Economics Detox Program

Cassidy, John. 2009. How Markets Fail: The Logic of Economic Calamities (New York: Farrar, Straus and Giroux).

105: "In 1996, when I set out to research an article for The New Yorker about the state of economics, I came across a lot of unhappiness and criticism. The economics department at Morgan Stanley, for example, was refusing to hire any economics Ph.D.s unless they had experience outside of academe. "We insist on at least a three-to-four-year cleansing experience to neutralize the brainwashing that takes place in these graduate programs," Stephen S. Roach, the firm's chief economist, told me. "Academic economics has taken a very bad turn in the road," Mark Dadd, who was then the top economist at AT&T and the chairman or the National Association for Business Economics, said. "It's very academic, very mathematical, and it really doesn't -- I want to choose my words carefully here: it is nothing like as useful to the business community as it could be."

Tax Increases on the Rich Will Not Greatly Reduce Aggregate Demand

Timothy Homan reports on a recent analysis from Chris Cornell and Mustafa Akcay of Moody’s Analytics that confirms what those of us who have been preaching the policy implications of the Life-Cycle Model have suspected:

Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

The two Moody’s economists also note that wealth effects from changes in the value of stock portfolios have important impacts on how much the well-to-do consume. I have to wonder if Harm Bandholz of UniCredit Global Research grasps any of this in light of the following:

Economist Harm Bandholz said discouraging the wealthy from spending could weaken the economy, something Republicans argue will happen if the Bush-era tax cuts expire. “Most of the consumption growth is coming from the higher- income groups,” said Bandholz, chief U.S. economist at UniCredit Global Research in New York. “The lower income groups, they are barely living hand-to-mouth.”

Duh! Consumption among the wealthy is up because the stock market has revived not because they got a tax break. And “living hand-to-mouth” is essentially facing borrowing constraints which represents an exception to the Life-Cycle Model. So tax cuts for the poor will have a larger impact on consumption than tax cuts for those who are not borrowing constrained.

Horan also relates this analysis to the political debate over tax policy.

A Reminder On 9/11 That Al-Qaeda Is Un-Islamic

Readers of this blog probably do not need to be reminded of this, but given all the recent surge of anti-Islamic hyseria in the US, it is useful to remember how far off some of the claims being made now are. As is often the case, Juan Cole provides some perspective today at http://www.juancole.com. He lists five things that al Qaeda has done or attempted that are simply against clear statements in the Qur'an and the Hadith: 1) There is to be no attempt to coerce anyone into becoming a Muslim (free choice is crucial), 2) Aggressive war is forbidden, only defensive war is allowed, 3) A "civil engineer" cannot declare war, it must be declared by a recognized community leader, which today would be a president or prime minister or monarch, 4) Non-combatants are not to be killed or hurt, 5) Sneak attacks are not allowed, war must be announced well ahead of time.

Go in peace all of you on this sad day.

July’s Trade Uptick: Underwhelming

The good news is that the Bureau of Economic Analysis reported yesterday that the US trade deficit decreased month-on-month from $49.8B to $42.8B in July. While monthly figures are intrinsically noisy and subject to later revision, we should be grateful for any shaft of sunlight.

Alas, on closer inspection there is little to be grateful for. First, of the $7B movement, about $4.2 is accounted for by a decline in imports. This would be fine if the US economy were growing, and the drop in imports represented expenditure-switching. The reality, however, is that growth in the US is sputtering at best, and that fewer imports reflect general weakness in spending.

The export side, which is truly critical not only to domestic recovery but also global rebalancing, is even more disappointing. Of the $2.8B increase, fully $2.3B are in civilian aircraft, an especially lumpy category.

All in all, not much to crow about.

