Never Say Never

by Sandwichman,

Over at TPM, in reply to prompting by the Sandwichman, Randall Wray wrote:

Work week reduction (or "work sharing") has never, anywhere, eliminated involuntary unemployment and underemployment; indeed, it has never had a significant effect. That reserve army of the unemployed persisted despite reduction to the 12 hour day, the 10 hour day, and the 8 hour day. It will persist even if we can move to the 6 hour day.

Meanwhile, Dean Baker wrote that one of two simple answers to the problem of secular stagnation was:

Work fewer hours - while workers in other wealthy countries can count on 4-6 weeks a year of vacation, workers in the United States are guaranteed no paid time off. As a result, the average work year in the United States involves almost 20 percent more hours than the work year in Western European countries. As fringe benefits a shorter work year can be more family friendly and also we can be less polluting if we take the benefits of our productivity growth in leisure instead of income.

Stimulus and Stagnation

by the Sandwichman

Economic stimulus is the talk of the town. Over at Talking Points Memo (and on his own blog), Robert Reich has raised the specter of "secular stagnation" -- what happens if we stimulate the economy but consumers refuse to go back to their old, pre-crisis spending ways?

Dean Baker thinks secular stagnation is easy and takes a page from the Sandwichman's blog: reduce the hours of work. Sandwichman thinks "secular stagnation" is just the economists' way of being dissing cornucopia. Sandwichman engages Randall Wray in a discussion of shorter working time in which Professor Wray warns against saddling the good idea of shorter hours with "unwarranted claim that they will relieve involuntary idleness."

Deflation??

A pretty good economic journalist, David Leonhardt, finds the happy side of falling prices. Let's look into the issue more.

The New York Times / December 17, 2008
Economic Scene: Finding Good News in Falling Prices
By DAVID LEONHARDT

Very few Americans alive today can remember a time when prices across the economy were falling. But they're falling now.

The cost of fruits, vegetables, clothing and vehicles are all dropping. Housing prices have been falling for more than two years, and a barrel of oil costs about $45, down from $145 in July.

The inflation report released by the government on Tuesday showed that the Consumer Price Index was 3 percent lower last month than it had been three months earlier. It was the steepest such drop since 1933.

Note that most of the prices that are falling are "commodity" prices that are inelastically supplied and demanded (like those of gasoline, fruits, veggies, etc.) The economist Michal Kalecki (who developed a lot of Keynesian economics before Keynes) called this the "demand-determined price" sector. We should expect falling demand to hit this sector hardest.


In general, significantly falling prices have not spread to the manufacturing or service sector (where prices are mostly determined by costs), with the obvious exception of autos.

By the way, falling housing prices do not show up in a big way in the usual measures of the "cost of living," which only cover newly-produced goods and services. The falling house prices that Leonhardt points to are like falling stock prices in that they refer only to assets, not newly-produced items. So they don't show up in the CPI or similar measures.

The cost of living measures do not assume that each person buys a house each year (or some period like that). Instead, they measure what the statisticians believe people would pay if they rented the houses. Thus, as house prices fall, that might affect the rental cost of housing and the cost of living. But actual rents did not rise as much as the asset price of housing in the late bubble, so they're not likely to fall as much either. Most workers -- who are mostly renters -- won't benefit much.

In any event, falling house prices will not be a benefit to those of us who are strapped for cash due to lay-offs or stagnant income and have a really hard time borrowing. Mostly, they will hurt those who (partially) own houses, pushing them in the direction of being "upside down" (having negative equity in the house). Many have already achieved that fate. This encourages the recession by depressing consumer spending further.

These [price] declines have raised fears of a deflationary spiral — fears that help explain the Federal Reserve's surprisingly large interest rate reduction on Tuesday. And there is good reason to fear deflation. Once prices start to fall, many consumers may decide to reduce their spending even more than they already have. Why buy a minivan today, after all, if it's going to be cheaper in a few months? Multiplied by millions, such decisions weaken the economy further, forcing companies to reduce prices even more.

This "expectations effect" is only one reason why deflation is a bad thing. In addition, deflation raises the real value of the debts of the debtors. It's true that it also raises the real value of the assets of the creditors. But debtors are usually the bigger spenders, so the net effect is to depress demand. Further, as the debtors are squeezed, more and more of them go bankrupt. This undermines the real value of the winnings of the creditors, further depressing demand.

