it would quickly increase demand and touch off additional production and hiring.

But even if the rough ratio of a 1-hour cut in the workweek to 1 million new jobs may be too high for practical purposes, it demonstrates the enormous potential of revision of the workweek as a force for enlarged employment.

If reduction took place for only half the fulltime non-farm workforce, for instance, the rough replacement ratio would be halved: One hour’s cut equals half a million new employed workers. A 5-hour cut to a 35-hour week for only half the workforce would release enough workhours for over 2.5 million jobs. [s-man: the punchline!]

What if similar rough calculations are made for manufacturing alone? There are roughly 14.3 million fulltime wage and salary workers on schedules of 40 hours a week or more (of 16.7 million total employment). The replacement ratio for a 1-hour cut in the workweek for these fulltime workers is 3 65,000 additional workers. For a 2.5-hour cut, it is 950,000 employees. For a 5-hour cut to a 35-hour week, it is over 2 million new employees.

In construction, comparable figures are more difficult to calculate because data on hours worked are often affected by weather and other factors. But very rough estimates indicate about 3 million construction industry workers are on workweeks of 40 hours or more. A 1-hour cut in their workweek would be equivalent to fulltime jobs for about 75,000 additional workers. A 5-hour reduction would be replaceable by over 400,000 new jobs.

In broad summary, then, reduction in hours without curtailment of weekly pay is looked to by the labor movement as a vital new tool to swing into action against excessive and rising unemployment.

Since 1953, after Korea, unemployment has doubled, from less than 3 percent then to nearly 6 percent today. For the decade ahead, with the labor force due to grow at a faster rate and advance in technology gaining momentum, unemployment is threatening to mount even more. If the economy does no better in creating new jobs in the 1960s than it did in the 1950s, the decade would close with an unemployment rate of nearly 10 percent—at least 7 to 8 million fully unemployed.

More from the NY Galbraith Conference

More from the Nov. 14 conference in New York organized by James Galbraith, as promised.

Bernard Schwarz called for the government to take over basic R&D for the Big Three automakers to come up with a truly green engine and to help reduce their expenses.

Bill Black supported bringing back the Glass-Steagall Act. I opposed this, but now seeing the collapse of Citibank am more open to the idea.

Pierre Calame called for the formation of regional monetary systems around the world.

Ping Chen called for a new relationship between the US and China in which the US would relax its restrictions on industries and firms that China can invest in, while China invests more directly in the building of US infrastructure and also in financially supporting its educational institutions.

George Papandreou, former foreign minister of Greece and president of the Socialist International, thanked James Galbraith for his father having saved the life of George's father, who was an economist and later prime minister, who was nearly executed by the junta. Papandreou called for a redistribution of wealth and power with green development to combat "barbarism on the planet."

(Happy Thanksgiving everybody)

So Shrink the Beast, Already!

by the Sandwichman

In the past, people trembled in fear of dragons, demons, gods, and monsters, sacrificing anything – virgins, money, newborn babies – to appease them. We know now that those fears were superstitious imaginings, but we have replaced them with a new behemoth: the economy. -- David Suzuki

David Suzuki is the Canadian counterpart to Carl Sagan -- a renowned scientist turned TV and radio celebrity. He's also an outspoken environmentalist with his own foundation and a weekly column published in newspapers and magazines across Canada. In last week's column, Suzuki highlighted a new book by Peter Victor, Managing Without Growth: Slower by Design, Not Disaster.

A key element of Professor Victor's proposed low-growth economic strategy is reducing work time. Although the discussion of reduced work time doesn't show up until the final chapter, it is hard to imagine a viable alternative to endless economic growth without it. As Suzuki wrote in his column, "This current economic crisis provides an opportunity to re-examine our priorities." (See also the New Scientist on The Folly of Growth).

This current economic crisis... and the political transition in the US. Back in August the New York Times Magazine published an article by David Leonhardt on "Obamanomics." The dramatic climax appeared toward the end of the article when a press aide walked back to Leonhardt's seat on the Obama campaign plane to tell him that Obama had more to say.

"Two things," he said, as we were standing outside the first-class bathroom. "One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?"

I didn’t, I said.

"Well, I’ll send it to you, because it’s one of the most beautiful of his speeches," Obama said.

In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, "counts special locks for our doors and the jails for those who break them” but not "the health of our children, the quality of their education or the joy of their play."