Confessions of a Serial Liberty-Reducer

Since I have been placed by Econ Journal Watch in the leading ranks of economists who have signed “liberty-reducing” petitions, I figure I should respond somehow. An obvious first reaction would be, if this is all it takes to be grouped with such distinguished and thoughtful individuals as Jamie Galbraith and Eileen Applebaum (not to mention our own Michael Perelman), please give me more to sign. But maybe I should say something about this idea of liberty-reduction as well.

The authors openly state that they rely on a single principle to gage liberty, noncoercion by government. By this standard, for instance, an increase in the minimum wage is liberty-reducing, since it increases the number of wage offers that would be criminalized. This is not just a theoretical possibility; in Los Angeles the co-owners of a chain of carwashes were forced to pay over a million dollars to their workers for minimum wage violations, a plea bargain they made in order to avoid long prison sentences. There can be no denying that the minimum wage, whether you favor it or not, has an illiberal aspect.

Of course, the starting point for evaluating the single-minded reliance on noncoercion as the barometer for liberty is normally Isaiah Berlin’s essay, “Two Concepts of Liberty”. Berlin contrasts noncoercion, or “negative” liberty, with “positive” liberty, which enables individuals to make the choices they truly prefer. Berlin’s treatment confuses three different variants of liberty, however, so it is a good idea to put his essay down and think more carefully about the issue. The most precise definition of positive liberty sees it as applicable to the individual level, but pertaining to the feasibility of choosing X (what one prefers) rather than simply the absence of a coercive constraint on choosing X, as negative liberty requires. To the extent that the minimum wage provides more resources for people at the low end of the labor market, so they can enjoy a wider range of choice over access to the necessities and comforts of life, it enhances positive liberty at the expense of negative. (Workers are denied the choice of accepting, and employers the choice of offering, a sub-minimum wage.) I will say in passing that I accept Berlin’s judgment that, of the two, negative liberty is more precious in a wide variety of situations, but I think I can demonstrate that in another set of situations, also quite large, positive liberty can have as much or more “liberty content” as its negative twin. (This is due to the interdependent nature of economic and social life, which can sometimes make the costs of not being supported by others comparable to the costs of being coerced by them—so that the threat of nonsupport becomes coercive.)

Nevertheless, there are still two more types of liberty that have large followings. One is collective liberty, the freedom to engage in collective action on the part of a group with a common identity or shared interests. The great theorist of this notion was John Dewey; see, for instance, his book Individualism Old and New. Economists steeped in game theory should have no problem in understanding why such a conception of liberty is necessary and popular. At an intuitive level, if there is any basis for people conceiving of themselves as a “we” instead of simply a set of “I’s”, there ought to be a corresponding idea of joint liberty. It should also be obvious that there is great potential for abuse if the “we” is insufficiently elective, or if inadequate allowance is made for individual differences within even the most cohesive groups—but all conceptions of liberty are dangerous if they are blind to the others.

The fourth conception arose during the Romantic period in the late eighteenth and early nineteenth centuries and is associated, in the United States, with writers like Emerson and Thoreau. If collective liberty is situated above the level of the individual, “inner” liberty is two levels down: it is about freedom from convention, habit, and any other barriers to the discovery and cultivation of one’s genuine potential. We know this today as the ethos of rock ‘n roll: the role of the singer or guitar hero is not to be the most technically proficient (although this is admired), but to reveal to the audience his or her deepest, most genuine self, a role model for this kind of liberation.

Schooled by Berlin, we often think of tradeoffs between competing notions of liberty, and this is undoubtedly true, but with four distinct possibilities to consider, there may be synergies as well. The case of the minimum wage is instructive. Here is my own story: I came of age during the 1960s, when there was full employment and the real minimum wage was far higher than it is today. Thanks to the counterculture, I took time out to explore different life directions: I spent years in underground newspapers and, later, community radio to see if I wanted to be an “alternative” journalist. I spent a few months trying out the life of a professional chess player. (OK, I was no Ken Rogoff, but I did combine chess journalism, instruction, and competitive play at a lower level.) I also dabbled in other stuff that we can leave to the side right now.... How was this possible? The high minimum wage, I would argue, had a lot to do with it. I felt free to experiment because, at any time, I could find a low-labor-force-attachment job that paid enough to keep me afloat. In other words, the positive liberty I enjoyed thanks to a high minimum wage also enhanced my inner liberty to find myself during the typical finding-oneself years. I think young people coming of age today have a lot less of this freedom, and this is sad.

