The Recovery of One

Referencing my comments in an earlier post about the period of mixed signals we now seem to be entering, one potential concern is that, in this age of the 24-hour news cycle, we may be over-reporting on the indicators.

Just as over-monitoring a stock portfolio can pose the danger of losing out on long-term returns by overtrading based on inevitable short-term fluctuations, excessive real-time news coverage of every tiny bit of released economic data could inflict further damage on public sentiment and, in turn, the economy.

For example, if we are in fact bottoming out or starting to move toward recovery, over reporting negative short-term indicators could needlessly prolong collective pessimism and keep consumer expenditures depressed. It could also drive businesses to maintain a defensive posture on their cashflow longer than they need to.

But the coverage is what it is--for reasons that are largely economic. It’s simple supply and demand. Editorial decisions to supply economic news as the main topical thrust are simply responses to what the audience is demanding. And currently, the public remains very hungry for economic news.

People are consuming economic news on a scale unprecedented in recent history. It‘s basic psychology. People seek out economic news because the feeling of being informed gives them a sense of having some level of control over the situation.

The danger, however, is the element of illusion in this sense of control. Without the big-picture context that a seasoned professional in a field like economics or finance might have, a general news consumer absorbing short-term stories may have the illusion of knowing far more than he or she actually knows. This, too, can drive ill-advised decisions.

Yet the 24-hour cycle self-perpetuates. Especially after the incessant bombardment with bad news, week after week, in the early part of the year, the public is so starved for any little morsel of good news that they’re ready to latch onto the smallest little bite. And when they bite, their raised hopes can then be disproportionately dashed by the next nip of bad news.

This is particularly true among those who are out of work, underemployed, facing strained family budgets or trying to keep struggling businesses afloat. And the danger is that the cycle of raised and dashed hopes could perpetuate the downward curve, or keep us treading water at the bottom for a longer time.

The unemployed may become more frustrated every time they hear bad news on jobless claims, and grow less inclined to pound the pavement. Business owners may hesitate to take the risks necessary to drive renewed growth, especially the risk of taking on new staff. This could prolong the crisis of the unemployed.

It’s a cycle that can be broken only by decisive action. And action, ultimately, must start at the individual level. Gandhi once said that, in terms of the cosmos, “Almost everything you do will seem insignificant, but it is important that you do it.” Echoing this idea in a comment on one of my blog posts on healthcare reform, one of my Facebook friends, Cheryl Batoon, emphasized the importance of “the power of ONE” in effecting political change and countering the destructive impact of misinformed negative rhetoric.

The power of one means you, no matter who you are, or what your current situation is. There is a wry sort of joke that has been much repeated during this crisis: if your neighbor is unemployed, it’s a recession. But if you are unemployed, it’s a depression. And for the out-of-work individual or the financially struggling business owner, the resolution ultimately depends on individual action.

Action has to start somewhere. Spending one dollar triggers a ripple of subsequent transactions that raise the impact of that one dollar by many multiples. And the actions of one individual create a similar multiplier effect within society.

From chaos theory we learn that a butterfly fluttering its wings somewhere along the coast of Africa can alter the course of a hurricane. Similarly, the buck-and-change you spend for a cup of Joe from the 7-Eleven could alter the course of the recovery.

So take some action. Take some risks. Spend an extra buck at the store today. If you’re in business and finally finding a bit more room in your operating margin or credit line, hire one more person, even if it’s for an unglamorous, low-paying position, to take one more person off the unemployment rolls and get them spending again. If you’re out of work, hit the Send button on just one more online job application today. It might be the one that ends your depression of one and your still-working next-door neighbor’s recession of one. Sphere: Related Content

The Cycle of the Storm

For the past several weeks, and often within the course of a given week, the tone of news about the economy has been like a roller coaster. One week housing starts or corporate earnings are unexpectedly up. The public likes it, and so does Wall Street.

Yet another week a surprising uptick in jobless claims hits. The public turns pessimistic again and the Dow takes a dip. Then Chairman Bernanke says there are strong indications that the economy has bottomed.

So we’ve entered a period of mixed signals and ambiguous indicators. Think back to the first quarter of this year, and it shouldn’t be hard to see the difference. After a brief period of collective optimism as the new administration came took over, the stark realities of an incredible tsunami of layoffs set in. The stories seemed increasingly grim as we stumbled our way through a tough and frightening first quarter.

In keeping with the season, the green chutes stories started showing up in the spring, and early in the summer some of the bolder pundits were among the earliest to pronounce the recession dead.

Against the backdrop of the beginning of 2009, the current mixed signals seem, in contrast, to be a good sign. Recovery doesn’t happen all at once, so it stands to reason that at the beginning of a recovery the signals would be mixed.

Just as there was a succession to the tumbling of the various sectors--starting, of course, with the banks and the big investment houses--there will be a sequence to the recovery. The crisis began with the banks, and the recovery seems to be starting with the banks. There’s really an elegant symmetry to the whole thing. A line from Yeats, “A terrible beauty is born,” comes to mind.

Remember, the signals were also mixed at the beginning of the downturn. Through 2007 and the first three quarters of 2008, the picture was cloudy and confusing. Unemployment began to rise well before the Bear Sterns and Lehman collapses. There were plenty of signs early on that something was amiss with the economy, but most people didn’t really have a clue what was coming.

There were recurring stories in the news about the subprime mortgage crisis, but people were too distracted by the noise of the energy-price crisis. But the true crisis, already well into its formation behind the scenes, wasn’t about energy at all.

Most people who were starting to feel the pinch of a nascent downturn thought it was all about the gas, until the collapse of the big financial firms in the fall of 2008 brought on a storm of a magnitude that no one was expecting. It was an economic equivalent of getting caught off-guard by hurricane Katrina. Few knew how serious the economic storm would actually be, so most of us were unprepared.

Indeed, one could say that the life cycle of a recession is like unto the life cycle of a hurricane. There is a period of gathering clouds, when no one is sure what course the storm will take and how much strength it will gather at sea before making landfall. This was 2007 and most of 2008. Especially given the behavior of the stock market, it would have been just as easy for the casual observer, entering 2008, to conclude that another boom could be in the making rather than a astronomical bust.

But then the storm struck in all of its wrathful, furious glory, leaving an immediate trail of astonishing devastation. This was the fall of 2008.

Then we went “into the eye,” a period of deceptive calm that gives few warnings of the fury that is still to come. This was the period from around just before the election through shortly after President Obama’s inauguration.

Once we were out of the eye, a second wave of fury ensued with the staggering tumult of job cuts as companies were forced to deal with decapitated credit lines, dreadful year-end results, and abysmal first-quarter forecasts.

In the spring the clouds showed some signs of breaking up and the storm signs of weakening. And through the summer bursts of sunlight have begun to show through gaps in the cloud cover. Is it time to send a bird out of the ark to see if it brings back a sprig of leaves?

Let’s just hope, to follow the metaphor through, that this is the end of the current hurricane season, and that there isn’t a Rita building strength in the tropics to unleash a second wave of fury after the economic Katrina. Sphere: Related Content

On the Profoundly Ironic Illogic of Screaming “Keep Your Government Hands Off My Healthcare!”

When a system has been in place throughout your entire nation since well before you were born, it’s easy to make the conclusion--unwarranted, given a lack of exploration of the evidence--that it's normal and that it makes sense. So it is, it seems, with the opinion of many Americans about our employer-based healthcare system, which is anything but normal among the major economies of the Western world.

It is a natural human phenomenon, one of the faults in our cognitive wiring. Thinking that “the way it’s always been” is normal and sensible is no different than a child who is just beginning to become aware of foreign languages refer to his or her own native tongue as “normal talk.”

To those who, at town hall meetings, are screaming “KEEP YOUR GOVERNMENT HANDS OFF MY HEALTHCARE,” or brandishing signs with similar messages of indignant protest, I would ask you to take a close, critical look at one very fundamental but largely ignored question.

