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August 10, 2009

Economist's View - 6 new articles

"An International Comparison of Small Business Employment"

John Schmitt and Nathan Lane of the CEPR:

An International Comparison of Small Business Employment, by John Schmitt and Nathan Lane, CEPR: Contrary to popular perceptions, the United States has a much smaller small-business sector (as a share of total employment) than other countries at a comparable level of economic development, according to this new CEPR report. The authors observe that the undersized U.S. small business sector is consistent with the view that high health care costs discourage small business formation, since start-ups in other countries can tap into government-funded health care systems. [Note: Click on figures for larger versions]

Cepr1

Cepr2

Cepr3

There's another factor that could also be contributing besides competitive disadvantages with countries that have government funded health care systems. A more extensive social safety net can reduce the risk of attempts at entrepreneurship. If there is an extensive social safety net to fall back upon if things don't work out, you might be more willing to quit the job you hate (the one with health insurance for the kids) and sink everything you have into a small business that you've always wanted to run. But I'm not sure the data above support this interpretation, i.e. that there is an obvious positive association between the strength of social insurance and the prevalence of small business. But it is highly suggestive, and regressions that control for other cross-country differences could help to settle the issue. In any case, one thing is clear, according to these measurements the US has low numbers relative to other countries in the sample.


"Astro-Turf Trolls for the Blogosphere"

Great. Organized, paid blog trolls:

Make no mistake: GOP is paying trolls to "blog attack", by Politics and Technology: This is unbelievable. We always knew that there were right-wing political hacks trolling the blogosphere, but this is a new low.

There's a company called Advantage Consultants that's offering up "professional blog warriors" to "flood the zone" with comments. In short, astro-turf trolls for the blogosphere.

Click to zoom on their ad..., but here's the text:

Are you ready for a blog attack?

Get ahead of your opponent with Professional Blog Warriors.

Be prepared to "flood the zone" with comments from professionals who are ready to put your talking points on the blogosphere 24/7.

Whether it's defense or offense, Advantage Consultants has a dedicated team of experienced blog warriors ready to advance your candidate or campaign.

Why wait for the attack? Launch your attack with a battery of blog and forum comments aimed at all media and blog sites in your district.

Contact us today and let us show you the Advantage in professional blog warfare.

...Incidentally, who are these people? Who is Advantage Consultants? Their president is Doug Guetzloe, a right-wing radio host and anti-tax activist in Florida.

The marketplace of ideas is far from ideal. This goes on in a variety of different formats, people are paid to call into radio shows, to write letters to the editor at local papers, to attend public meetings, if there's a public forum on an important issue you can bet someone, somewhere is doing their best to figure out how to manipulate the discussion in their favor. This is just the extension of an old technique to a new format (e.g. here's the same consulting group explaining how to manipulate talk radio).

But the basic dishonesty of it all bugs me.


Stabilization Policy and Intertemporal Shifts in Output and Consumption

I've seen lots of objections to the Cash for Clunkers program based upon the fact that all the program does is shift consumption intertemporally, it doesn't actually create sales that wouldn't have occurred anyway.

But that is not, in and of itself, a valid objection. Shaving the peaks in output and consumption to fill the valleys stabilizes the economy. When the economy is in recession, creating brand new things that wouldn't have existed otherwise to lift the economy back toward full employment is preferred, but generally there aren't enough opportunities along these lines to give the economy the help it needs. In the cases where we cannot create enough new output and consumption to bring the economy back to health, moving consumption from a time when the economy is overheated to a time when it is underperforming helps by bringing both time periods closer to the long-run trend.

Now, Cash for Clunkers is not the the best way to shift consumption from the future to the present, or anywhere close since the intertemporal shifting is generally only for a month or two rather than from good times to bad, so this should not be interpreted as a defense of the program on this basis. But that doesn't mean the idea of intertemporal shifting is inherently flawed.

There seems to be an idea that policy must create something new, that simply rearranging consumption intertemporally is of no value. But there is value in avoiding large cyclical swings in the economy, i.e. value in stability, and when we have the opportunity to shave the peak of housing and other booms - times when the overheating is dangerous as it could result in bubbles, inflation, and other problems - and then use the "shavings" to fill the troughs of recessions, we should do so.


Paul Krugman: Averting the Worst

[Note: The actual column, "Averting the Worst" by Paul Krugman, is here.]

*****

I heard you say that we aren't going to have a second Great Depression. What saved us?

The answer, basically, is Big Government.

So the government fixed things? Does everyone go back to work tomorrow?

Just to be clear: the economic situation remains terrible. We haven't yet reached the point at which things are actually improving; for now, all we have to celebrate are indications that things are getting worse more slowly.

We're still skidding towards the cliff, but we'll stop in time? I'll feel better when we're actually stopped, or better yet, headed in the other direction.

The latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss. A few months ago the possibility of falling into the abyss seemed all too real.

So what was so special about the way government reacted?

Probably the most important aspect of the government's role in this crisis isn't what it has done, but what it hasn't done.

Okay, then what didn't the government do that was so special?

Unlike the private sector, the federal government hasn't slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.