The second point Obama wanted to make was about sustainability. The current concerns about the state of the planet, he said, required something of a paradigm shift for economics. If we don’t make serious changes soon, probably in the next 10 or 15 years, we may find that it’s too late.

"Something of a paradigm shift for economics" would require a move away from economic growth for growth's sake. Otherwise, it wouldn't be much of a paradigm shift. Managing without growth necessitates the reduction of working time. Otherwise, unemployment and poverty will destroy social stability.

The Sandwichman would like to call attention again to his "American Vision", submitted to the change.gov transistion website, of a Shorter Work Time Jubilee.

Five versions of ‘truth’ for the Three Mile Island nuclear disaster.

I had a phone call from a member of the Australian Citizens' Electoral Council this morning. The CEC is the Australian arm of Lyndon La Rouche's group and, as such, this branch is also heavily involved in the promotion of the expansion of nuclear power across the globe. When I questioned the wisdom of promoting such a dangerous and unsustainable form of energy I was assured by the caller that the science surrounding nuclear power is sound. I decided to have yet another look at some of the studies done. To simplify, I focussed on those related to Three Mile Island and specifically on the way the exposure levels of radiation were determined. What I found was a divergence of 'objective' observations clearly at odds with each other. (References 3, 4 and 5 all refer to the one report, the 1990 Hatch-Susser study.]

Harold Denton, Director of the Office of Nuclear Reactor Regulation ““They are getting 63 curies per second…[in] the order of three times what they were yesterday, which would put us in the 1200 millirems per hour." [1]

Joseph M Henri Chairman of the Office of Nuclear Reactor Regulation: “To a distance of about five miles. I have got a reading. During one of these burst, releases up over the plant several hours ago, up over the plant about 1200 millirems per hour which seems to calculate out, by the time the plume comes to the ground where people would get it, would be about 120 millirems per hour. Now, that is still below the EPA evacuation trigger levels; on the other hand, it certainly is a pretty husky dose rate to be having off-site [2]

The American Nuclear Society: “in every instance, the level of exposure was deemed to be very low” – an average of approximately 10 millirems and projected maximum dose of 100 millirems. [3]

Jan Beyea (nuclear physicist involved in the Hatch-Susser study): He estimates the maximum was 200 millirems. He said the figure could be up to four times that much, but said that was "very, very unlikely." Average doses in the area northwest of the plant - the direction in which the radiation plume traveled - were about 28 millirems, he said….. Some of the gauges simply were not able to measure amounts as high as what was released, said Jan Beyea…"It was insane," Beyea said of the inadequate monitoring. "It was sort of a sign of the optimism that nothing would ever go bad." [4]

Text from the scientific abstract of the Hatch-Susser study as published in the American Journal of Epidemiology: “the model of accident emissions was validated by readings from off-site dosimeters.” [5]



It is alarming to witness the parallels occuring in the fields of enviromental monitoring with that of the pesticide industry. Industry and government technicians seek out the areas where toxins are most likely to be watered down and base their observations and conclusions on studies in those areas. The vulnerability of individuals to narrow swathes of intense bands of poisons is ignored completely.

At this juncture in time I believe that it is justifiable for one to conclude - on the basis of a long history of disasters and accidents - that nuclear technology has been truly tested 'in the field'. Like many other industrial sectors it has been found wanting and so have the associated regulatory and academic institutions. Governance has simply not kept pace with the dangerous technologies employed by the world's transnational corporations.

[1] Pittburgh Post-Gazette Monday, April 16, 1979. The newspaper published a special report from the Associated Press that included excerpts of tape recordings of the proceedings of the Nuclear Regulatory Commission including the transcripts of the taped voices of Harold Denton, Director and Joseph M Henri Chairman of the Office of Nuclear Reactor Regulation. Their voices were taped on 30th March 1979 as they responded to the enormous release of radioactive gases at the Three Mile Island nuclear power plant in the US. As published in ‘SECRET FALLOUT - LOW-LEVEL RADIATION FROM HIROSHIMA TO THREE-MILE ISLAND – Chapter 18 ‘Too Little Too Late’ by Ernest Sternglass.
http://www.ratical.org/radiation/SecretFallout/SFchp18.html