To indulge, for the sake of argument, in some phraseology that might among some readers get my non-party-affiliated, more-or-less centrist self branded as a lot more Lefty than I in fact really am, I would like to ask: why in the WORLD, out of all the scenarios one could possibly envision, would you want your EMPLOYER’S bottom-line-driven hands on your healthcare?

If you are concerned about a government healthcare plan infringing upon your privacy and your constitutional rights to life, liberty, and the pursuit of happiness, I would suggest taking a closer look at whether you might be much more vulnerable to abuses in those areas from your employer.

The right to privacy is all but non-existent in a workplace setting. Once you cross the threshold of your office building, you waive, by implied contract, many of the rights and protections you enjoy when you are out in public. Your employer can archive your e-mails and read them if they wish. Your employer can monitor your activities with hidden cameras, without your knowledge. Your telephone calls "may be recorded for training and quality assurance purposes." And your employer, of course, is involved much more intimately in your daily life than the government could ever be, unless, perhaps, you work for the government.

The potential for abuse may be greatest in small-to-midsize companies, in which the administrative infrastructure for ensuring the protection of employee rights to privacy and non-discrimination may be non-existent, as may the checks and balances to prevent personal and private information from getting into the wrong hands and being misused.

Here is just one of many scenarios. Imagine you work for a small firm of about 25 people, in which, as is often the case in small offices, there is virtually no privacy, and everyone pretty much knows everyone else’s business.

Let's suppose, further, that you or a dependent covered under your plan have had a serious, chronic illness that will require very expensive treatment for some time to come. And everyone in the office knows it, from the owner of the company right down to the guy who comes in to empty the trash at night.

And suppose, for the two years running during which this illness has been an issue, your company's health insurance provider has hit your company with a hefty increase in premiums. In a small office, it wouldn't be hard for the owner, or the operations or HR manager, or whoever else might be responsible for benefits, to put two and two together and figure out just what might be playing an important role in the increasing costs.

And finally, imagine that, after years of glowing performance evaluations, the boss suddenly becomes concerned about some previously undiscussed flaws in your performance, and dismisses you for cause -- or, even more stealthily, promotes you to be head of a new department and then, not long afterward, decides that the new department no longer fits the corporate strategy, eliminates the department and, by extension, the need for your job.

Illegal? Yes. But also difficult, if not virtually impossible, to prove. And even if you could prove it, doing something about it would be very costly--both monetarily and, quite possibly, professionally. Most employees, particularly in small communities, or in smaller industries in which managers in competing companies tend to know one another, would likely rather move on than risk the possible stigma that can follow someone who has sued a prior employer.

Do you think this scenario is unlikely? I don't. I'm sure it plays out in various permutations and combinations all the time, all over the U.S., with its wonderful, employer-based healthcare system. The best healthcare system in the world, say those who are fighting the current reform effort and screaming at the town hall meetings.

Unfortunately, many of us seem to be stuck in a cognitive loop when it comes to seeing the flaws in the most basic attribute of our current system, and to envisioning alternatives. Sphere: Related Content

Identify Yourself!

If you read this blog regularly, I’d like to ask a favor. To ensure that you receive the most timely possible alerts on new postings, as well as information on opportunities to receive supplementary publications or ancillary products that we may announce from time to time, I would like to enroll you as a registered subscriber. To register, please e-mail haywardwc@gmail.com with the minimum information of your first name, last name, and preferred e-mail address for receiving updates.

Additional information, such as your city, state/province, country, mailing address, telephone number, organizational affiliation, job title, etc., may also help us serve you better in the future as this project develops further, but is entirely at your discretion.

Last but not least, enrolling as a registered subscriber will help us meet our objective of achieving a consistent and growing readership base which, in turn, will help ensure the long-term viability of Undismalization as a self-sustaining electronic publication.

We will not share your personal information with any third parties without your express permission.

So please take a moment to e-mail the information requested above. Thank you in advance for considering participation as a registered subscriber and for taking the time to read Undismalization. As always, your comments, critiques, and proposals for guest contributions are welcome.

Respectfully yours,

W. C. Hayward, Editor Sphere: Related Content

The Undismal Weekly Wrapup - July 12-18, 2009

Analytical Summaries of Key Stories of the Week on Economics and Public Policy

Interesting week, with major themes focusing on cautious optimism on signs of recovery (but with a tone of expectations management on its pace) and next moves for the Fed.

America Needs a National Manufacturing Policy. Now. (Huffington Post)
In a guest column for the Huffington Post, Sen. Sherrod Brown (D-Ohio), Chairman of the Senate Banking Subcommittee on Economic Policy, points to the pivotal role of the declining manufacturing base in the U.S. in the current plight of the middle class, and argues for an urgent need for “a national plan … that aligns federal actions with the goal of strengthening our manufacturing sector.”

Experts Tell Congress to Lay Off the Fed (Wall Street Journal)
David Wessel of the Wall Street Journal reports that 250 noted economists, including Robert Shiller, have urged congress not to cave in to pressure to intervene in the Fed’s policy making efforts, driven by critics of the central bank. They also caution that efforts currently under discussion to revisit the Fed’s powers and governance structure could backfire.

Geithner Says Global Economy Faces Recovery Setbacks (Bloomberg)
Speaking in Saudi Arabia, U.S. Treasury Secretary Timothy Geithner cautions that the recovery of the global economy is likely to be gradual with a higher than normal share of temporary fluctuations and reversals, due to such factors as wealth lost during the crisis and the heavy increase in public debt, according to this report for Bloomberg from Rebecca Christie.

McCulley Says Fed Needs To ‘Be Irresponsible’ If Prices Tumble (Bloomberg)
Dakin Campbell reports for Bloomberg on advice to the Fed from Paul McCulley of Pacific Investment Management Co., who argues that, if the U.S. economy falls into a protracted slump similar in character to Japan’s lengthy recession, the central bank may need to initiate radical interventions that set aside the normal context of keeping inflation within a targeted level.

Paulson Defends His Response to Economic Crisis (Associated Press)
Responding to the substantial second-guessing of the Bush administration’s responses to the economic crisis toward the end of 2008, former Treasury Secretary Henry Paulson contends, according to this report from AP’s Ann Flaherty, that the actions prevented suffering of a “far more profound and disturbing level.”

Summers: Economy Has Moved Back from Catastrophe (Associated Press)
Obama economic advisor Larry Summers makes a case, as reported by AP’s Jim Kuhnhenn, for cautious optimism -- based on several indicators, including a decrease in public gloom evidenced by declining Google searches for the phrase “economic depression,” a slower pace of economic contraction, improving consumer confidence, and stronger quarterly earnings reports.
Sphere: Related Content

The Undismal Weekly Wrapup -- July 5-11, 2009

Analytical Summaries of Key Stories of the Week on Economics and Public Policy

A Possible Bailout for Small Business (Forbes)
Brian Wingfield reports on the possibility, currently under consideration by the Obama administration, of making a portion of the original $700 billion TARP allocation available to aid small enterprises via the small business administration.

Do We Need Another Stimulus? (Washington Post)
Economists and politicians weigh in on the issue, including: Robert Reischauer, President, The Urban Institute; Rep. Donna Edwards (D-Maryland); Rep. John Boehner (R-Ohio), House Minority Leader; Mark Zandi, Chief Economist, Moody’s Economy.com; Martin Feldstein, Professor of Economics, Harvard University; Dino Kos, Former New York Fed Executive Vice President; Douglas Holtz-Eakin, Former Director, Congressional Budget Office; and Lanny Davis, Former Special Counsel to President Clinton.

Fed's Stern: First Stage Of Recovery 'Close At Hand' (Wall Street Journal)
Michael S. Derby reports on comments by Gary Stern, President of the Minneapolis Fed, who cites positive indicators in consumer spending, manufacturing, and housing sales, while also cautioning about the possible pitfall of asset price instability, which could hinder the recovery and is difficult to control through the Fed’s normal monetary policy arsenal.

