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March 10, 2009

Economist's View - 7 new articles

"Adam Smith's Market Never Stood Alone"

Amartya Sen explains how Adam Smith has been misinterpreted, and how the beliefs associated with that misinterpretation lead to a form of capitalism that Smith would not have approved of. In fact, Smith would not have been surprised that the type of capitalism we have seen in recent decades would lead to the difficulties we are having today:

Adam Smith's market never stood alone, by Amartya Sen, Commentary, Financial Times: ...[T]he market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. .... The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. ...

Do we really need a "new capitalism"...? ... What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification... In a similar way, dependence on the profit motive, and on ... private ownership, are seen as archetypal features of capitalism. However,... All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy. ...

Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. ...[A]n economy needs other values and commitments such as mutual trust and confidence to work efficiently. ...

Even though the champions of the ... Smith enshrined in many economics books may be at a loss to understand the present crisis..., the far-reaching consequences of mistrust and lack of confidence in others which have contributed to ... this crisis ... would not have puzzled him. ... The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been ... sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

[There is] ... a tendency towards over-speculation that, as Smith argued, tends to grip many human beings in their breathless search for profits. Smith called these promoters of excessive risk in search of profits "prodigals and projectors" – which, by the way, is quite a good description of the entrepreneurs of subprime mortgages over the recent past. The implicit faith in the wisdom of the stand-alone market economy, which is largely responsible for the removal of the established regulations in the US, tended to assume away the activities of prodigals and projectors in a way that would have shocked the pioneering exponent of the rationale of the market economy.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. ... Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief ...; he argued, in general, for institutional choices to fit the problems that arise rather than ... leaving things to the market.

The economic difficulties of today do not ... call for some "new capitalism", but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.


Quick Note

I'll be on the Mark and Dave show (KEX Portland) between 4:00 and 7:00 p.m. (PST) today (it's a recorded interview, so not sure of the exact time). It was 5-10 minutes long (streaming audio).


The Shrinking Middle Class?

If the trends over the last 25 years continue, as is likely, when the economy finally starts to recover and create new jobs, many of those who lost jobs during the downturn will find that the jobs available to them are not as attractive as the jobs they left:

The middle-age, middle-income squeeze, by Stephanie Schorow, MIT News Office: ...Dramatic shifts in the U.S. labor market in the last 25 years are relegating older workers -- even those with a college education -- to lower-wage jobs... This trend appears likely to steepen in the current recession, as employers accelerate the rate at which they shed nonessential positions.

In a paper co-authored with graduate student David Dorn, "This Job is 'Getting Old'...,"... Autor analyzes a phenomenon that he refers to as the "hollowing out" of the U.S. job market from 1980 to 2005.

"One of the most remarkable developments in the U.S. labor market of the past two and a half decades has been the rapid, simultaneous growth of employment in both the highest- and lowest-skilled jobs," Autor says. European labor markets echo this shift.

Automation, computerization and offshoring are reducing the number of middle-wage, skilled occupations -- stock clerks, inspectors, telemarketers, payroll workers, sales agents and software programmers -- Autor finds. These jobs are particularly vulnerable to automation because their core tasks follow well-understood routines that can increasingly be codified in software and executed by machinery.

Ironically, many jobs that require less formal education -- such as construction workers, janitors, truck drivers, auto mechanics, home health workers and wait staff -- are more difficult to automate than these white-collar positions because they demand physical flexibility and rapid adaptation to unpredictable circumstances (e.g., oncoming traffic, unhappy customers). Humans excel at this form of flexibility while current technology falls short. Demand also remains high for high-wage, high-skill jobs, such as attorneys, physicians, engineers and top managers -- all of which perform analytic, interpersonal and problem-solving tasks requiring both expertise and intellectual flexibility.

As the labor market "hollows out," workers who in a previous generation would have occupied middle-skill, white-collar positions must increasingly find their fortunes elsewhere -- either in high-skill, high-education professional, technical and managerial positions, or in less-educated manual labor and in-person service jobs. Autor's data indicate that since 1980, older workers with at least some college education are increasingly doing what was once thought of as "non-college" work, i.e. non-routine, but not highly skilled jobs.

According to data compiled by Autor and Dorn, the share of college-educated workers found in low-wage, non-routine occupations rose from 19.9 percent to 23.6 percent from 1980 to 2005. Moreover, the average age of those with college education working in such jobs rose by 6.7 years during this time. ... And as computers and offshore sourcing continue to reduce jobs in areas such as accounting and sales, this trend has accelerated. ...