Closing note: the authors of the EJW article speak of “ideological” biases of economists based on the extent to which they support or oppose the noncoercive conception of liberty. I see it differently. To me, to be ideological is to be unable to recognize the claims of competing points of view. For instance, raising the minimum wage increases some kinds of liberty of some people, and reduces other kinds of others. You strike the balance according to your values and judgment. But a nonideological view demands that you bear in mind that, even though you may think the balance falls on the side of raising the wage floor, this does not cancel out the negative consequences. If a thousand workers are better able to put food on the table, but ten teenagers are unable to get an after-school job of a few hours a week, the benefits to the larger group do not erase the costs to the smaller. Ideological thinking typically means putting on only one set of glasses and disregarding other points of view. Nonideological thinking means being able to live with contradictions.

In this sense, I think the categorizers and not (necessarily) the categorized in the EJW article are the ideologues.

Boehner’s Two-Step Job Destruction Plan

Ezra Klein rightfully criticizes what he calls John Boehner's stale 'two-step job creation plan' as something that could lead to larger long-term deficits. But let’s look at what the likely effects would be for the current weak economy. Step 1 would be to roll back Federal spending by almost $100 billion per year.

The difference in what Boehner as his step 2 is proposing versus the President is proposing amounts to a difference in tax collections from the very rich that is less than $100 billion per year. If we took the Peter Orszag proposed political compromise and extended these tax cuts for the very rich for only a couple of years, we would have a temporary tax cut for the well to do who are not likely liquidity constrained The life cycle model says most of this will be saved with very little aggregate demand impact. The Ricardian Equivalence extension of this model says all of it will be saved with zero aggregate demand impact.

Combining the two steps – we would clearly have a reduction in fiscal stimulus and hence a reduction in aggregate demand. The Boehner proposal is therefore not a job creation plan but rather a recipe for another recession.

Progress in Handling of Bank Bailouts

The New York Times reports that the emerging democracy of Afghanistan is taking a strong stand against bank bailouts, that was an interesting twist. Yes the government is calling upon others to bailout the bank, but that doesn't mean that the government is not willing to do is its part. It sent soldiers to prevent workers from entering the bank to claim their back wages. At least, the new government, for all its faults, clearly understands the priorities of a modern capitalist system.

http://www.nytimes.com/2010/09/09/world/asia/09kabul.html?_r=1&ref=world

CNNMoney Fails Introductory Macro

OK – I just ripped off the title of Peter Dorman’s ripping of Peter Orszag’s NYTimes oped but how else can you describe the CNN/Money piece entitled Boehner unveils his own plan to aid economy?. Boehner and other GOP leaders propose to cut government spending which would deepen the recession. How can any reporter say this is an aid to the economy? Could at least one reporter have the intelligence and integrity to entitle such a piece Boehner unveils his own plan to screw economy? If you any decent reporting on such GOP gibberish – let us know.

No Increase In Social Security Age Eligibility!

Ezra Klein had an excellent piece in Sunday's WaPo criticizing the current push from the Deficit Reduction Commission to raise the retirement age for social security, which he notes seems to have bipartisan support on the commission and is the item they are most enthusiastic about, even though it would do a big fat zero about the size of the deficit in the near term and is widely opposed by the US population. Mark Thoma links to it and quotes a big chunk of it along with additional comments at http://economistsview.typepad.com/economistsview/2010/09/making-social-security-less-generous-isnt-the-answer.html#comments .