How Did California Get Into This Mess? (Los Angeles Times)
Examining the complex, multifaceted causes of California’s budget crisis, John Vasconcellos contends that there’s plenty of blame to go around, not only in the realms of government but also among California voters, whose contradictory support of both tax reductions and increased services placed the state government in a quandary.

The Stimulus Trap (New York Times)
Commenting on the political predicament President Obama may soon find himself in amidst declining public confidence in his economic policies, economist Paul Krugman makes the case that the current best option is to pause and observe, giving the original package time to work, while simultaneously evaluating options for strengthening the current policies should they prove to have been insufficient.

Weekend Opinionator: Is GM Back from the Dead? (New York Times)
Tobin Harshaw explores opinions from various analysts on what’s in store for General Motors after a fast-track emergence from bankruptcy. Sphere: Related Content

The Undismal Weekly Wrapup -- June 28-July 4, 2009

Analytical Summaries of Key Stories of the Week on Economics and Public Policy

A Setback on Jobs (New York Times)
In an analysis of unexpectedly high job losses reported for June, David Leonhardt describes the state of the economy as “stepped back from the precipice of depression” but far from being in good shape.

As U.S. Celebrates July 4th, Rest Assured that Obama is No Socialist (Chicago Tribune)
Citing opinions from economists and other experts, columnist David Greising characterizes the widespread cries of “socialism” from President Obama’s critics as intellectually lazy, arguing that the administration’s policies have been working “at all times from a capitalist frame of reference.”

In a Crisis, Rethinking Fiscal Federalism (New York Times)
Harold Pollack of the University of Chicago School of Social Service Administration and Ed Kilgore, Managing Editor of The Democratic Strategist, contend that complex fiscal crises occurring across the U.S. at the state and local levels reflect “a frayed partnership between states and the federal government.”

New White House Office to Redefine What Urban Policy Encompasses (Washington Post)
President Obama’s newly created Office of Urban Affairs seeks to “redefine the word urban and set the tone for policies not only for inner cities but for nearby suburbs as well, according to this report from Robin Shulman of the Washington Post

Taking Stock: Economy and Government on July 2, 2009 (The Atlantic)
Continuing to characterize the present crisis as a “depression,” Richard Posner cautions that, in spite of signs of “incipient recovery,” prospects for the economy remain uncertain amidst continuing fundamental problems of unemployment, underemployment, declining home prices, and reduced personal consumption.

U.S. Stimulus a Small Patch for Big Economic Hole (Reuters)
In this news analysis piece, Emily Kaiser takes stock of the impact thus far of the federal stimulus package, especially in the context of the daunting difference in magnitude between the federal program’s $787 billion scale vs. the “$12 trillion in household wealth that has been wiped out since the recession began.”

Why This Recession is Hitting Men Harder (Wall Street Journal)
Featuring commentary by experts from the Economic Policy Institute and the Center for Economic Policy and Research, this report from Andrea Coombes examines the factors behind and social impact of the gap in unemployment levels between men (10.5 percent in May) and women (8 percent), especially given that male dominated industries account for half of job losses since the beginning of the recession. Sphere: Related Content

The Return of Cottage Industry

In the Great Recession, resources like Craigslist, Facebook, LinkedIn, Twitter, flyers on telephone poles and under windshield wipers, blogging platforms, slapped-together DIY business cards, and concepts like guerrilla marketing are fulfilling the same purpose as did the storied fruit stands of The Great Depression.

An article originally published in the Hartford Courant reports figures from the U.S. Bureau of Labor Statistics indicating that self-employment nationwide jumped nearly 2.5 percent in just one month this year (February to March 2009).

Annualized, that would be a 30 percent increase. And with about 3 percent of the entire U.S. population self-employed, we’re clearly looking at a small but significant portion of all working adults and an important factor in the entire economy.

Of course, many of these so-called microbusinesses don’t offer the excitement of a high-tech startup and may involve work that some might consider mundane, such as cleaning houses or mowing lawns. But the trend highlights a distinction that is especially important given the dismal unemployment figures just reported for June: while jobs may be scarce, there is always plenty of work.

Behind this distinction is the fact that the current recession was created by a crisis of big banking, big finance, big business and, arguably, by a failure on the part of big government to regulate them in the right ways. And while the resulting contractions of credit, home prices, consumer spending, and employment have affected businesses large and small, it’s important to take a look at the real, physical world around you. It hasn’t changed in much, has it?

The crisis made some jobs go away, but it didn’t really make work go away. There is still plenty of work to be done: plenty of houses that need to be cleaned, painted, or repaired; lawns that need to be mowed, watered, and fertilized this summer; leaves that will need to be raked and gutters that will need to be cleaned this fall; snow that will need to be shoveled this winter; restaurant menus that need to be designed; documents ranging from resumes to press releases that need to be skillfully written; hardwood floors that need to be skillfully installed; cracked windshields that need to be repaired; carpets that need to be cleaned; errands that need to be run; new entrepreneurs who need to be coached; passengers who need rides to the airport; senior citizens who need transportation to medical appointments or grocery runs made; students who need to be tutored; driveways that need to be resurfaced; music lessons that need to be taught; babies that need to be sat; content that needs to be search-engine optimized; dogs that need to be walked; poop that needs to be scooped; weddings that need to be sung at and photographed; digital videos that need to be edited; hair that needs to be braided; Web sites that need redesigns and fresh, well-written content; computers that need to be troubleshot; and so on.*

The list could go on and on, but you get the point, don’t you? There’s a difference between jobs and work, and there’s no real shortage of the latter. A suddenly unemployed or underemployed desk jockey might feel loathe to take on some of the categories of work listed above. But it’s worth considering that business savvy acquired in corporatedom, combined with the low-cost, technology-driven marketing resources available today, some persistently applied guerrilla marketing principles, and an abundance of willing workers on the labor market, could grow a one-person operation based on some forgotten skill into a lucrative small-to-midsize business, especially once the recovery begins.

Will this be a good thing for the economy in the long run? It’s hard to imagine why it wouldn’t, especially if it also facilitates a transition back to an increasingly localized business, economic, and financial base, with fewer “too big to fail” entities -- which, in turn, could leave the population as a whole less vulnerable to the booms and busts of global business and finance.

And, driven by necessity, it will probably happen independent of, in spite of, and under the radar of the noisy debate over the appropriate role of the federal government in setting the economy back on track.

*The services listed above are for example only and, of course, may involve varying startup costs and, in some cases, regulatory or licensing requirements. Check with your relevant local government agency, such as a state department of labor and industry, before taking the plunge. Sphere: Related Content

The Undismal Weekly Wrapup -- June 21-27, 2009

Analytical Summaries of Key Stories of the Week on Economics and Public Policy

A Funding Roadblock Ahead for Clean Energy (New York Times)
Kate Galbraith of the New York Times explores the question of what will happen to efforts to finance green energy projects “once the stimulus funding runs out.”

Analysis: Obama Scores Major, Much-Needed Victory (Associated Press)
News analysis piece by AP’s Liz Sidoti on the House of Representatives passing “the first energy legislation ever designed to curb global warming.” Also explores the implications of this legislative success for President Obama’s healthcare efforts.

Betraying the Planet (New York Times)
Renowned economist Paul Krugman scolds the 212 House of Representatives members who voted against the Waxman-Markey climate change bill, characterizing them as climate-change deniers who are committing what is tantamount to “treason against the planet.”

Can Governments Till the Fields of Innovation? (New York Times)
The dicey question of whether governments can play an effective role in driving the private sector toward creating new industries in such areas as energy and healthcare to revitalize the economy and create jobs is explored in this report from Steve Lohr of the New York Times.