[2] Pittburgh Post-Gazette Monday, April 16, 1979. The newspaper published a special report from the Associated Press that included excerpts of tape recordings of the proceedings of the Nuclear Regulatory Commission including the transcripts of the taped voices of Harold Denton, Director and Joseph M Henri Chairman of the Office of Nuclear Reactor Regulation. Their voices were taped on 30th March 1979 as they responded to the enormous release of radioactive gases at the Three Mile Island nuclear power plant in the US. As published in ‘SECRET FALLOUT - LOW-LEVEL RADIATION FROM HIROSHIMA TO THREE-MILE ISLAND – Chapter 18 ‘Too Little Too Late’ by Ernest Sternglass.
http://www.ratical.org/radiation/SecretFallout/SFchp18.html

[3] Health Studies Find No Cancer Link to TMI. From the American Nuclear Socity website. Accessed on 26th November 2008.
http://www.ans.org/pi/resources/sptopics/tmi/healthstudies.html

[4] Gaps in research have angered some who were there in 1979
TOM AVRIL / Philadelphia Inquirer 26mar04
http://www.mindfully.org/Nucs/2004/Three-Mile-Island26mar04.htm

[5] American Journal of Epidemiology Vol. 132, No. 3: 397-412
Copyright © 1990 by The Johns Hopkins University School of Hygiene and Public Health
research-article
CANCER NEAR THE THREE MILE ISLAND NUCLEAR PLANT: RADIATION EMISSIONS
MAUREEN C. HATCH1,, JAN BEYEA2, JERI W. NIEVES1 and MERVYN SUSSER1,3
http://aje.oxfordjournals.org/cgi/content/abstract/132/3/397

1Division of Epidemiology, Columbia University School of Public Health New York, NY
2National Audubon Society New York, NY
3Gertrude H. Sergievsky Center, Columbia University New York, NY

2.5 Million Jobs III

From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook

CREATING JOBS THROUGH SHORTER HOURS

The Government’s Role

The government could encourage bargaining to reduce hours, set an example by adjusting hours on government work and/or enact new workweek legislation. A positive policy would require specific announcement that the Administration would not discourage reductions in hours and would welcome this, at least in particular industries, as one of the variety of measures individual industries might use to bolster employment security.

Setting an example, in its role as an employer as it has done in the past. would require establishment of new reduced workweeks for employees to serve as an experiment and broad guide for private industry. It is worth noting that about a third of U.S. municipal governments already have fulltime workweek schedules shorter than 40 hours for their administrative and clerical employees.

New workweek legislation could of course take many forms. The principal approaches suggested have called for a reduction in the 40-hour standard established by the Fair Labor Standards Act, either immediately or in several steps spread over a period of time and either uniformly for all covered industries or through a special industry committee procedure functioning on an industry-by-industry basis. Each of these alternatives has some past legislative precedent.

Another major suggested legislative approach is a flexible workweek to be adjusted according to changes in the unemployment rate. A federal fund financed by a tax on employers could be established to help maintain weekly pay and national consumer purchasing power upon such reduction in hours. If the payments from the fund were scaled according to whether the employer hired more workers when he reduced hours, there would be an additional incentive for increased employment.

The Return of Rubinomics

As the President-elect announced the appointment of Peter Orszag as head of OMB, he said something that might cheer up those deficit hawks:

In these challenging times, when we are facing both rising deficits and a sinking economy, budget reform is not an option. It is an imperative," Obama said in the statement. "We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group," he said. Obama said he would ask his economic team to "think anew and act anew" to meet new challenges. "We will go through our federal budget -- page by page, line by line -- eliminating those programs we don't need, and insisting that those we do operate in a sensible cost-effective way," Obama said.

Rubinomics – at least as I understood it – meant that we accelerate Federal spending in the midst of a recession but tell Wall Street over the long-term, we are serious about long-term fiscal restraint. We might also give tax cuts to liquidity constrained people such as the working poor but raise taxes on those who are not liquidity constrained – such as Bill Gates and Warren Buffet. In other words, short-term fiscal restraint to actually REDUCE national savings with some assurance to Wall Street that once this recession is over, we restore a commitment to increasing savings and investment.

While John Taylor seems confused about this one, Paul Krugman gets it:

Thus, John Taylor — a very good economist, when he wants to be — insists that we must respond to the economy’s temporary weakness with a permanent tax cut. Let us reason together. Does it make sense to let one recession dictate tax policy in perpetuity? What happens if there’s a boom; can we increase taxes (no, because then the cut wouldn’t have been permanent.) What if there’s another recession? Do we permanently cut taxes again? Is there a tax-cut ratchet (or maybe racket)? Think this through, and it makes no sense at all. And Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook

In just a few weeks, we will finally have a President who also gets it even if that lame duck never did.