Klein notes that many supporting this age increase point to a large increase in life expectancy over the last 75 years, but much of this is due to a sharp decline of infant mortality. Men at 60 do not have that much greater life expectancy now than did men at 60 back then. Furthermore, there is a huge distributional factor: most of the increase in such expectancy has been among higher income people, and many of those people work in jobs that do not involve physical labor or are boring and oppressive, where people really would like to retire, but with the collapse of the defined benefit pension plans means more are going to rely on social security.

It really is astounding how totally sold out these commission members are. Almost nobody wants this, and it does little for near term deficits, but Klein notes that other things such as further reforming the medical system or reducing defense spending or raising taxes all seem more politically fraught, even if the public does not like this raising the age requirement. Indeed, the majority of workers who reach 62, take social security then, not waiting for the higher benefits of retiring at 66 or 70.

An Explanation of Social Security, the Trust Fund and National Savings for Those Who Are Still Wondering

A while back, I lambasted Matt Bai of The New York Times for saying that the Social Security Trust Fund, because it is invested in Treasuries, is just a pile of worthless IOU’s the government won’t be able to redeem. I made fun of his suggestion that Uncle Sam is teetering on the edge of default, but there is a deeper issue I didn’t address. Bai, despite his economic confusions, is conveying a mainstream sentiment, endorsed by the broad center of American politics, that the drawing down of the Trust Fund is an impending catastrophe for the federal budget and national savings. Every T-bill sold back to the government is seen as another arrow in the heart of fiscal prudence, and we must somehow find a way to keep the fund at its current level by cutting benefits or raising payroll contributions.

Here I want to shed some light on the overall relationship between pensions and savings.

First, imagine a society with no money at all. Suppose it is an isolated fishing community: early each morning, every able-bodied adult sets off in a boat and dips a net into an ever-renewing fishing bank. Then they come home, unload their fish and eat them. This is the entire economy—fish, fish, fish.

Now introduce retirement. When people grow old, they lose the ability to fish, or perhaps they just want to do something different in the years remaining before they die. (Maybe they want to take up surfing.) How can they do this without starving? There is only one answer: their younger compatriots must eat fewer fish than they catch and divert the surplus to their elders. There is simply no way for people to “save” fish when they are working for consumption in future years, since the fish are perishable. This society may have complicated arrangements, perhaps involving pieces of paper (IOU’s) that convey entitlements to various quantities of fish, but in the end there is no escaping the reality that the working population supports the concurrent retired population at whatever level of abundance is agreed upon. If the ratio of retirees to working fishers rises, or if retirees want to eat more fish in their golden years, either the working population has to increase its fishing efficiency (catch more fish per person) or reduce its own consumption, or both.

Now consider the Social Security system. The Trust Fund has accumulated a huge portfolio of government securities, and in a few years it is scheduled to begin a slow process of cashing-in—selling securities for money that can be used to write checks to recipients. This money will come from the Treasury, which can raise it by selling new securities. This will raise the public debt unless non-SS related deficits are brought down by the same amount, since the ownership of Treasuries will have shifted from the government (the Trust Fund) to the public. That is what the SS alarmists are pointing to.

But, for the sake of argument, suppose that we had no Social Security system at all—that all pensions were privately financed out of the personal savings accumulated before retirement. Upon retiring, individuals would stop accumulating savings and begin drawing them down. Say they had bought only private securities, like stocks, corporate bonds and shares in equity funds. To pay for their retirement consumption, they would have to sell this paper, and those still working would have to buy them. The money for these financial purchases could come from either increased savings (less consumption) by the working population, improvements in productivity (increased real income from work), or increased debt (borrowing by issuing new debt in order to purchase retiree debt). In other words, it’s the same set of alternatives faced by the government in dealing with Social Security.