Confidence in Stimulus Plan Ebbs, Poll Finds (Washington Post)
A new Washington Post-ABC News Poll finds that barely half of Americans remain confident that the stimulus package will be effective in turning the economy around, according to this report by Washington Post staff writers Dan Balz and John Cohen.

Inflation – The Real Threat To Sustained Recovery (Financial Times / Tehran Times)
Former Fed Chairman Alan Greenspan cautions that failure to pare back the U.S. federal budget deficits and pubic sector debt after the economy turns around could set the stage for inflation and stifle the effectiveness of private market forces in efficiently allocating resources, in this Financial Times column reprinted in the Tehran Times.

The Debt Tsunami (Washington Post)
A Washington Post editorial characterizes the latest long-term U.S. federal budget deficit projections from the Congressional Budget Office (CBO) as “scarier than ever.” Sphere: Related Content

Do Something. Now.

I’ve touched before on the issue of what I think, ultimately, will propel us out of The Great Recession. But I’d like to expand upon it a little more now. On the one hand I agree with those economists who have acknowledged that such measures as bank bailouts and the stimulus package have been essential to preventing a crisis from becoming a calamity, as well as those who have asserted that there is already evidence that these measures have succeeded in slowing the downturn and bringing us close to a bottom -- if, in fact, we aren’t there already.

But, on the other hand, I also believe that, in the final analysis, it isn’t really going to matter all that much what government does. Government interventions may jump-start the beginning of the next up cycle, but they won’t be the primary factor or “first cause.”

All this is based on the assumption that we will remain, fundamentally, a free country with an economic system based on reasonably free enterprise. I think the likelihood is extremely high that this assumption will hold true, in spite of the efforts of some conservative commentators to incite McCarthy-esque, anti-socialist paranoia. Notwithstanding what Rush Limbaugh might say, we’re not about to turn into the next Cuba. The checks and balances built into our system are working -- we can see the congress and the administration compromising when they find the may have strayed too far beyond the public consensus.

Taxes may increase, as may regulations. And this may indeed alter the “topography,” if you will, of the business playing field. But it won’t block access to the field. As long as we remain a free people, and as long as our spirits of ambition, self-reliance, enterprise, ingenuity, and inventiveness do not for some reason become broken or stifled, we will adjust to the new topography. We’re homo sapiens, after all, and Americans. So we have the ability to adapt to a changing environment.

Business Will Adapt to the Topography of the New Playing Field

In the same way that human beings likely emerged as a species in a hot tropical environment but successfully adapted to be able to succeed in diverse settings ranging from the Sahara Desert to Iceland, we Americans should be able to adapt to and prosper in whatever environment of reasonable taxation and regulation we end up with -- through the same inventiveness, ambition, and work ethic that have served us well thus far.

This won’t be the first time our economy has experienced basic structural changes that have altered the topography of the playing field. Changes occur all the time, and businesses and the individuals who lead and work in them will adjust to the new environment, as they have in the past.

Example One: The Two-Income Household

Examples? Well, in the years following World War II until, perhaps, the late 1970s, it was very possible for an average Joe to get an average job with a compensation level that would support a family reasonably well without the need for his wife to work. But as women increasingly entered the labor force the dynamics of the labor market changed.

In the early phases of the two-income, middle-class household phenomenon, the wife’s return to work was a way to substantially increase a family’s standard of living. But as the number of two-income families increased, the labor pool grew faster than the rate of available jobs, and the market moved gradually toward an equilibrium at which the average Joe or Jane could only earn about half of what it takes to sustain a middle-class lifestyle.

I would argue that, today, perhaps with a few exceptions in certain industries and occupations, a middle-class worker needs to rise to at least middle-management level to earn compensation sufficient to support a family as the sole wage earner. So for households in which neither spouse has yet achieved that rank, the second income is not an enhancement to the standard of living but a virtual necessity to enter the middle class.

This might not be the most positive example, but it shows how business adapt when the playing field changes. The labor supply expanded, so the true cost of labor went down -- simple supply and demand.

Example Two: The Impact of Taxes

I think taxation has a similar effect. The fact that we pay income taxes is factored into the hidden “formula” that sets wage levels. Do you really think that, if the federal income tax were eliminated tomorrow, your employer would continue paying you, indefinitely, as if you were still paying taxes?

I don’t think so. While you might experience a short-term windfall, eliminating taxes would simply create a basic structural change in the cost of labor, and market forces would adjust your real compensation gradually to return you to about the same level of net purchasing power, through such means as reduced annual increases and reduced ability to negotiate higher salaries for in-house promotions or moves to other employers.

For businesses to keep nominal compensation the same if employees were no longer paying taxes would be patently irrational. This is why I believe that, in much of our political debate, taxes are little more than a rhetorical bogeyman.

The same would hold for increased taxes on businesses or on wealthy business owners, who, again, would eventually pass on their increased tax costs in the form of higher prices or, yes, even job cuts. In reaction to both of these responses to tax increases, the market would return to a new equilibrium. Increased prices, for example, would place more upward pressure on wages, while job cuts would provide other businesses with the opportunity to benefit from the talents of displaced workers.

Indeed, if market forces are as strong as those on the unconditional laissez-faire side of the equation insist that they are, one might wonder what the fuss over taxation is really all about. If the invisible hand always prevails, the system should be able to adjust to a new equilibrium no matter what government does, short of extremely draconian, fascistic restrictions on business activity or extremely high, confiscatory tax levels -- neither of which is likely in this country, at least under current conditions.

The Response to Crisis Generates Energy -- And Value

The illustrations I’ve offered here are rather lengthy, but the underlying principle of the ability of business to adapt brings me back to my basic premise. The current crisis has already changed the economic playing field in this country. And the playing field would have changed with our without the significant government intervention we have seen. Pain has been inflicted upon many in the process, both in terms of businesses and individuals.

But this pain, these challenges, can also be looked at as an infusion of energy, like an injection of strong medicine that initially causes pain to a patient from the needle prick, and perhaps some queasiness as the drug enters the bloodstream. Nevertheless, the medicine will ultimately do its good work. And those who have suffered setbacks may find themselves more motivated than ever to take actions that will improve their situation and improve their ability to withstand a future crisis.

It’s a cliché, but I’ll say it anyway: a time of crisis is a time of opportunity for those willing to say “No!” to the temptation to sit around and stew, for those willing to, instead, get off their butts and do something. Maybe it’s a career change. Maybe it’s starting a new business. Maybe it’s making painful decisions about whether to unload the McMansion at a substantially-reduced, post-bubble price and downsize to a more modest -- and perhaps more realistic and sustainable -- lifestyle.

But what all of these responses to crisis have in common is that they are all actions. And we know from physics that every action creates an equal and opposite reaction. These acts of “doing something” will create ripples of energy in the economy, and this energy will eventually show up somewhere as added value. One person’s “fire-sale” on their McMansion becomes someone else’s bargain investment that will eventually produce a return in terms of an enhanced standard of living, rental income, or a capital gain after the market turns around. One company’s layoff of a mid-level manager may mark the birth of a new entrepreneurial venture, successful freelance career, or unexpected and positively life-altering occupational change.

In the aggregate, these ripples of energy, created in the course of one “decision to do something” at a time, will have a tremendous impact. It is ultimately this energy, rather than stimulus packages or centrally planned systemic overhauls, that will drive the next up cycle.

So do something. Now. Don’t sit around and mope about multi-trillion dollar deficits or whether healthcare reform will lead to higher taxes and unfunded liabilities. Don’t focus so much on what the dueling pundits are saying. Instead, do some creative thinking about what next move might work best for you, and give it your best effort.