Autor also suspects employers facing rising health costs and falling profit margins are more likely to hire young people because of the higher health care costs associated with older workers.

Thus, Autor's findings underscore the importance of both career retraining and, potentially, public assistance with health coverage in softening the brunt of the economic downturn on older workers. But they also challenge assumptions about the long-term value of a college education.

Higher education, particularly an advanced degree, is still the best way of ensuring future income, Autor says. However, "the degree to which a college education insulates you from downturns and from loss of prestige and earning power of your occupation is unfortunately smaller than it used to be."


Optimism Abounds at the White House

Tim Duy doesn't see the light at the end of the tunnel that the administration says may be there:

Optimism Abounds at the White House, by Tim Duy: With the ink barely dry on the recent stimulus package, commentators are already calling for a fresh round of stimulus. But will these calls be heeded, or fall on deaf ears? For now, it looks like the Obama Administration is standing firm. And, really, what else could we expect? A call for more stimulus at this juncture is only a signal that the first package was destined to be a failure from the beginning, an admission that this Administration could not afford so early in the term. Christina Romer, chair of the Council of Economic Advisers, delivered a clear message today:

"We absolutely need to let this one work," Christina Romer, chair of the White House's Council of Economic Advisers, said Monday at the Brookings Institution. Tax withholding tables are just now being changed to get more money into consumers' pockets, she said, and many forecasters are saying the recent uptick in consumption may mean the economy is approaching bottom. "I think people are perhaps seeing some light at the end of the tunnel," Ms. Romer said.

Light at the end of the tunnel...what information exactly is flowing into the Oval Office? Did the White House get the same jobs report the rest of us saw last Friday? Not so much light in that report as pitch black. Another 651k employees cut from payrolls, unemployment pushed to 8.1%, and the U6 rate pushed to a whopping 14.8%. These numbers are all expected to deteriorate in the months ahead. What else did we see last week? Perhaps the light was the in the ISM reports? Manufacturing barely budged, and remains mired deep in recession territory; nonmanufacturing tells a similar tale. Initial claims fell, but at 639k still signalscontinued sharp deterioration in the labor market, and the 4-week moving average still edged up. Maybe she is referring to the downward revision to 4Q08 productivity, which suggests firms still have more work to do in reducing labor costs.

Recent data shows little light, in my opinion. It describes an economy in virtual free fall. Romer appears to be holding onto the hope that the relative stabilization in real consumption expenditures signals a bottom of activity. I hope she is correct, but I remain cautious - households are getting a significant boost right now from declining energy prices, but with oil prices settling out in the $35 to $50 zone, future gains are less likely. Moreover, the confidence numbers are not supportive of a bounce back in consumer spending:

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Most irritating is that Romer knows all this; she is much too smart to not appreciate the severity of the data. But once you go are in the Administration - whatever Administration - you heed to the party line. Romer continues the line:

The White House is betting that addressing the root cause of the economic downturn — the housing and financial-sector trouble — will be enough (along with the stimulus spending) to return the U.S. to growth. Tim Geithner, the Treasury secretary, "loves to say, 'There's more stimulus in financial rescue than in stimulus,'" Ms. Romer said. "By getting our financial markets back, getting lending going again, that's incredibly important for aggregate demand and for spending."

Sometimes I feel like I am in Oz. And I want to go home, so badly do I want to go home. To a time that credit flowed like water from a spring, and the answer to all life's problems could be found in a home equity line of credit. And Geithner is whispering to me, "just click your heels, and say 'I want to go home.'" Yet for months I have been clicking my heels - since Fall of 2007 - and still I am stuck in Oz.

Efforts to unglue the financial system are important, but I sense that the Administration's expectations of what will by delivered by a fix will fall far short of what is necessary to fill the growing hole in the US economy. Even BOA CEO Ken Lewis, in a self-serving WSJ oped, admits as much:

Second, one of our greatest challenges is balancing the need to extend credit with the need of households to pay down excessive debt. In an economy that became too dependent on debt-driven consumption to create growth, the prospect of household deleveraging is sobering. The answer, in my view, is to let competitive forces lead us back to responsible lending practices, not the type of indiscriminate lending that has created so many problems.