In simple terms, if you borrowed a bunch of money last year and your money income falls now, then you discover very quickly that your interest and principal payments have not fallen, pushing you to the wall.

One rule is that the more debt people and companies have accumulated in the past, the more they and the economy suffer due to deflation. We in the US have just ended a monumental debt-powered splurge, at least among consumers. So avoiding deflation is especially important.

In passing, it's interesting to note that the very orthodox economist Irving Fisher developed his "debt-deflation theory of great depressions" back during the last serious deflation (the early 1930s). Somehow, the role of debt has been elided.

But a truly destructive cycle of deflation is still not the most likely outcome. For one thing, the price of oil cannot fall by another $100 in the next few months. For another, the federal government will soon, finally, be fully engaged in trying to stimulate the economy.

In mechanical terms, the Fed's rate cut is actually a decision to pump more money into the economy (which will cause short-term interest rates to fall). Starting next year, the Obama administration is planning to spend hundreds of billions of dollars on public works and other programs.

It should be mentioned that the Federal Reserve has just run out of interest rate ammunition to stimulate the economy. Maybe "Helicopter Ben" can do something just by printing a lot of money, but we'll see how effective that is. On the other hand, Obama's stimulus plan will not happen for months... Who knows what will happen in the meantime or how large the deficit hawks will allow the stimulus to be.

All else being equal, more money sloshing around an economy causes prices to rise. In this case, it will probably keep them from falling as much as they otherwise would have.

Right.

So amid all the legitimate worries about deflation, it's worth considering what may be the one silver lining in the incredibly bad run of recent economic news: The cost of living is falling.

Jobs are disappearing, bonuses are shrinking and raises will be hard to come by. But the drop in prices, which isn't over yet, will make life easier on millions of people. It's possible, in fact, that the current recession will do less harm to the typical family's income than it does to many other parts of the economy.

There's a lot of truth to this (Leonhardt's main point). My grandparents used to tell me about how they (who weren't hurt by the 1929 Crash or the 1929-33 Collapse) were able to get real bargains because of the deflation then, even buying luxury goods that they normally couldn't afford.

But a lot of other people suffered big time. My research has found that the amount of nutrition received fell significantly. Per capita food energy per day fell about 5% between 1929 and 1933.

The reason is something called the sticky-wage theory. Economists have long been puzzled by the fact that most businesses simply will not cut their workers' pay, even in a downturn. Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.

The Post-Keynesian economist Paul Davidson also praises the sticky money (nominal) wage as a nominal anchor that prevents deflation.

The stickiness of money wages is crucial, because without it, falling prices could start a downward wage-price spiral, with wages falling due to falling prices and prices falling due to falling wages. It's this spiral which represents true deflation, the kind of deflation that's been so destructive in the past. A merely temporary fall in prices does not have this kind of negative effect.

Traditional economic theory doesn't do a good job of explaining this [wage stickiness]. During a recession, the price of hamburgers, shirts, cars and airline tickets falls. But the price of labor does not. It's sticky.

In the 1990s, a Yale economist named Truman Bewley set out to solve this riddle by interviewing hundreds of executives, union officials and consultants. He emerged believing there was only one good explanation.

"Reducing the pay of existing employees was nearly unthinkable because of the impact of worker attitudes," he wrote in his book "Why Wages Don't Fall During a Recession," summarizing the view of a typical executive he interviewed. "The advantage of layoffs over pay reduction was that they 'get the misery out the door.' "

This makes a lot of sense. I hope that orthodox economists are going to follow this lead and return to the 1930s fashion of actually talking to businesscritters and workers as a way of finding out the nature of economic behavior, to supplement the standard abstract/deductive or statistical techniques.

However, it's not true that "Traditional economic theory doesn't do a good job of explaining" downwardly sticky wages. The problem instead is that the dominant schools of economists ignore a very traditional reason why workers resist or resent money-wage cuts (perhaps because of an obsession with "representative agent" models). It's a version of the prisoners' dilemma.