The moral of the story is that, while the system of paper assets that governs wealth and debt is extremely important for distributional issues at the individual level, the overall relationship between retiree consumption, worker savings and productivity is deeper and ultimately determinate. Our fishing community either learns how to fish better, or its working members tighten their belts in order to feed their elders, or they make their elders tighten their belts. If they have a connection to other fishing communities, they can also borrow fish from their neighbors, with the understanding that this may reduce their living standards in the future. If you follow the money in the Social Security case, you find the same factors. Redeeming a bond is like supplying fish and must be financed through either greater productivity, reduced consumption or debt.

At the level of paper assets, Social Security is healthier than it has ever been in its history. At the level of the division of the national product between working and retired people, the political dimension is unavoidable. Overall, productivity growth has tended to exceed the rate of increase in the dependency ratio (retired to working population), but there will always be a tradeoff between the rate of growth in the consumption of workers versus that of retirees. This is less visible in the arena of private savings, since the claims of retirees upon working-age citizens are made in a decentralized way through financial markets. With Social Security, the process is centralized and guided by public decisions. The tradeoffs remain the same.

What people like Matt Bai are saying is that, as the retiree population continues to grow, it will force the rest of us to increase our borrowing because we refuse, on political grounds, to take steps that would impinge on our consumption. To avoid this, we should see to it that the growth in retiree consumption is curtailed. In my earlier post I referred to this as the catfood option, but maybe this was a mistake: cats love to eat fish.

Orszag Fails Introductory Macro

Let’s leave aside the larger questions having to do with how and why the US economy got into the current bind—global imbalances, the political economy of investor hegemony, etc.—and look only at the immediate fiscal and employment effects. What’s wrong with Peter Orszag’s suggestion in today’s New York Times that the demands of the short run output gap and long run fiscal sustainability can be met by extending the Bush tax cuts for another two years, but written in disappearing ink, with a mandatory end after that?

Simple: he forgot the balanced budget multiplier. He could accomplish much more of the first goal without any cost to the second by proposing a different plan: end the tax cuts immediately while simultaneously appropriating an equivalent amount of money to a fund that could be spent on various public projects or simply rebated to the states to reduce their own program cuts. If he thinks two years is the magic timespan, he could write in two years’ worth of the revenue increases due to ending the tax breaks. The economics that every introductory students learns, and which is in fact unassailable, should tell him that the stimulative effect of an equal dose of higher taxes and higher spending is greater than the equivalent of reduced taxes and reduced spending. Of course, this difference is even greater in the case of the Bush tax cuts, which were overwhelmingly tilted toward high-income households with a much lower marginal propensity to consume. (And I leave out equity considerations, which are not supposed to infect macroeconomic analysis.)

Note to instructors: clip this op-ed and use it in class after you cover fiscal policy. See how many students can outsmart this former head of the CBO and OMB. I realize this is setting the bar a bit low, but they might still get a charge out of it.

Economics and Asperger’s

Anyone who has been paying attention will notice that a lot of economists are Aspies. True, we don’t have any hard evidence on this, but just look around at an ASSA meeting. You will see lots of stiffly-moving men lost in their own worlds, slamming into or just ignoring the people milling around them. Then, of course, we have the testimony of “autistic economics”, portrayals of human behavior that elevate Aspie-like eccentricities to an operating norm for society.

There are many candidate explanations for this. (1) Economics, by its nature, leans in an abstract, formalistic direction, like music, math and chess, and all these fields seem to attract and make effective use of the skills of Aspies. (2) Academic life, more generally, exalts feats of the intellect over what is now called “emotional intelligence”, especially at large research institutions. (Prediction: you will see far fewer Aspie-economists in small liberal arts colleges, where collegiality and connection to students are more highly valued.) (3) The peculiar representation of human society as a field of colliding particles, each pursuing its own individual, unrelated trajectory, ought to be well received on Planet Asperger.