It won’t be easy, and there are no guarantees of immediate success. There are, after all, and however sadly, no guarantees for any of us in this journey of life. But at a minimum the effort will generate “psychic income,” as a learning experience that will leave you stronger and better prepared for whatever it is that life has in store for you next. And although it might take a while, with sustained effort you have a good chance of ending up in a place you’ll like better than where you were before. Sphere: Related Content

The Undismal Weekly Wrap-Up -- June 7-13, 2009

Analytical Summaries of Key Stories of the Week on Economics and Public Policy

National Summit Arrives Amid Economic Trouble (Associated Press)
AP’s Jeff Karoub reports on a National Economic Summit being held under markedly different circumstances than those at the time it was originally planned, describing the climate as scaled back but no less determined to lead to tangible action.

G8 Finance Mins Start to Plan for End of Crisis (Wall Street Journal)
Luca Di Leo and Paul Hannon report from the G8 meeting in Lecce, Italy, on discussions focused on how to ramp down the pace of stimulus funding that member nations have infused into their economies in hopes of accelerating recovery.

Obama’s Spending Plans May Pose Political Risks (Washington Post)
Polling data and concerns among administration insiders indicate that President Obama may risk losing political capital if efforts toward reducing the pace of spending increases are not demonstrated soon, according to a story by Scott Wilson of the Washington Post.

2010 Vote Shift Could Bring Fed Policy Showdown (Reuters)
A standard rotation procedure scheduled for January will lead to changes in which members of the Fed’s Open Market committee will have voting authority, possibly leading to shifts based on such issues as differing viewpoints on the risk of inflation under the current policies.

Following the Money in the Healthcare Debate (New York Times)
Some $2.5 trillion and daunting issues about how it will be reduced and divided among numerous interest groups are at stake in the healthcare reform debate. Reed Abelson of the New York Times explores the complexities in an in-depth report.

Geithner Says 'Too Soon' for G-8 to Pull Back on Economic Aid (Bloomberg)
The U.S. Treasury Secretary cautions that G8 member nations need to stay the course on current stimulus efforts, focusing for now on restoring growth rather than reducing deficits, as reported by Bloomberg’s Rebecca Christie.

Lawrence Summers Defends Obama Policy (United Press International)
UPI reports on a speech to the Council on Foreign Relations by Nobel Laureate and top Obama economic guru Larry Summers, attempting to allay perceptions that the administration may have taken excessive measures to involve government in managing major segments of the financial, medical, and industrial sectors.

The Politics of Jump-Starting (Huffington Post)
Charles D. Ellison poses the question of just how well the tireless optimism and energetic initiatives of the Obama administration, such as the new 100-day effort to accelerate the pace of recovery, are actually resonating with the American public. Sphere: Related Content

Washington D.C., Eventually, Got Baseball Back -- So Maybe There’s Hope for Universal Healthcare, Too

The healthcare reform issue reminds me a bit of the extended saga of efforts to bring major-league baseball back to Washington D.C. after the Senators left in the early 1970s.

The acquisition of the Montreal Expos to become the Washington Nationals came together rather quickly. But before that, fans in the Washington Metro area waited decades to once again have their own team, suffering through several episodes of having their hopes built up only to be dashed, through such failures as attempts to move the San Diego Padres to D.C. During these years many fans gave up hope of ever having a true home team to root for.

And as the lines between the Washington and Baltimore metropolitan areas began to blur, with many residents having come to think of the two regions as one combined metropolis, the Orioles became so much of an adopted home team among Washingtonians that many fans and sports commentators came to feel that there was no longer a need for D.C. to have its own franchise.

The quest for universal healthcare in the United States is similar in many ways, in terms of its chronology and of a series of raised and dashed hopes. Washington lost the Senators in the 1970s, the same decade that Sen. Edward Kennedy (D-MA) emerged as the highest-profile advocate for national health insurance. But Kennedy’s efforts in the 70s came to naught, as did the efforts during the same decade get the Padres.

During the Reagan 80s, with the ascendancy of HMOs and other managed care models, the nation seemed to collectively buy into the notion that the private sector was best equipped to provide healthcare. Meanwhile the Orioles during the 80s succeeded in adding more and more Washingtonians to their fan base, and baseball fans in the D.C. area became increasingly complacent about the issue.

And as Washington dragged on through the next decade without a baseball team, a Democratic administration suffered perhaps its second biggest political embarrassment, with the failure of the healthcare reform effort delegated to Hillary Clinton by her husband. I don’t think I need to mention what the first biggest embarrassment of that administration was, but I’ll offer a hint for the clueless that it had something to do with a sartorial item, blue in color, and cigars.

Yet just when so many Washingtonians had become comfortable thinking of the Orioles as their team, and had come to view Waiting for Baseball in Washington as being just as absurd as Waiting for Godot, suddenly the Montreal Expos were the Washington Nationals. And just as the solution to the D.C. baseball problem came from north of the border, President Obama has suggested that, if we were starting a healthcare system from scratch, the best solution just might look like the kind of government operated, single-payer system we see in Canada and most other modern, industrialized nations.

But the practical reality is that we’re not starting from scratch. With a system, flawed as it may be, of private insurers and managed care organizations so firmly entrenched, it’s hard not to be just as much of a cynic about universal healthcare as one might once have been about Washington baseball, especially when confronted with indications of just how much money and power seem to be weighing the political and legislative processes toward the status quo.

President Obama has already said that the single-payer option is not on the table, and if one is to believe a caller to NPR’s Diane Rehm show on June 12, Sen. Max Baucus (D-MT), who chairs the Senate Finance Committee, has been making every effort to keep the voice of the single-payer advocate out of the dialogue.

Identifying himself as a physician, the caller claimed to be among the single-payer advocates whose requests to participate in the Finance Committee’s roundtable sessions on healthcare reform were refused, and who were arrested on order of Sen. Baucus for disrupting two of the sessions. The caller also claimed that the effort to silence the voice of single-payer advocates stems from a heavy influence on Baucus and other lawmakers of powerful and well-funded lobbies in the healthcare industry with an interest in thwarting efforts to establish a government-operated program.

Baucus’s side of the story is represented in a report from NPR’s Julie Rovner, aired May 22 on Morning Edition. In Rovner’s report, Baucus comes across very much as a realist and pragmatist, making an effort to get something passed that will be at least a step toward positive change.

"It just can't pass, not today," Baucus said of the single-payer issue, adding that "we can't squander this opportunity. We can't waste capital on something that's impossible."

Regardless of the veracity of the caller’s allegations about Baucus’s ties to the industry, Baucus, in practical terms, is probably correct. For those of us who accept the premise that corporations such as GM and AIG were too big to fail, it would seem difficult to argue that the private healthcare industry is not too big to demolish for the sake of starting from scratch.

And, as has been pointed out frequently in the ongoing dialogue on healthcare reform, it is true that a significant proportion of Americans do have coverage that they are satisfied with. So it would be unfair to pull that coverage out from under them.

This argument almost certainly still holds true even though the number of Americans in that category has probably diminished somewhat over the past year. For example, 55-year-olds who, after having successfully clawed their way into what they thought were comfortable and secure middle management gigs with good benefits, only to now find themselves with neither jobs nor healthcare, may be far less inclined to display “Have You Hugged Your HMO Today?” bumper stickers than they would have 25 years ago as thirtysomething yuppies during the Reagan 80s.

Nevertheless, it does seem, for now, that even though Washington D.C. was ready for the Expos to swoop down from Canada and become the Nationals, it looks like political Washington -- arguably for good reason -- isn’t yet ready to bring the Canadian “Medicare for All” model down to be the national healthcare solution.

But there appears to be hope that we are no longer going through the exercise in absurdity of Waiting for Godot. We can’t afford to go back to the drawing board, but it looks like there’s a good chance of getting a decent level of coverage for the uninsured and creating some viable and affordable alternatives for those who lack or are not satisfied with coverage at work.

And accomplishing that, sports fans, might not be a home run, but it would be at least a solid base hit. Sphere: Related Content

Has Declining Mathematical Literacy in the U.S. Contributed to the Economic Crisis?