Greg Mankiw on Obama’s Fiscal Stimulus Proposal

Does Greg Mankiw have a good point here:

Dividing one number by the other, that works out to $280,000 per job. What is going on here? Logically, it must be one of three possibilities: 1. The fiscal stimulus is going to be much smaller than is being reported. 2. The new administration is setting a low bar for itself when it comes to job creation. 3. The Obama team believes in very small fiscal policy multipliers.

Greg is reviewing to this:

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years ... Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

To be fair, I praised the size of the proposed stimulus and I also wondered why there was such a low bar for job creation over the first two years.

But let me suggest an alternative explanation (as opposed to low multipliers) based on something the President-elect has said about things getting worse before they get better. Could it be that his economic team expects employment to fall even further before this proposed stimulus turns things around? For example – suppose we wake up in the New Year to an 8 percent unemployment rate which would translate into about 3.5 million jobs lost. To get a net increase of 2.5 million new jobs would mean we would have to see 6 million jobs created over the next two years. If the actual fiscal stimulus were $500 million, then we are talking about $83 thousand not $280 thousand. And the implied multiplier would be closer to 1.2 not 0.36.

An Appeal to Reason on Iran

On November 21, the inimitable Juan Cole (http://www.juancole.com) posted an appeal from 20 experts on Iran from both parties with a variety of backgrounds, including three ambassadors, for a more reasonable policy on Iran. One should go to his site to see the full discussion, but the highlights are five recommendations and the deconstruction of eight myths. I list them without details. Cole called for others to publicize this, and so I am doing so here a few days late, and making clear my agreement with and support of this appeal.

The five recommendations:
1) Replace calls for regime change in Iran with a long term strategy.
2) Support human rights through effective international means.
3) Allow Iran a place at the table in determining the future of Iraq and Afghanistan, along with other key states.
4) Address the nuclear issue within the context of a broader US-Iran opening.
5) Re-energize the Arab-Israeli peace process with the US being an honest broker.

The eight myths:
1) President Ahmadinejad calls the shots on foreign and nuclear policy.
2) The political system in Iran is frail and ripe for regime change.
3) Iranian leaders' religious beliefs render them undeterrable.
4) Iran's current leaders are implacably opposed to the US.
5) Iran has a declared intention to attack Israel to "wipe Israel off the map."
6) US sponsored "democracy promotion" can help bring true democracy to Iran.
7) Iran has clearly and firmly committed to developing nuclear weapons.
8) Iran and the US have no basis for dialogue.

2.5 Million Jobs II

From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook

CREATING JOBS THROUGH SHORTER HOURS

The relative merits of alternative economic approaches are not evaluated here. The points below may be useful, however, in assessing the wisdom of hours reduction as against other measures generally:

1. Shortening of hours does not need pinpoint timing for full effectiveness but is practicality and value diminish once a full-fledged recession is in process. The workweek can best be reduced with no loss in weekly pay while the economy is still comparatively prosperous, before unemployment pressures have mounted to become the dominant economic force. If the shorter hours tool is held in reserve too long and turned to only after the full shock of recession or immense load of unemployment arrives, its practicality and positive benefits will be severely blunted. Shorter hours would likely come then largely in an undesirable worksharing, cut-wage form force by overwhelming unemployment and would not be adequate to the task of contributing substantial momentum to employment upturn.

2. Advocacy of shorter hours does not mean rejection of other measures to increase employment. The choice need not and should not be an either/or proposition. Reduction of hours should be one of many steps applied to control unemployment, with the size of the reduction determined by the effectiveness of the overall program. If other measures prove effective in providing needed jobs, hours reduction can of course proceed more gradually.

3. Shorter hours are increasingly recognized by most workers and the public generally as directly related to the unemployment problem. This is not true to the same extent for other measures, such as government fiscal or monetary policies. Because so many workers would be directly or consciously involved in a general shortening of hours, there likely would be a wide sense of participation and appreciation of the anti-unemployment campaign, with accompanying psychological benefits for the economy.

4. Many of the collective agreement and government measures used to ease unemployment effects are geared to helping the unemployed worker hunt for a new job. These include private public retraining programs, relocation aid, counseling, severance pay and approaches. A major objective of shorter hours, on the other hand, is to reduce the need for layoffs and thereby encourage retention of workers in the type of work and industry to which they are already attached and in which they have already acquired training.