Whatever the etiology, the prevalence of Asperger’s among economists and the call to reform the discipline raises the question, how to raise the level of social awareness? On a personal level, I highly recommend the work of Erving Goffman, the pioneering sociologist who studied face-to-face and other immediate forms of interaction. His books on micro-norms and the nuances of language and bodily expression offer a virtual how-to manual for Aspies trying to shore up their social skills. It’s painless, too, because he does it in the context of highly analytical, abstracted discourses on institutions, roles and expectations. For a fuller run-down, see this fine appreciation by Daniel Little at Understanding Society.

Negative Voting

Nate Silver, over at 538, a New York Times blog, has a post today about the “none of the above” option in Nevada. It seems that NOTA is polling well enough to have an effect on the Senate race, where a majority dislikes Reid but fears Angle. Lots of comments weigh in on the pluses and minuses of voting for no one.

I’ve thought for a long time that a simple improvement over the current system would be to give voters the option of voting for or against a particular candidate. If they vote for, the candidate gets an additional vote, the way it works now. If they vote against, one vote would be deducted from that candidate’s total.

There are two advantages. First, in many cases it will allow voters to more accurately express their preferences. If you really don’t like candidate X and are neutral about candidate Y, negative voting makes your feelings clear. In fact, if there are more than two candidates in the running, stopping one of them may be your highest priority.

Second, the final tally may give a better representation of the public’s true feelings, especially if the winning candidate is the one with the least negative numbers. We would hear less nonsense about mandates.

Virginia Judge Upholds Academic Freedom, Sort Of

The Charlottesville Daily Progress reports that in the morning of August 30, Judge Paul M. Peatross, Jr. of Albemarle County (around Charlottesville) ruled in favor of the University of Virginia against the subpoenas by Attorney General Ken Cuccinelli who sought documents including emails on the research of former U.Va climatology professor Michael Mann, "in their entirety, without prejudice."

Most observers are very pleased with this, including Michael Mann reportedly, now at Penn State, and I am also. However, there is an unfortunate caveat in the story. The judge also ruled that Cuccinelli has the authority to issue further "civil investigative demands" (CIDs), although they need to be more specfic than the ones he issued earlier that were struck down by this judge. Thus, I saw Cuccinelli on local TV earlier this evening proudly declaring that he would be right back at it again with further CIDs for U.Va, although this time more specific so that he can "satisfy this judge." So, unfortunately this business is not over at all, despite this favorable ruling for the moment. The assault on academic freedom will be continuing in Virginia, along with the publicity machine for Cuccinelli to be a big hero for the Know Nothing right wing.

Any Experts on the German Economy Out There?

The Wall Street Journal has two articles about German. One describes how German wages are stagnating, despite the expansion.

Here is the first articles:

Thomas, Andrea. 2010. "German Workers' Wages Belie Country's Rebound." Wall Street Journal (15 August).http://online.wsj.com/article/SB10001424052748704296704575431240767523752.html?mod=WSJ_World_MIDDLENews

"Germany has surprised the world with a sharp acceleration in its economic recovery, but perhaps the least impressed by this feat are Germans themselves. The German economy expanded a sharp 2.2% in the second quarter from the first -- the fastest pace since reunification in 1990. But, despite the export-driven rebound, most German workers aren't getting any richer."

"Chancellor Angela Merkel's government has hailed Germany's "job miracle" after whittling the jobless rate down to 7.6% of the work force, compared with unemployment levels of about 10% in the U.S. and France. But the bulk of that reduction has come from the emergence of part-time jobs, often at low pay. That helps explain why German domestic demand has remained sluggish even as German exporters boast booming foreign orders. The disparity has drawn accusations from Germany's neighbors, notably France, that it is exploiting the world recovery without contributing to global demand."
"Average annual net income per employee has fallen steadily since 2004, reaching 15,815 euros in 2009, down from 16,471 euros in 2004. As part of the so-called Hartz IV labor-market overhaul program to support low-income groups, the government has spent 50 euros billion in welfare subsidies since 2005 for people who earn too little to make a living."