The standard story is that if workers accept a nominal wage cut, it will lead to falling prices, ceteris paribus. Thus, real wages won't fall much, but they will fall a bit, raising employment. The problem with this story is that each group of workers fear that no other groups of workers will take wage cuts. If one group takes a money-wage cut and others don't, prices won't fall much and the group will suffer real wage declines. There won't be a significant increase in employment (especially given the aggregate demand failure). Fearing this fate, most groups of workers resist nominal wage cuts. This means that the only price decreases are in the commodity sector (gasoline, food, etc.) and assets (houses, stocks, etc.)

If money wages in the manufacturing and service sectors don't fall, but the demand for products is falling, then employers will employ lay-offs because their profits will be squeezed. They will also refrain from expanding their operations (as they're doing right now). This encourages further falls in employment.

Lay-offs mean that the average money wage of the entire labor force (employed and unemployed) may fall even though that of employed workers does not. Falling asset prices will also hurt those workers who own houses or other assets, discouraging consumer spending. This encourages further production cut-backs and lay-offs. A downward spiral can occur even though money wages don't fall.

Wage stickiness, by the way, is likely less important in the U.S. economy than it was a generation ago. That's because of the "neoliberal policy revolution" of the 1980s and after (starting with the resistable rise of Paul Volcker to power in August 1979). This revolution has meant that more and more workers are treated as commodities. Fewer and fewer of them belong to labor unions (outside of the government sector). So it's more and more likely that nominal wages will fall during the current recession.

It's just possible the neoliberal policy revolution, which aimed at returning the economy to its pre-1929 state, has brought back the deflationary disaster of the 1930s. Of course, we won't know until it happens. If the reflation efforts of the Fed and the federal government succeed, any undermining of the sticky wages phenomenon is irrelevant in practice.

If the anti-government rhetoric of the neoliberals is to be taken seriously, it's ironic that its policies have put so much responsibility has been put in the Fed's and federal government's hands.

Companies resort to cutting jobs and giving only meager pay increases, increases that are even smaller than the low rate of inflation that's typical during a recession. This recession may well be the worst in a generation — but thanks to the stickiness of wages, the pay drop for most families may not be much worse than that of a typical recession.

The forecasting firm IHS Global Insight predicts that prices will fall by an additional 1 percent in 2009. That would bring the total drop, from the summer of 2008 to the end of 2009, to roughly 4 percent. But you can be sure that most executives will not force their workers to take a 4 percent cut in their paychecks. The fears about morale will be too great.

Should we rely on this forecast? I doubt it. The accuracy of economic forecasts has dived even lower in recent years. Forecasts seem better measures of what people expect than of what might actually happen in the world.

Strange as it sounds, the drop in prices will keep real incomes — inflation-adjusted incomes — from dropping too much.

I don't mean to make things sound better than they are. The economy is bad and getting worse. A deflationary spiral remains a real threat, even if it's not the most likely result. No matter what, unemployment is headed much higher.

People who keep their jobs, meanwhile, will suffer through some stealth pay cuts — higher health insurance premiums, for instance. Raises will also remain meager in 2010, even if prices start rising again. Like every other recent recession, this one will force families to take an effective pay cut, and a significant one.

Alas, "stealth pay cuts" are not really stealthy: they hit people directly in the pocketbook, having the same effect as non-stealthy pay cuts. Higher health insurance premia reduce the amount of income left over for other purposes. And they're hard or impossible to avoid, just like a payroll tax increase. They encourage resentment -- and cut-backs in consumer spending -- just like non-stealthy pay cuts.

But the drop in prices will still soften the blow. And at this point, American families can use any bit of economic help that they can get.

E-mail: leonhardt@nytimes.com

Copyright 2008 The New York Times Company

True, but methinks that Leonhard is a tad too optimistic.
--
Jim Devine

Goldman Sachs, Income Taxes, and Transfer Pricing

Bloomberg reports:

Goldman Sachs Group Inc., which got $10 billion and debt guarantees from the U.S. government in October, expects to pay $14 million in taxes worldwide for 2008 compared with $6 billion in 2007. The company’s effective income tax rate dropped to 1 percent from 34.1 percent … The rate decline looks “a little extreme,” said Robert Willens, president and chief executive officer of tax and accounting advisory firm Robert Willens LLC. “I was definitely taken aback,” Willens said. “Clearly they have taken steps to ensure that a lot of their income is earned in lower-tax jurisdictions.” U.S. Representative Lloyd Doggett, a Texas Democrat who serves on the tax-writing House Ways and Means Committee, said steps by Goldman Sachs and other banks shifting income to countries with lower taxes is cause for concern.