The idea that students in the U.S. are behind other major nations in math and science has been discussed widely, and it’s backed up with hard data. For example, a study by the Program for International Student Assessment (PISA), administered by the Organization for Economic Cooperation and Development (OECD), found that 15-year-olds in the U.S. ranked 24th among other countries in math literacy and 26th in problem solving.

It’s telling that the math and science performance of students in the U.S. seems to decline as they progress through school and as the expected skill-set advances with age group. Elementary students test about on par with international peers, but in middle school they fall behind, culminating in the troubling results for the 15-year-olds in the PISA study.

Talk of problems with math and science education in the U.S. is nothing new, having emerged as a topic of attention in the media at least as far back as the 1970s. As a long-term issue, it raises the question of what has happened as students with inadequate mathematical literacy and problem solving skills have advanced into college and on to professional life.

I don’t currently have data to back this up, but it would seem that the students who do come out of high school with a strong grounding in math would gravitate toward the more math-intensive subjects like science, engineering, and biomedicine. For the rest, that leaves the less mathematically rigorous majors like business and liberal arts, in which students can struggle through the most basic required college math courses and then move on to advanced coursework in their chosen majors.

By extension, this would mean that some graduates less skilled in mathematics may have moved on to careers in fields like financial services, which, in turn, is problematic when you consider the increasingly complex nature of the financial instruments that have emerged over the past 20-30 years.

One such instrument is the securitized pool of subprime mortgages, which, now infamously, investors were allowed to purchase at 30-to-1 leverage. What does this mean, mathematically, and what level of math does it take to understand it?

As one of my math professors was fond of saying, the best way to understand something is to take “the simplest example,” so that’s what we’ll do. Let’s say I have $10 to invest, and I am allowed to invest it at “30-to-1 leverage.” Leverage is really a euphemism for debt. If I can invest my $10 at 30-to-1 leverage, it means essentially that I can use my $10 as collateral to borrow $300.

So let’s say I do that, and I use the borrowed $300 to buy a security consisting of 300 $1 loans (as I said, this is a simple example). For each year it’s outstanding, simple interest of 5 percent is payable on each $1 loan. Thus, for the first year, I can expect a profit of $0.05 on each of the loans, or $15 -- a handsome return, made possible by 30-to-1 leverage, of 150 percent on the 10 dollars of my own cash that I put up as collateral. My budget for the year is based on that expected return, including payments on the $300 I borrowed to buy the security, along with any other expenses -- after which, hopefully, I will retain a decent profit margin.

However, let’s assume everything doesn’t go quite as planned. I receive my interest payments on 285 of those loans, for a return of $14.25. But 15 of the borrowers, or about 5 percent, default. Here are the consequences:

• I’ve incurred a shortfall of $0.75, or 5 percent, on my budgeted revenue for the year, from which my expenses and profit margin were to have been derived.
• I’m now on the hook for the $15.00 in bad debt. If I can’t collect, the first $14.25 of that loss eats up the interest revenue I received, and the other 75 cents adds to the loss on my original $10.00 cash -- now 7.5 percent -- and that’s before paying my expenses, including the payments on the $300 I borrowed to buy the security.
• I would now do my best to mitigate this devastating loss, laying off staff and cutting other expenses, and filing claims with any company that may have insured me against losses. And so the cycle of crisis begins, with losses passed through the system from one stakeholder to the next.

This is a very simple model of what happened in the subprime mortgage crisis, and it illustrates how leverage has as much power to magnify losses when things go wrong as it does to magnify profits when things go right.

For the current discussion, it’s noteworthy that the math I used here is very simple -- using ratios and percentages to calculate expected interest, returns, etc. No advanced math is required -- no algebra, certainly no calculus. It’s elementary-school or at most middle-school stuff. It’s the sort of math that the cohort of fifteen-year-olds in the PISA study should have mastered well.

So how could this crisis have been allowed to happen? Did too many people in the financial community -- not to mention the grass-roots consumers who were taking out mortgages, negotiating home prices, and investing in the stock of banks that were issuing risky mortgages -- lack the math skills to comprehend the possible consequences? Or were they blinded to the magnitude of danger by the lure of potential profit?

While only simple math is required to see the inherently questionable risk in such a highly leveraged investment, there are other factors to consider when evaluating an investment, such as:

• How accurate are the valuations of the assets underlying the security -- the accuracy and stability of home prices, in this case
• How accurate are the assessments of the ability of the borrowers to repay, and of their default probability

These two considerations require somewhat more complicated math. Analyzing valuation accuracy, risk of loss, and default probabilities enters the realm of actuarial science and is highly vulnerable to any flawed assumptions or inaccuracies in the input data (garbage in, garbage out). Among such data flaws could be widespread misrepresentation of borrowers about their incomes, or prices that have been distorted by a speculative bubble. The results of an actuarial analysis should price the level of risk into the cost of the security and measure the risk, in terms of factors like expected default rates, against the expected return. But any inaccuracies in the original data or assumptions can lead to a misinformed decision.

If we look in this context at how the subprime mortgage crisis could have been allowed to occur, we see only a couple of explanations: (1) not enough people understood the math well enough to see what could go wrong, and/or (2) those who saw the potential for disaster (and, yes--there were a few lonely, expert voices crying in the wilderness) didn’t speak up loudly enough or act decisively enough.

Or, perhaps more plausibly, the explanation could lie in some combination of the two factors. If so, the level of math literacy throughout society is even more important. If enough everyday homeowners, mortgage underwriters, investment bankers, and others throughout the population of stakeholders understand the math, they are more likely to make better decisions that would counteract the impact of those who may be capable of understanding the danger but, out of whatever motivation, are at best in denial or at worst deliberately ignoring it.

This is why it’s good to see that math and science education are among the priorities of the Obama administration. Combined with the greater public attention the crisis is generating to finance and economics, an increased level of mathematical sophistication throughout the country could lead to a future of better financial decisions by all stakeholders, from the boardrooms of the financial sector to grass roots consumers on Main street. This would make future crises of this magnitude far less likely. Sphere: Related Content

Rethinking the U.S. Retirement System

For most Americans currently in the private-sector workforce, pension-based retirement models are now all but non-existent. Though certainly not without flaws, pension plans provided many retirees a level of security that is now, for most workers, a distant memory of something that was available to their parents' or grandparents' generations.

Yet the current recession is putting the spotlight on serious pitfalls of 401(k) programs and similar investment-based retirement plans in which workers for the past three decades have been staking their future hopes. And Social Security, which was never intended in the first place to be more than a bare-bones supplement, may also be headed for a crisis.

In this context, the possible need to re-think the retirement system in the U.S. is emerging as an important issue. So important, in fact, that four major nonprofit organizations — the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, the Pension Rights Center and the Service Employees International Union (SEIU) — have joined forces to launch Retirement USA, an initiative advocating for a new retirement system that, in conjunction with Social Security, would provide universal, secure, and adequate income for future retirees.

Ross Eisenbrey, vice president of the Economic Policy Institute, said, “The current private retirement system is failing most Americans. More than half have no employer-provided retirement plan and most of those who do are woefully unprepared as they near retirement. 401(k)s can’t do the job.”

Launched last month, the Retirement USA initiative centers on a set of core principles that include such concepts as:

• Shared responsibility among employers, employees, and the government
• Pooled assets that are professionally managed
• Payouts only at retirement
• Benefits that are portable from job to job

The organization is currently collecting proposals, which will be examined at a conference this fall, for a new retirement system. Retirement USA has also published a working paper that reviews problems with the current retirement system in the U.S. and outlines principles for a new system. To establish a comparative framework, the working paper also examines retirement systems in other countries.

Sphere: Related Content

MIT Economist Compares Dialogue from Right to Andrew Mellon

Watching a re-run of Crash: The Next Great Depression on The History Channel last night, I got a good refresher on the Great Depression and the tragic mistakes the U.S. government, under the leadership of the staunch free-market apostle Andrew Mellon, made in responding so slowly to the crisis.