"Lobby groups for low-paid and unemployed workers worry that an increasing number of jobs have to be subsidized. "Hartz IV has made it possible for companies to get their profit subsidies from the general public, with companies paying starvation wages while those affected need Hartz IV to survive," said Martin Behrsing, spokesman for the Unemployed Forum Germany."

"Another measure for low-income workers is looking at people who earn two-thirds or less of the average income. By that measure, the number of low-paid workers increased by almost 2.3 million people to 6.55 million between 1998 and 2008, according to a recent study by the Institute for Employment and Qualification at the University Duisburg-Essen."

"The Organization for Economic Cooperation and Development's employment outlook report 2010 shows that 21.5% of Germans worked in the low-pay sector in 2008, up from 16% in 1998. In an international comparison, the share of low-paid workers remained unchanged at 24.5% in the U.S. and increased only slightly in the U.K. to 21.2% from 20.8%. The average among OECD countries is 16%."

"I think we have seen in Germany for quite a while now an expansion of the low-wage sector, since the mid, late 1990s," said Herwig Immervoll, an economist with the OECD, which is based in Paris. "There is an increase in the inequality in Germany. We see this in other countries too, but maybe not as much as in Germany."

"Duisburg-Essen University's employment institute puts it even more starkly: "No other country has experienced a similar increase in the low-income sector over the past years and a differentiating of wages to the downside as Germany has," it says in its study."

"The upswing hasn't reached me. What I am witnessing is exploitation. There is more and more low-paid work. People don't find work, and if so only as temporary work, which is a great mistake because it's destroying the wage system," Mr. Friedrich said. "It might well be that the upswing has reached the big companies and that they are making more money, but it's the opposite for the ordinary guy," he said."

"Such sentiments are weighing on Ms. Merkel's center-right government, whose popularity has been tumbling in opinion polls that increasingly favor the center-left opposition. One recent poll showed that four out of five Germans say they aren't personally benefiting from the rebound."

"Hubertus Heil, deputy parliamentary floor leader of the opposition Social Democrats, is angry about the increasing number of subsidized jobs and said a legally binding minimum wage is urgently needed. "It's a shame that people who work full time have to put up with this," he said."

"At present, Germany has no general minimum-wage level. Minimums do exist for specific sectors, such as for the construction, cleaning, waste and nursing sectors. To match the minimum-wage levels in other European countries, Germany would have to introduce hourly minimum pay of between 5.93 euros and 9.18 euros."

"The DGB umbrella group of trade unions has called for an hourly minimum of 8.50 euros. But others, such as the Ifo economic research institute, warn that this could result in the loss of 1.22 million jobs, largely among those earning low incomes."

"Nelli Einstein, a 48-year-old from Berlin, has been selling clothes, bags, jewelry and tools for 1 euros apiece for the past two years. It sometimes takes her as long as a year to sell 10,000 euros of merchandise."

Here is the second article:

Fuhrmans, Vanessa. 2010. "Germany Suffers a Labor Shortage." Wall Street Journal (27 August): p. A 12.
http://online.wsj.com/article/SB10001424052748704913704575453652182261156.html?mod=ITP_pageone_3

"The surprising strength of Germany's economic rebound is exacerbating an already worrying problem for legions of its companie Industrialists and economists long have warned of a looming shortage of skilled German labor, a consequence of the country's declining birth rate and an exodus in recent year of engineers and other highly trained workers, to around the European Union, the U.S. and elsewhere. But the rapid recovery of Germany's export-fueled economy in recent months has suddenly brought the problem home for many domestic companies, which fret that the shortage could restrain their ability to respond to the nascent rebound."