5. There is rather wide recognition that rapid technological strides will enable or force radically shorter hours at some point in the future, perhaps not all distant. Reduction in typical hours of work in the present period are necessary to aid in the economic and social transition to increased reliance on technology in place of manpower.

1979: A Warning and a Prophecy for America

"Washington must realize that the dollar can no longer act as the sole reserve currency in the world. The dependence of the world on the dollar is not a blessing but a curse for America."

.....Nobody knows how Turkey Zaire, Peru and many other impecunious countries will ever pay back their loans to Citibank, Chase or the rest of the big U.S. lenders. The debtor countries, pleading poverty, could indefinitely defer repayment. Then the Federal Reserve Board would have to cover those bad debts, meaning that the U.S. taxpayer would finance the bailout. Says Zombanakis: "We have created a system in which almost the entire debt of the world rests on the Federal Reserve."[1]

These are the words of 'gunslinger' loan shark that sold syndicated loans [2] to the third world at an astronomical rate, according to economic historian and author Michael Moffitt [3].

"...Zombanakis did not invent the syndicated loan, but he is the one who put real flesh and blood in the market. Zombanakis brought numerous countries to the market who had never borrowed in international money markets before. Jetting around the world he dropped in on companies and finance ministries drumming up loan business for Manufactures Hanover, in the late 1960s when the Shah of Iran was virtually unknown outside the Middle East, he was introduced to Europe’s banking elite by Minos Zombanakis. As one banker told ‘institutional investor’ Zombanakis almost single-handedly got Manufacrturers to make a loan to Iran when it did not even have enough reserves to cover a month’s imports.” Loans like these were extremely risky and were sold more on Zombanakis’ bravado than on Iran’s credit-worthines...."[4]



[1]
The Saudis and the Dollar
By Marshall Loeb. Monday, Mar. 26, 1979
http://www.time.com/time/magazine/article/0,9171,916691,00.html

[2] "Rather than assuming the whole risk of, for example, a $100 million loan to Mexico, the lead bank will telex a hundred others and offer them a piece of the loan. Syndicated loans are priced at the going interest rate, known as LIBOR, (London Inter-Bank Offered Rate) plus a margin known as a spread, which is inevitably proportional to the perceived creditworthiness of the borrower. For years, Brazil borrowed a tiny fraction over LIBOR. Once bankers got wind of Brazil’s smoldering debt problems, its spreads quickly soared over 2 percent. "‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.

[3] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk. Pages 57 - 61

[4] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk. Pages 57 - 61

Is the US Treasury Getting too Big to Fail?

For an administration based on an ideology of untrammeled capitalism and which demands that all socially useful programs meet cost-benefit calculations heavily tilted toward inaction, the government seems to be getting little bang for its buck. Here is a Bloomberg estimate of a commitment of $7.7 trillion. Yes, the government can recoup some of this money, but probably not a lot.

Pittman, Mark and Bob Ivry. 2008. "U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit." Bloomberg.com (24 November).

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

[...]

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

Mutual Aid

Recently, I was talking with a bunch of other parents of teens who have high-functioning autism.* We were talking about the massive cut-backs in public services that have been happening and loom on the immediate horizon.

But the dark cloud may have a silver lining. Here in California, it seems, parents spend tremendous amounts of time and effort on the phone and in meetings (due process, etc.) hassling with the care-givers and -financers in order to get appropriate services or something reasonably close to it. In other places (such as Australia or most of the U.S.), it seems, many fewer publicly-provided services are available. But this (bad) situation can encourage a positive response: while in California, the state-sponsored Regional Center used to provide services such as "respite care" (time away from the damned kid), in other places, the parents pool resources to provide respite care to each other. There's less time spent hassling the care-givers and -financers, because they don't do much if anything.

This kind of "mutual aid" (a concept central to libertarian socialist or anarchist thought, according to the Wikipedia) can be immensely liberating. However, I can imagine that a lot of time and effort can go into hassling other participants if feelings of solidarity are weak. If successful, this mutual aid can promote feelings of solidarity, encouraging a virtuous circle. In the US in the 19th century, labor unions were much more involved with this type of activity (in burial societies, providing unemployment insurance) than they are today (where the Andy Stern business union model of dues extraction seems the rule).

If the current recession turns into something more serious, it could combine with the longer-term trend of public-service cut-backs to encourage more mutual aid. This might in turn be the basis for broader "grass roots" political movements, independent of the political establishments (the two-party duopoly).