There may be lots of reasons for the drop in the effective tax rate but the most recent 10-Q filing for Goldman Sachs admits the following:

The firm is subject to examination by the U.S. Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where the firm has significant business operations, such as the United Kingdom, Japan, Hong Kong, Korea and various states, such as New York. The tax years under examination vary by jurisdiction. During fiscal 2007, the IRS substantially concluded its examination of fiscal years 2003 and 2004. Tax audits that have been substantially concluded in other jurisdictions in which the firm has significant business operations include New York State’s examination of fiscal years through 2003, the United Kingdom’s review of fiscal years through 2003 and Hong Kong’s review of fiscal years through 2001. The firm does not expect that potential additional assessments from these examinations will be material to its results of operations … The effective income tax rate for the first half of 2008 was 27.7%, down from 29.5% for the first quarter of 2008 and 34.1% for fiscal year 2007. The decreases in the effective tax rate were primarily due to changes in geographic earnings mix.

In other words, less taxable income has been declared in high tax areas such as the US, Japan, and the UK. I wonder if the IRS Examination will scrutinize the transfer pricing policy for this company which recently received debt guarantees from the U.S. government.

Deflation

David Goldman reports:

The Consumer Price Index, a key inflation reading, fell 1.7% last month, according to the Labor Department. That was much weaker than October's 1% drop and exceeded the 1.3% decline forecast by a consensus of economists surveyed by Briefing.com. Prices fell by the greatest amount since the Department of Labor began publishing seasonally adjusted changes in February 1947. Though falling prices may seem like a good thing for consumers, deflation is generally bad for the economy. If prices fall below the cost it takes to produce products, businesses will likely be forced to cut production and slash payrolls. Rising unemployment would cut demand even further, sending the economy into a vicious circle. Deflation usually represents a system-wide contraction in demand, with consumers waiting on the sidelines as they wait for prices to decline even further. Economists expect more drops in consumer prices for several months, but most say deflation is still a long way off. Deflation usually represents large, sustained drops in consumer prices, but so far the economy has only recorded two consecutive declines. "It's a bit premature to say we're in a period of deflation," said Anika Khan, economist at Wachovia. "We've had two months of record declines, [and] deflation may be a far-off worry if that continues."

Is it really premature to worry about deflation? Then why is the yield on inflation indexed government bonds for 5-year and 7-year maturities higher than the yield on their nominal counterparts?

Kudlow on Corker’s Plan to Save GM

Forgive me but I did a silly thing this morning – I ventured over to read what the National Review was saying about the automobile bailout controversy. Is Lawrence Kudlow guilty of more mendacity or stupidity or both:

“Who lost the U.S. car business?” Right after the UAW vetoed a compromise, bankruptcy-lite, Detroit-little-three rescue plan put together by Tennessee Republican Bob Corker, UAW president Ron Gettelfinger played the blame game by blasting Corker and the Republican party for “singling out” union workers to shoulder the burden of reviving the U.S. car business. In truth, the UAW is to blame. If Sen. Corker’s plan had prevailed, with UAW support, many believe it would have had 90 votes in the Senate. GM could have gone forward with a clean-as-a-whistle balance sheet under a three-part restructuring plan that included a $60 billion bond-refinancing cram-down, a renegotiation of the $30 billion VEBA health-care trust, and a pay-restructuring plan that would put Detroit compensation levels in line with those of foreign transplants Honda, Toyota, Nissan, and BMW. Average compensation for the Detroit little three is $72.31. Toyota’s average wage is $47.60, Honda’s is $42.05, and Nissan’s is $41.97, for an average of $44.20. So Corker’s idea was to bring that $72 a lot closer to that $44.

Kudlow should know by now that this $72 an hour compensation claim is a crock. Count this claim as mendacity. But 90 votes in the Senate for Corker’s plan – that is off the charts! As far as a clean-as-a-whistle balance sheet, doesn’t Kudlow know how to read a balance sheet with GM’s showing about $170 billion in liabilities exceeding the book value of its assets by about $60 billion.