"Though German unemployment still hovers around 7.6%, about 70% of German companies report they are having trouble finding enough master craftsmen, technicians and other skilled labor, according to a survey released this week by the DIHK Association of German Chambers of Industry and Commerce. Companies haven't been able to fill some 36,000 engineering jobs open across the country, the Association of German engineers reports. "

"Bitkom, Germany's largest information-technology industry association, says the same goes for 43,000 IT posts. "

"And this is happening just barely out of the severe recession of 2009," said Hans Heinrich Driftmann, DIHK's president. "As the economy improves and companies need to hire more people, it's only going to get more severe."

"For now, Germany's marquee corporations, such as Siemens AG and BMW AG, have enough skilled job applicants, thanks to aggressive recruiting and generous training programs. But many of the country's Mittelstand, the thousands of small to mid-size companies that are the backbone of its export-led economy and provider of 70% of German jobs, are struggling to find needed employees as demand picks up."

"One is DELO Industrie Klebstoffe GmbH, a Bavarian maker of industrial adhesives. With ?30 million ($38 million) in sales and 230 employees, the family-owned firm is looking to hire another 60 highly skilled workers this year as orders from the electronics, auto and other industries take off. But so far, filling the posts has been difficult."

"We're troubled most of all by the search for technicians and engineers," said DELO Executive Director Sabine Herold. Located near Munich, the company says it is tough to compete for skilled job candidates with better-known companies in the area, so Ms. Herold has been trying to forge closer ties to universities and vocational-training institutes, and sponsoring business programs at local high schools."

""If we're going to expand further, we need smart people right away," Ms. Herold said. "But a lot of school graduates don't know us.""

"Behind the growing shortage is a combination of demographic trouble spots. Like in many European countries, Germany's declining birth rate-at 1.38 children born per woman on average in 2009-isn't enough to keep its population stable. And since 2008, more people have been leaving Germany than immigrating to it. That tendency is particularly strong among those with university or vocational training degrees. Last year, some 27,500 post-secondary-school graduates came to Germany from other European countries, for example, while 32,000 left for elsewhere in the European Union. "

"Economists estimate the skilled worker shortage is resulting in annual economic loss of between 15 billion euros and 20 billion euros, and with that, more potential jobs. "If there isn't enough skilled labor, then there can't be more production," said Klaus Zimmermann, president of the DIW German Institute for Economic Research. "

"Major companies are acting to counter the trend longer term. BMW and Siemens, for example, have expanded in recent years programs that train apprentices in specialized technical fields as they pursue post-secondary degrees at universities or technical colleges, thereby compressing the training time before they can fully join the work force."

""They don't have any difficulties getting hired. They're in great demand," said Gnther Hohlweg, head of Siemens' training programs, who adds that 90% remain with Siemens."

"Others are using older workers. German auto-supplier giant Robert Bosch GmbH maintains a reserve of several hundred semiretired skilled employees between ages 60 and 75 that it taps when it has to ramp up production and can't find enough qualified labor on short notice."

"Daimler AG, which manufacturers Mercedes-Benz cars, anticipates that within 10 years half of its workers will be older than 50 years, compared with 25% now. To accommodate them, it has introduced more flexible shift rotations and installed strength-training equipment near plant assembly lines. According to this month's DIHK survey, 21% of the 1,600 companies polled said they would take steps to draw more older workers."

"As Germany's economy has gathered strength in recent months, the skilled-worker shortage has reignited a debate about immigration policies, and created a new source of tension within Germany's center-right governing coalition."

"Earlier this month, the country's economics minister, Rainer Bruderle, proposed introducing cash "welcome" payments to lure more skilled foreign workers to Germany, as well as lowering the minimum income level it requires for skilled workers to be eligible for extended immigrant status. The current annual income level is 66,000 euros, which many economists and companies say is too high."
"The proposals were quickly rejected by labor leaders, as well as a spokesman for Chancellor Angela Merkel, who said the government just introduced immigration policies in January 2009 aimed at making it easier for foreigners trained in Germany to find work there, and their effect had yet to be felt."