Even if households suddenly rediscover their love affair with credit, a big if given the destruction of wealth in recent months, they will find themselves stymied by tighter credit conditions. A healthy, well functioning financial system simply will not extend credit on the scale seen in recent years. Without a replacement for that demand, economic activity will slide into a sub par equilibrium, and would likely remain sub par for an extended period of time as structural imbalances are corrected. David Altig at macroblog summarizes:

When I look ahead, I envision the U.S. economy over the next several years in terms of a simultaneous process of recovery and reformation: Recovery in the sense that the actual contraction of GDP will end, but reformation in the sense of structural transformation in financial markets, consumer behavior, and perhaps an adjustment of the global imbalances that are arguably at the root of much of the financial instability that has characterized the past decade.

Additionally, what is the time line for a financial market fix? One month, or one year? Will TALF jump start the securitization market overnight? How much damage will be done to the US economy while we wait? This Administration appears willing to find out.

In short, I grow increasingly fearful that the pace of economic deterioration will leave the US economy in a much deeper hole than this Administration expected, swallowing the stimulus package. Moreover, that even with a functional financial market, crawling out of that hole will be difficult at best. I see little but fiscal stimulus that could fill that hole. You might not like it, you might worry about the long term budgetary consequences, but we all might soon fall back on the old battlefield adage: There are no atheists in foxholes.


Tent City

Along the American River, near Sacramento, California:

The small town I grew up in is not too far from there. Here's a story from the local paper:

Jobless rate hits 26.7%, by Susan Meeker, Colusa Sun Herald: ...State labor officials estimate more than 2,900 of Colusa County's 11,000 workers are unemployed, a significant increase in just two months.

But good news is on the way, as ... job seekers will soon benefit from federal stimulus money... "We don't know exactly how much we will receive from the federal stimulus package, but money is on the way," said Luis Moreno, deputy director of Colusa County Economic Development Department ...

Colusa County's unemployment rate was 26.7 percent in January – an increase of 8.7 percent since November...Mid-Valley counties traditionally have higher unemployment rates during the winter – due to the slowdown in seasonal agriculture work – it's the recession driving the latest figures.

"We are seeing a lot more people with a higher level of education lose their jobs," Moreno said. "That also includes people with a long work history. Many have been in jobs 10, 20 and 30 years. ... But Moreno said the EDD will move aggressively to jump start job creation once the stimulus money is in hand. ...

"We are going to spend this money very quickly," Moreno said. "The last thing we want to do is send it back to the federal government. After that, we just have to hang on and hope the recession will end soon." ...


Mr. Freeze

David Brooks:

The Democratic response to the economic crisis has its problems, but let's face it, the current Republican response is totally misguided. The House minority leader, John Boehner, has called for a federal spending freeze for the rest of the year. In other words, after a decade of profligacy, the Republicans have decided to demand a rigid fiscal straitjacket at the one moment in the past 70 years when it is completely inappropriate.

The real goal, I think, is to protect the Bush tax cuts. The tax cuts are scheduled to expire soon due to budget games the Republicans played to get the tax cuts in place, but they never intended to actually let the tax cuts be reversed. Now that they are out of power, something they didn't expect would happen, there is a possibility that the increase in taxes Bush scheduled to game the budget figures will be allowed to happen after all. However, if the political winds move against more spending - something Boehner is trying to facilitate - and the economy remains weak, the case for allowing the scheduled Bush tax hikes to occur is harder to make.

Update: Paul Krugman:

Can America be saved?: So I read this:

Boehner said Americans want government to practice the same financial restraint they have been forced to exercise: "It's time for government to tighten their belts and show the American people that we 'get' it."

and I wonder if this country can handle the crisis we're in. Remember, John Boehner is, in effect, the second-most influential member of the GDP...

What's insane about Boehner's remark? He's talking about the current economic crisis as if it were a harvest failure — as if we faced a shortage of goods, so that the more you consume the less is left for me. In reality — even most conservatives understand this, when they think about it — we're in a world desperately short of demand. If you consume more, that's GOOD for me, because it helps create jobs and raise incomes. It's in my personal disinterest to have you tighten your belt — and that's just as true if you're "the government" as if you're my neighbor.

Plus, who is "the government"? It's basically us, you know — the government spends money providing services to the public. Demanding that the government tighten its belt means demanding that we, the taxpayers, get less of those services. Why is this a good thing, even aside from the state of the economy?

Again, this is what the leaders of a powerful, if minority, party think. Can this country be saved?


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