The ultimate whopper in this Kudlow canard was that Corker was trying to negotiate in good faith while the “UAW refused to make concessions”. If I were a conservative, I’d be completely embarrassed with the serial garbage that gets published under the name The National Review.

The concept of illegal and illegitimate debt

Last month a special debt audit commission in Ecuador released a report charging that much of that nation's foreign debt was illegitimate or illegal. "The commission evaluated all commercial, multilateral, government-to-government and domestic debt from 1976-2006".

Perhaps the most critical element of this commission's ruling is the charge that Paul Volker's decision to hike US interest rates to extraordinary and unprecedented levels in the late 1970s [1] constituted a "unilateral" increase in global rates that compounded Ecuador's indebtedness.

The loans to Ecuador, according to John Perkins in his 2004 book 'Confessions of an Economic Hit Man' were denominated in US dollars and designed from the outset to "to foment conditions that make [Ecuador] subservient to the corporatocracy running our biggest corporations, our government, and our banks." The conditions of the infrastructure loans were that "engineering and construction companies from our own country must build all these projects. In essence, most of the money never leaves the United States; it is simply transferred from banking offices in Washington to engineering offices in New York, Houston, or San Francisco." [2]

How legitimate can it be for, on the one hand, political leaders to be accepting loans on terms that leave their nations economically vulnerable, and on the other for the US to have the power to 'unilaterally' and unjustly increase loan liabilities for the world's poorest (and other) nations?

The long-term outcomes of such an international lending regimes have been disastrous. Since 1970 – in the period known as the ‘oil boom’ in Ecuador the official poverty level grew from 50 to 70 percent and under or unemployment increased from 15 to 70 percent. Public debt increased from $240 million to $16 billion. At the same time "Vast areas of rain forest have fallen, macaws and jaguars have all but vanished, three Ecuadorian indigenous cultures have been driven to the verge of collapse, and pristine rivers have been transformed into flaming cesspools."[3]

Ecuador's use of legitimacy as a legal argument for defaulting on their loans sets a major precedent in international finance and the global economy. "Indeed, the mere formation of a debt auditing commission does so." [4] There is no doubting, however, that the rapidly increasing poverty and hunger along with the dire state of the world's living environment means attention to the impacts of unreasonable and unjust debt regimes is long overdue.



[1] Paul Volker was then chairman of the US Federal Reserve.
[2] Confessions of an Economic Hit Man by John Perkins
Plume, 2005, paperback, 280 pp.,
http://www.ecobooks.com/books/ecohitman.htm
[3]Confessions of an Economic Hit Man by John Perkins
Plume, 2005, paperback, 280 pp.,
http://www.ecobooks.com/books/ecohitman.htm

As Crisis Mounts, Ecuador Declares Foreign Debt Illegitimate and Illegal
By Daniel Denvir, AlterNet. Posted November 26, 2008.
http://www.alternet.org/audits/108769/as_crisis_mounts,_ecuador_declares_foreign_debt_illegitimate_and_illegal/

Shock Doctrine in California

California is undergoing its own shock treatment. The Republicans are a minority, but they have enough votes to block the supermajority required to pass a budget. They have all signed a no tax pledge. They have a plan to balance the budget without taxes, by drastically cutting spending and destroying environmental and labor protections, such as giving employers flexibility to demand as much work for as many hours without overtime pay on any single day, so long as the number of hours does not exceed 40.

http://sacbee.com/topstories/story/1475895.html

Labor Shortage Among Immigrant Workers?

TalkingPointsMemo points us to an interesting article by Miriam Jordan:

The economic downturn is forcing tens of thousands of Hispanic immigrants to withdraw from the U.S. labor market, according to a new study, a development that suggests the migrants are facing unprecedented competition for blue-collar jobs that may prompt them to return to their countries of origin. In the third quarter of 2008, 71.3% of Latino immigrant workers were either employed or actively seeking work compared with 72.4% in the same quarter a year earlier, according to a new study by the Pew Hispanic Center, a non-partisan research organization. The 1.1 percentage point drop "marks a substantial decrease in the labor market participation of Latino immigrants," says Rakesh Kochhar, the Pew economist who prepared the report ... During the economic boom, immigrants entered the U.S. at the rate of more than one million each year. Last year, however, the country's foreign-born population grew by just half that, or about 500,000. Latin American workers bore the brunt of the collapse of the construction sector, which employs 20% to 30% all foreign-born Hispanics. As the housing market tumbled last year, they lost jobs in ever-greater numbers

.