According to Ricardo J. Caballero, head of the economics department at MIT, those on the conservative side of the equation today don't seem to have learned very much since. In an opinion piece from today's Washington Post, Caballero writes that it is "scary to hear the right regurgitating the untimely liquidationist claims that Treasury Secretary Andrew Mellon made."

He goes on to suggest that the best sign of promise in the recent economic news is President Obama's recent pledge of "persistence" in the effort to get the economy out of the hole it's currently in.

Well put. We'd all do well to make sure we think beyond politics and ideology and persist in "doing stuff," because ultimately it's our actions and efforts, as individuals, as businesses, and as a nation, that will turn the situation around. Not every effort will succeed. We can't expect to get everything right the first time. But, as the lessons of the Great Depression teach us, inaction is the greatest enemy, and the actions taken by the Roosevelt administration, however imperfect, were what finally moved things in the right direction.

Sphere: Related Content

Support for Obama Remains Strong Despite Negative Coverage from Some Pundits, Media Watchdog Group Says

WASHINGTON - April 1 - Watchdog group Media Matters for America released a comment today in response to a recent Washington Post/ABC News poll showing that only 26 percent of the public blames the Obama administration for the country's economic situation:

"This poll shows that despite what they are hearing from the media, the public overwhelmingly blames banks, business, and the Bush administration, not President Obama," said Erikka Knuti, a spokeswoman for Media Matters. "The media have repeatedly attached Obama's name to the economic crisis and all but erased the role of the previous administration from their coverage. The American people aren't falling for it."

The Washington Post/ABC News poll, released on March 31, asked respondents who they thought "deserve[d]" the most "blame" for "the country's economic situation." Results for who deserved a "great deal" or "good amount" of blame are as follows:

-80 percent said banks and other financial institutions
-80 percent said large business corporations
-72 percent said consumers
-70 percent said the Bush administration
-26 percent said the Obama administration

In their news release, the watchdog group also cites their documentation of how media figures, in their reporting of economic issues, have blamed Obama for the economic recession by disappearing the Bush administration's role and repeatedly referring to the "Obama recession."

Specifically, according to Media Matters, beginning in early November 2008, conservative media figures such as Rush Limbaugh, Sean Hannity, Dick Morris, and Hugh Hewitt have asserted that Obama is to blame for the decline of the stock market since the election and have promoted the myth of an "Obama recession," in spite of the finding from the National Bureau of Economic Research that the recession began in December 2007.

Media Matters also claims to have documented numerous media outlets declaring the existence of an "Obama bear market," and charges MSNBC with using, in numerous reports, misleading charts to suggest that the Dow only began dropping after Obama's election or inauguration, despite the fact that the Dow was on a downward trajectory months before the election, dropping 3,738 points from May 2, 2008, to November 3, 2008.

The watchdog group cites the phrase "Obama bear market" as just one example of a pattern of the media allegedly leaving out relevant information about the role of Bush-era policies in discussing the current state of the economy. According to Media Matters, among the examples is a March 8 Associated Press analysis, in which Tom Raum suggested that Obama is to blame for job losses since he took office and even before he did so -- an argument the watchdog group asserts has been rejected even by conservative CNBC host and National Review Online economics editor Larry Kudlow.

Sphere: Related Content

Can We Learn Something from the Aussies?

Early in 2008, I was chatting with a colleague from Australia on my way to a sales meeting in Asia. I don’t quite recall how the conversation got started, but apparently signs of trouble in the U.S. economy had already started to spread in the international news, and my colleague asked me about it. Somehow the subject of unemployment came up.

“You don’t have services in the States for people who are unemployed, do you?” she asked.

I was a bit surprised to hear that, and clarified that we do indeed have an unemployment compensation system to help people who have lost one job through no fault of their own get through until they find a new one.

“But it’s very limited, isn’t it?” she replied.

“Well, yes,” I said. “It’s normally around three months, but in a particularly bad economic situation it’s sometimes extended.”

“It’s indefinite in Australia,” she said. “Some people even live off the dole.”

The conversation then, understandably, switched around to taxes, and she said that their heavy tax rate was what they sacrificed in exchange for a measure of security in Australia. She said that she understood that we don’t pay very much in the way of taxes in the U.S., but I responded that, when you add up our sales taxes, income taxes, fuel taxes, property taxes, state and local taxes, etc., our tax burden ends up being pretty heavy. I told her about our “Tax Freedom Day” concept which, last I heard, held that we all have to work until sometime in May before we can finally call our income our own.

“My tax bracket last year was 47 percent, by the way,” she said, which does translate to somewhat more than 5/12 of the year … but not a lot more.

It makes you wonder. Australians pay somewhat more in taxes than we do, but perhaps not a whole lot more. But seemingly they provide a better safety net for those who are having trouble. Is it a good tradeoff? Conservatives in the U.S. would argue that a huge social welfare system in the U.S. would be devastating to the economy.

But if the compared GDP growth rates for the past five years in Australia vs. the U.S. (see chart, data source indexmundi) are any indication, maybe this isn’t the case. Although Australia recently declared that its economy, as a result of the global crisis, is projected to shrink this year, they are doing better than we are on the unemployment front, with a jobless rate of 7 percent. And for the last five years, they beat us by a small margin in average annual GDP growth – 3.24 percent for Australia as opposed to 3.18 percent for the U.S.

Maybe a “welfare state” isn’t such a bad thing economically as the conventional wisdom in the U.S. leads us to believe. Is it possible that a larger and more expensive social safety net amounts to a form of “permanent stimulus?” Here in the States many of us don’t like the idea of handouts, and that’s understandable. But perhaps giving the poor a consistent level of money to spend and a reasonable minimum standard of living can have a beneficial and stabilizing effect on the economy, and a moderating effect on fluctuations driven by the booms and busts of business cycles.

Sphere: Related Content

The Private Sector Always Allocates Resources More Efficiently: Myth or Fact?

If you listen to conservative talk radio (and in the market I currently live in there’s not much other choice), you’re likely hearing the likes of Rusty Humphries, Glenn Beck, and Rush Limbaugh continuing to preach against an active role of government in managing the economy, based on the long-held premise that “the private sector always allocates resources more efficiently.”

But I don’t think one needs a PhD in economics to realize that this premise isn’t one that deserves serious credence anymore, if it ever really did. Like governments, businesses are run by people, with the same human failings. And the bigger businesses get, the less they become about money and efficient resource allocation, and the more they become about other things like the egos of their owners and management. If the efficient resource allocation premise were unconditionally true, then every company car would be a small hybrid. No executive would drive a company-owned Mercedes.

Having said that, I also believe that there’s nothing inherently wrong with businesses making decisions on criteria other than efficient resource allocation. Other things being equal, if a business that is legally and fairly making enough of a profit to float something like a $1.2 million office renovation, then so be it. If it’s okay with the ownership, senior managers, or shareholders, and if it’s not done by a company in the process of being rescued by taxpayers, then it’s okay with me. But it’s almost an insult to one’s intelligence to suggest that it’s an efficient allocation of resources.

When I saw former Merrill Lynch chairman John Thain on television trying to explain
away his $1.2 million office renovation, I had, on one level, the same visceral, “how dare he” reaction that most people probably did. When he tried to explain the issue away by saying that the office in its previous form just wouldn’t have been effective for him to use, there did seem to be an element of condescension and entitlement in his tone. It was almost as if he was saying, “You little guys just can’t possibly understand how essential a $1.2 million office is to a high-powered executive like me.” In the current context of economic calamity, rising unemployment, and huge corporate bailouts, Thain’s press appearance was surreal, a bit like a latter-day version of the “let them eat cake” incident.