On the other hand, people might look to (soon-to-be) President Obama as the source of all solutions, sticking to the atomizing electoral model of politics. The latter can have the benefit of providing standardized public services. On the other hand, decentralized mutual aid tends to produce a division between groups having different amounts of income and health, belonging to different ethnic groups, etc. It does not seem to encourage mass grass-roots participation, except in short-lived waves.

I don't know what's going to happen to the economy (though it sure looks bad). What's going to happen with the society is even more difficult. With incomes falling along with public services, people could be driven into each others' arms (mutual aid). On the other hand, we may be split up into warring communities or praying that our benevolent leaders will solve our problems. Ideally, we could see the rise of new mass movements that would change the balance of political power, shifting it to the left, in favor of justice.

* It's the kids who have it, not the parents. That ambiguity is a problem with the "PC" language that prescribes "a person with a disability" to replace "a disabled person." I'm generally in favor of that "person first" language, by the way, because in the latter case the person is identified with the disability instead of having the disability seen as contingent.
--
Jim Devine

Deflation!

Some people in the media are freaking out about the possibility of steadily and/or steeply falling prices, i.e., deflation. So I figured out what kind of deflation was currently being expected by those in financial markets.

I calculated the expected inflation rate implied by the difference between the rates on constant-maturity non-indexed 5-year government bonds and the inflation-indexed version of the same bonds. This number was steady at between 2 and 3 percent per year from 2003 to early July of 2008, which in general fits with the inflationary experience of the time. Then, there was a sudden fall. (What happened on July 2 or thereabouts?) As of November 20, it was –1.79%!! It's not just the media. The finance types are also freaking out.

Why is deflation a bad thing? Part of it is if people expect prices to fall, they delay purchases. Also, if prices are falling steadily, people don't want to borrow because the real value of their debts would rise. It's the opposite of the case of the inflationary 1970s, when people wanted to borrow a lot because the debts would lose value over time.

In looking at loans economists use the "real" interest rate, which is the nominal or money interest rate minus the expected inflation rate. Suppose I pay 4% interest on a loan. At the same time, inflation is barreling along at 2% per year and I expect it to do so in the future. That means the money I'm paying my loans back is losing 2 percent of its purchasing power each year. Thus, I subtract the inflation rate (2%) from the nominal rate (4%) to get the real rate, the interest rate in constant purchasing-power money (2%).

If the inflation rate that people expect goes from 2% per year to -2% and the interest rates appearing on loan agreements stays put at 4%, the real interest rate rises from 2% to 6%. And it's this rate that counts in determining decisions. The nominal rate can fall, of course, counteracting this. But it can't fall below 0. After that, increasing rates of deflation mean rising real rates.

Rising real rates make the recession worse by discouraging borrowing and spending. Recession then encourages further deflation. It can be a vicious circle.

It’s more than a matter of expectations. If people are locked into long-term loans with constant nominal interest rates and amortization rates on principal, and if nominal wages and salaries generally fall with prices, that means that debt service rises relative to wages due to deflation. If general enough, this phenomenon encourages bankruptcy.

Key to the last paragraph is the assumption that nominal wages and salaries fall with prices. A “true” deflation can be distinguished from a minor one by saying that in a true one, we see a wage/price spiral going downward. If wages and salaries don’t fall as quickly as prices, on the other hand, a mild deflation causes profit squeezes. Both are unpleasant in a capitalist economy.

--
Jim Devine

Tyler Cowen on Investment During the 1930’s

Tyler Cowen has been busy opining on macroeconomic policy during the 1930’s including a November 23rd NYTimes oped critiqued by Econoclast but let us turn attention to Tyler’s critique of what Brad DeLong had to contribute. While I am grateful that Tyler pointed out my graph of net investment, I’m puzzled by this:

Only in 1941 did net investment exceed its 1929 level. Here's a chart which seems consistent with these claims and which shows the difference between the net and the gross series for investment. The waves are very similar but at different absolute levels. Can any readers explain what is going on In this time period, using this data, is net or gross investment a better indicator of recovery and economic conditions? Is the pro-New Deal claim that making net investment "less negative" (but still negative) counts as a success or rather that the gross investment series is what matters?

Whether one uses gross investment as Brad did – or net investment as I did (given the George Will tirade) – the measured increase in investment demand was roughly the same. So Tyler’s first question seems silly from a Keynesian perspective, while the answer to his second question is YES.