I have one small nitpick – TPMs lead was “Study: Labor Shortage Driving Immigrants Out Of the Labor Market”. Jordan was clearly describing a labor market with excess supply – not excess demand. The folks over at TPM are smart enough to know the difference so I trust they will properly adjust their lead.

The report can be found here and notes that the decline in this group’s employment-population ratio was even greater as their measured unemployment rate rose.

Drop in Housing Values and Consumption Demand

CNNMoney reports:

American homeowners will collectively lose more than $2 trillion in home value by the end of 2008, according to a report released Monday. The real estate Web site Zillow.com calculated that home values have dropped 8.4% year-over-year during the first three quarters of 2008, compared with the same period of 2007.

Life-cycle models of consumption tend to suggest that a drop in wealth would lead to a decline in consumption. If one assumed that each $1 decline in wealth leads to a $0.05 decline in consumption, this $2 trillion estimated decline would mean a $100 billion decline in consumption. Real consumption (all figures 2000$) declined by almost $80 billion on an annualized basis last quarter. Since 2006QIV, consumption has increased by only $142.2 billion per year even though real GDP increased by $355.9 billion. Had the ratio of consumption to GDP remained at its 2006QIV level of 71.5 percent, we would be seeing an additional $112 billion in consumption demand.

Maybe a rise in savings might be seen as a good thing if investment demand were also rising, but currently the fall in investment demand is so large that it is largely wiping out the progress in export demand. As private consumption declines, we will need a boost from government purchases if we are to avoid what Keynes called the paradox of thrift.

Speaking of the paradox of thrift – check out this cartoon with hat tip to an Angrybear.

Stupidity, Cowardice, Stimulus

by the Sandwichman

In his "Tour of German Inflation" (in One-Way Street), Walter Benjamin singled out the expression, "things can't go on like this" as exemplifying the "stupidity and cowardice constituting the mode of life of the German bourgeois". Embedded in the expression is the unfounded conviction that, somehow or other, unpleasant conditions cannot be enduring ones. However, as Benjamin noted, "to decline is no less stable, no more surprising, than to rise."

Yesterday, in the New York Times, nine economists weighed in on what, in their opinion, would constitute the ideal stimulus package, given the constraints of a $500 billion total to be either spent, returned in tax cuts or some combination of the two. Of course, the underlying premise of any stimulus package is the growthodox conviction that "things can't go on like this" -- that the accustomed "economic growth" of the recent past should be the norm and interruption of that growth can only be an anomaly.

Get over it, suckers. Bernie Madoff had the economic stimulus package meme down pat. Madoff's estimated $50 billion Ponzi scheme was already 10% of the proposed $500 billion package. O.K., then, in twenty five words or less, what's the difference between a stimulus package and a Ponzi scheme (bearing in mind the operative concept, "German Inflation"; see also "Uh Oh...")?

GM, Chrysler and the Recovery Program

Time to shift frames on the auto bailout. The question lurking behind current thinking is “How can these companies make money again producing and selling cars?” This explains the obsession with labor costs, future product lines and the like. The short answer is probably, they can’t. Even if they do everything right from now on, a steadily shrinking car market is the logical implication of serious, grown-up carbon regulation. (I will post on that topic soon, focusing on the news from Europe.)

For an alternative, step back into history and consider the story of Lucas Aerospace, brilliantly chronicled by Hilary Wainwright and David Elliott in The Lucas Plan: A New Trade Unionism in the Making? Lucas made military aircraft and was facing devastating (but socially desirable) cuts in demand for their wares. Seeing the handwriting on the wall, production workers teamed up with engineers and conducted a detailed inventory of their firm’s capacity: what skills and resources they comprised. Then they canvassed a range of nonprofit organizations to find out what kinds of products served important social needs but were not being provided in the market, like improved prosthetic devices and equipment for upgrading railroad crossings. Putting two and two together, they proposed production plans to give the company a new lease on life. The final piece, however, never materialized. The social agencies needed the government to allocate funds for these new products, but the government didn’t come through, and Lucas eventually folded.