But at another level, I also couldn’t help but feel a little embarrassed for the guy. There was something almost pathetic about his hopeless effort to explain himself. In a way, it was almost like a scene you could imagine of some poor schleb who’d managed to claw his way into middle management trying to explain to his boss an excessively pricey dinner on an expense report.

The whole incident seemed to confirm the idea that Thain had risen to his position in an environment that encouraged executives to think of such extravagances as perfectly acceptable. As Nick Foulkes wrote in a column in the April 6 issue of Newsweek, “John Thain's $1.2 million office refurbishment spree would probably have been regarded as perfectly unremarkable 18 months ago.” That’s exactly the point. Numerous factors that have nothing to do with efficient allocation of resources can drive private-sector entities to a point where excess is not only tolerated but encouraged.

The executive compensation question is similar. The AIGs of the world have defended lavish bonuses and compensation packages by asserting that they are essential to recruiting and retaining top talent. By extension, this argument follows the efficient allocation of resources line of reasoning – the fat paychecks go to the talented business geniuses who deserve them.

But, again, there’s a strong case for the fallaciousness of this argument. As Seth Godin puts it eloquently in a March 23 blog post on “The Myth of Big Salaries,” “Sometimes markets get stuck because there is a disconnect between what something costs and what you get.” Godin argues that at compensation levels above $1 million per year, the game has become about things other than money. And, by extension, I would argue that it has also become about something other than allocating resources efficiently.

When corporations reach a certain size and level of power, they tend to take on quasi-government attributes and become prone to many of the same pitfalls, such as inefficient, bureaucratic management structures and self-serving motivations of the people that run them. So it’s naïve to believe that the “invisible hand” of resource allocation choices made by businesses as “rational decision making units,” a self-regulating mechanism, is the only regulation that is ever necessary. Like individuals, businesses don’t always act rationally. So checks and balances are as essential to businesses as they are to governments.

Where those checks and balances should come from – shareholders, boards, associations, governments, etc. – is of course a highly fluid and context-dependent question. But let’s get real and stop swallowing the simplistic notion that everything would be fine and dandy if we just stepped out of the way and let the self-regulating mechanisms of the free market run their course. Sphere: Related Content

So Just Who Is This Geithner Dude, Anyway?

Treasury Secretary Tim Geithner seems to be in the unfortunate position of being one of the favorite punching bags of conservative pundits. The criticism as a blunder of his first news conference, in the midst of which the stock market tanked, is probably fair. He wasn’t prepared to present details of a rescue plan for the banking industry, and it’s hard to see much excuse for that.

It’s especially hard to see if you look back a bit further into his background. Among his publishing credits are a 2006 lecture, “Hedge Funds and Derivatives and their Implications for the Financial System,” and a 2004 paper “Changes in the Structure of the US Financial System and Implications for Systemic Risk,” in which Geithner wrote that “… the increased size and scope of these entities necessarily exposes them to a wider array of shocks and risks and means that the failure of one of them could have a broader impact than in the past and be considerably more difficult to resolve. The implications for such a failure would almost certainly fall outside the range of experience captured in conventional markets.”

In this remarkable passage we see that, four years before the fateful events of Fall 2008, the President of the New York Fed already seemed to be aware of the unprecedented vulnerabilities in our banking system. At a time when the U.S. was just entering the upward curve of the Great Housing Bubble, Geithner was apparently well aware that our economy could be dwelling in a house of cards.

If Geithner knew this, so too, no doubt, did the rest of the Fed, which begs the question of why preventive action wasn’t taken sooner. Maybe behind the scenes the keepers of the temple were indeed quietly exploring the issue. Perhaps they were alarmed but didn’t see much that could be done without creating a panic that would bring down an economy that, after the collapse of the tech bubble, was being propped up entirely by the housing bubble. Perhaps the Fed, which of course is almost infamous for its cautious approach to public comment, and understandably sensitive to the impact of its statements on the markets, saw delaying the inevitable as the best among options that were all pretty bad. It also seems quite plausible that political pressure from the George W. Bush administration may have played no small role in the acquiesence.

But now, of course, a different administration is in power. And, in view of Geithner’s above-referenced contributions to the financial literature, we can perhaps take comfort in the idea that the new administration has at least placed someone at the helm of the financial system who has a thorough understanding of the issues behind the crisis.

Much has been made recently in the media of the alleged difficulty the administration has experienced in hiring deputies for Geithner. Given the beating he has taken in the media, maybe a good PR guy is among his staffing needs. In case you’re reading this, Mr. Geithner, I’d certainly be interested in entertaining an offer. Sphere: Related Content

Welcome!

Economics is often called "the dismal science." But our current crisis has taught us that it’s a science we all need to understand better. Over the past thirty years, the leaders we chose here in the U.S. implemented policies that created the conditions that made our current crisis possible.

Even now, it appears that we may not yet have learned our lesson. The public dialogue that frames the current crisis often seems inadequate and based on premises that may by now be very outdated, using the language of such old, simplistic dichotomies as liberalism vs. conservatism, socialism vs. capitalism, etc. Newsweek runs a story with the headline We Are All Socialists Now,” while conservative pundits continue to insist that all the government needs to do to get us out of the hole is cut taxes, cut spending, and get out of the way.

Both sides of this dichotomy are based on ideas that come from a very different world. Isn’t getting government out of the way, through such actions as deregulating financial markets and castrating anti-trust laws, exactly what we did, starting thirty years ago? And don’t those actions have a precise cause-effect relationship to the boom-and-bust cycles we’ve witnessed over three decades and, especially, to the the insane financial practices that gave rise to the current crisis?

But on the flip side, the vocabularies of socialism or New-Deal-style liberal democracy are just as inadequate to helping us comprehend and see our way out of the current predicament. If centralized planning proved ineffective in the 20th-century Soviet Union, just think how much more inadequate it is to the complex, fast-paced, technology-driven world we have today. Centralized planning isn’t what will get us out of this hole. What will get us out are the grass-roots efforts that individuals and organizations, out of sheer self-preservation. are already making to deal with the current situation, responding to such practical, everyday challenges as: How can I make sure that my family continues to have food on the table? How can I make sure my small business will have adequate cashflow to continue to operate? What innovative venture of my own could I launch to replace the income from the job I just lost?

Yet the chatter of the popular media seems to be locked into the framework of old ideas. That doesn’t mean, however, that there aren’t new ideas out there or that there aren’t contemporary thought leaders who, behind the scenes, are quietly influencing those currently vested with decision-making authority. So, the question is: who are the current thought leaders in economics, and what do they have to say? And will the ideas shaping the decisions of those we have placed at the helm help put our society, 30 years from now, in a better place than where we are now, a more stable place where we will be safer from the vagaries of the bubble-and-bust roller coasters of the past three decades?

This blog was conceived as a forum for exploring those very questions. Our current predicament shows that we need a better understanding of what we are assenting to through the authority we vest in our representatives. When our country bought into Ronald Reagan’s evangelism for low taxes, “free” markets, and deregulation, did we understand that the result would be allowing mega-banks to gamble all of our financial futures by placing risky bets on assets leveraged 30 to 1, or that we were creating an illusion of prosperity by building a debt-driven economy? Of course not. We cast our votes and acquiesced to the policies without understanding what we were getting ourselves into.

Let’s avoid making the same mistakes again. Let’s make sure we understand why we believe what we believe. Let’s make sure we truly know our leaders on both the dominant and opposition sides. And, perhaps more importantly, let’s make sure we know the thought leaders who are shaping their opinions, so that, when we exercise our democratic rights through our votes and through the ongoing feedback we provide to our chosen representatives, we are advocating for our own self-interest, from a fully informed context.

I’m not a credentialed expert on economics -- I’m just a reasonably well educated dude with some halfway-decent research skills and, I like to think, a knack for putting together a fairly readable English sentence. So it’s an exploratory undertaking for me, and I invite all interested to join me and, especially, to contribute to the discussion. Sphere: Related Content