One might be wondering why I choose to graph exports (EX) minus imports (IM) as a share of GDP (all series in real terms) for the more recent years in a post about net investment during the 1930’s, but this is by way of an analogy. We have had negative net exports (NX) for quite a long time but we are not shy about saying how an increase in export demand had been fueling economic recovery until recently. So I do not see anything odd about Brad showing us gross investment without including the depreciation chart.

Now if Tyler wants to lament that the capital stock fell during the 1930’s, he has a point but a very different point. Incidentally, the net financial wealth of the U.S. has also been eroding during this prolonged period of current account deficits.

Globalised banking 1944 - 1983

The following flow chart describing developments in the global banking and finance industry between 1944 and 1983 has been mostly compiled from information provided in Michael Moffitt's 1983 book 'The World's Money - International banking from Bretton Woods to the brink of insolvency'[1]. The common theme is clear; that the form of globalisation that has taken place over those decades has been largely determined by (mostly) western transnational corporations and with one overriding goal - worldwide profit maximisation.

Bretton woods (1944). -->The birth of the Eurodollar (1949) --> accelerating concentration of industry and banking --> American, Japanese and European corporations extend their global reach. --> the spectacular rise of the intracorporate (nonmarket) economy of the global oligopolies --> increasing intervention of government into the “private sector”--> A common tilt in investment and speculative decisions. US pressures European countries to restore convertibility of their currencies under the provisions of Bretton Woods (1958) --> Marked speculation in currencies begins with the re-emergence of hot money --> Development of the Euromarket (mid 1960s) --> a new generation of young bankers with the desire to go global. --> desire to build a global bank free of government regulation. US government prohibited interest on chequing accounts --> corporations and wealthy individuals transferred money out of these accounts and into financial products that earned interest (eg Treasury securities) --> banks forced to find new ways to attract corporate savings to stop the drain of funds --> negotiable certificates of deposits invented (CDs) by Walter Wriston of Citibank. --> banks bid competitively for corporate funds. --> the Euromarket undermines domestic monetary policy (1966). The 1973 oil shock [usury?] --> Petrodollar recycling 1973 --> bankers court the Saudis for deposits and conglomerate international banks try to drum up loan business from the 3rd world --> syndicated loans -->Growth of 3rd World debt --> Debt extended with eye to natural resources --> Interbank market--> Vast new opportunities to wheeler deal on a global scale --> Governments lose influence over events -->A regime of floating exchange rates is midwifed by massive speculation against the US dollar (1975)--> Despite the IMF the banks soon take over the business of lending to governments --> No way of recognizing a loss on a sovereign loan [Usury] -->European, Japanese and Arab banks take US share of global finance --> East-West Trade increased dramatically. Meaner terms are implemented on 3rd World loans [Usury]--> further debasement of credit standards in loans to 3rd World --> new forms of big business emerge in advisory role on loan reschedules to the 3rd World --> US Government bail out banks that made irresponsible loans to the 3rd World --> House of cards --> Global debt crisis now permanent. Usury in the form of extraordinarily high interest rates is institutionalized to preserve dollar hegemony (Volker, Oct 1979 ) --> IMF is now a supranational agency intervening in domestic politics --> Zero coupon bonds created by banks to avoid Government tax on interest. -->Economic and social disaster in poor countries (1983) --->



“…In the short run, the challenge of the global corporation concerns stability; in the long run, development. There has never been a time since the Great Depression when there has been more economic uncertainty around the world [1974]. But the corporate prospect of a world without borders offers something more distressing than uncertainty. It is a vision without ultimate hope for a majority of mankind. Our criterion for determining whether a social force is progressive is whether it is likely to benefit the bottom 60 percent of the population. Present and projected strategies of global corporations offer little hope for the problems of mass starvation, mass unemployment, and gross inequality. Indeed, the global corporation aggravates all these problems, because the social system it is helping to create violates three fundamental human needs: social balance, ecological balance, and psychological balance. These imbalances have always been present in our modern social system; concentration of economic power, antisocial uses of that power, and alienation have been tendencies of advanced capitalism. But the process of globalisation, interacting with and reinforcing the process of accelerating concentration, has brought us to a new stage…” [1]

[1]‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.

[2]‘Global Reach – The power of the multinational corporations’ by Richard J Barnet & Ronald E Muller. Simon and Schuster1974. SBN 671-22104-3 Paperback. Page 364