You can probably see where I’m going with this. Obama is proposing to spend hundreds of billions of dollars on public projects to restart the economy, and forward-thinking observers, like Jamie Galbraith, are pointing out that we need long-term restructuring, not just a quick burst of stimulus. Who will build the transit systems, smart two-way electrical grids and other components of a clean, green America? If the auto companies are liquidated, we lose a ton of capacity it will be difficult and expensive to replace.

Message to the Obama team: begin formulating the reconstruction plan as a set of receivables and be ready to energize producers from the outset, perhaps with contracts having a loan component.

Message to the UAW and progressive-minded professionals in the auto industry: don’t wait for your top management to shuck the business plans they’ve staked their careers on. Begin a Lucas-like process of discovering what you can produce, and convey this directly to the federal recovery folks.

Senate Republicans First Shot Against Organized Labor

Countdown discussed a memo entitled "Action Alert - Auto Bailout," which was sent to Senate Republicans Wednesday morning and states:

This is the democrats first opportunity to payoff organized labor after the election. This is a precursor to card check and other items. Republicans should stand firm and take their first shot against organized labor, instead of taking their first blow from it. This rush to judgment is the same thing that happened with the TARP. Members did not have an opportunity to read or digest the legislation and therefore could not understand the consequences of it. We should not rush to pass this because Detroit says the sky is falling.

But didn’t many of the same Senate Republicans who filibustered the auto bailout bill vote for TARP? Jonathan Chait notes a little irony in how these Senate Republicans played their hand:

if the White House follows through on its suggestion that it might use TARP funds to stave off bankruptcy, the GOP maneuver will have been a total disaster. Remember, the Republicans have leverage because they still have 49 Senate seats and the auto companies need their loans right away.And, indeed, Republicans have used their leverage to force wage concessions and not force the auto companies to start producing low-emissions vehicles. But if they've overplayed their hand to the point where the White House floats a loan until January, then the GOP's leverage will nearly collapse. When the new Senate and White House convene, the Democrats will cut a much better deal for themselves, with fewer or no wage cuts for workers and tougher environmental standards.

In other words, their ploy may have failed and now we know their true motivations was to let millions of workers lose their jobs for raw partisan purposes.

Uh Oh, Is the Dollar About to Collapse?

So, recently here Peter Dorman and I were commiserating over having largely called most of the current crises, only to fail to have seen the surge of the dollar as people "flew to quality," leading ultimately to the absurdity of negative yields on 90 day Treasury bills just a few days ago. A number of other commentators also have been beating themselves over the head for failing to foresee the dollar's strength (Brad DeLong and Arnold Kling, among others), although none of them were as prescient on other matters as Peter and me (ooh, ooh, such self-puffery).

However, in the last two days the euro to dollar rate has gone from about 1.27 to 1.33. Does this mean that the other shoe is about to drop, and that the world is about to become fed up with the dollar and run for their lives in the face of our ongoing massive current account deficit and historically unprecedented net foreign indebtedness, not to mention so much other baloney?

Senate’s Failure to Pass Automobile Bailout

As David Herszenhorn report this sad news, I have a few questions:

The Senate on Thursday night abandoned efforts to fashion a government rescue of the American automobile industry, as Senate Republicans refused to support a bill endorsed by the White House and Congressional Democrats ... So far, the Federal Reserve also has shown no willingness to step in to aid the auto industry, but Democrats have argued that it has the authority to do so and some said the central bank may have no choice but to prevent the automakers from bankruptcy proceedings that could have ruinous ripple effects … the Senate failed to win the 60 votes need to bring up the auto rescue plan for consideration. The Senate voted 52 to 35 with 10 Republicans joining 40 Democrats and 2 independents in favor ... The automakers would also have been required to cut wages and benefits to match the average hourly wage and benefits of Nissan, Toyota and Honda employees in the United States.

First of all – if only 40 Democrats voted for cloture, where were the other guys? Secondly, what is it that the Federal Reserve might do to keep the Big 3 alive until we have a new Congress and White House? Finally, when Mitch McConnell says he wants the UAW to eliminate their gap between their hourly compensation and that of those US employees of the Japanese car manufacturers, does he still (mistakenly) think that their current compensation is over $70 an hour?

Hilzoy suggests that the behavior of McConnell and his minions is not responsible. It is certainly true that some of their arguments against this bailout proposal have been dishonest.