All of this has helped support the economy in its time of need, in a way that didn't happen back in 1930.

This means that budget deficits — which are a bad thing in normal times — are actually a good thing right now.

I can buy that the government had an "automatic" stabilizing effect through its normal expenditures and by supporting increased demand for programs such as unemployment insurance, food stamps, those sorts of things. I can also see how running a deficit is the only way to support these programs. But the financial bailout, surely you aren't going to tell me that was helpful too? Look how it was handled!

You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it's possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.

The point is that this time, unlike in the 1930s, the government didn't take a hands-off attitude while much of the banking system collapsed. And that's another reason we're not living through Great Depression II.

So what you are telling me is that the bailout worked, and was necessary, but we could have bailed out the system in a way that cost taxpayers less and the people responsible for the problems more? You're right about it being possible to be dissatisfied even though it worked. Anyway, since we're talking about poorly structured programs, above when you talked about automatic stabilizers, you didn't mention the stimulus package. Is that because it hasn't helped much yet?

From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.

So automatic stabilizers, an imperfect but effective enough financial bailout, and an imperfect but at least helpful stimulus package are all working together to overcome the problems in the economy?

Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

That's not the only thing he was wrong about.

And aren't you glad that right now the government is being run by people who don't hate government?

Speaking of which, how do you think things would have been different if McCain had won the election?

We don't know what the economic policies of a McCain-Palin administration would have been. We do know, however, what Republicans in opposition have been saying — and it boils down to demanding that the government stop standing in the way of a possible depression.

Yeah, Republicans aren't exactly fans of the stimulus package. They'd reverse it right now if they could.

I'm not just talking about opposition to the stimulus. Leading Republicans want to do away with automatic stabilizers, too. Back in March, John Boehner, the House minority leader, declared that since families were suffering, "it's time for government to tighten their belts and show the American people that we 'get' it." Fortunately, his advice was ignored.

Ignoring Boehner's advice is a good idea in general. Ignoring him saved the day.

I'm still very worried about the economy.

Why?

There's still, I fear, a substantial chance that unemployment will remain high for a very long time. But we appear to have averted the worst: utter catastrophe no longer seems likely.

And Big Government, run by people who understand its virtues, is the reason why.


Fed Watch: The Recovery Edges Forward

Tim Duy reviews the state of the economy in anticipation of the Federal Reserve meeting scheduled for Tuesday and Wednesday of this week:

The Recovery Edges Forward, by Tim Duy: Data flow continues to support those who argue that if the recession is not already over as of July, it soon will be. The July jobs report - while not exactly cheery news for those still losing their jobs - is another clear indicator that the employment picture is turning. Still, excitement over the end of the recession aside, the data also reveal that the economy is recovering in fits and starts, with tell-tale signals that the consumer orgy of this decade is not likely to be repeated.

The July employment report in many ways spoke for itself. Possibly most important is the clear improvement in the pace of job losses:

FEDWATCH0809092

This serves as confirmation of what we already knew from initial claims - the worst damage to the job market is in the rearview mirror. Other positive signs included a rise in manufacturing hours and stability in aggregate hours. To be sure, not all is perfect. The decline in the unemployment rate was driven by an exodus from the labor force - not exactly a sign of improving conditions. And a key leading indicator of employment, temporary help payrolls, continues to decline. If the recession did in fact end in June, and we see evidence of that end in the July industrial production report to be released this week, the decline in temporary help employment is clearly a disappointment. Indeed, coupled with rising production, it would simply reek of jobless recovery.

Other data supported the notion of weak recovery as well. While industrial activity may be close to turning a corner on the back of inventory reduction and the cash for clunkers program, not all is well in the service sector. The ISM read on nonmanufacturing activity actually edged downward for the month, with declines in not only the headline number, but also business activity, new orders, and employment. Better than the freefall of last year, but nothing to suggest that a V-shaped recovery is imminent.

Perhaps the lack of enthusiasm in the service sector is a reflection of what is clearly a subdued consumer. The June personal income and outlays report reveals that consumer spending declined in for the month:

FEDWATCH0809091

The impact of a weakened consumer is evident in a spate of stories and data during the week. For example, the first read on retail sales for July:

Retailers endured another tough month in July -- the worst since January -- as weaker consumer spending signaled a tough time for back-to-school sales, the second-biggest retail season after Christmas.

And note that where consumer activity is occurring, it tends to be at a lower price point:

Procter & Gamble Co., under assault by penny-pinching consumers, has quietly rolled out a version of Tide detergent that the company freely admits isn't "new and improved."

The product, Tide Basic, is currently for sale in about 100 stores throughout the South. It lacks some of the cleaning capabilities of the iconic brand -- and costs about 20% less. Its very existence is one of the most telling signs to date of how the sour U.S. economy is forcing mass marketers to shift course. On Wednesday, the company reported an 18% plunge in fiscal fourth-quarter profits as sales of its premium-priced brands shrank amid tightened consumer budgets.

The decision to develop Tide Basic didn't come easily. For decades, P&G had held fast to a strategy of promoting new features to convince shoppers to pay a premium for detergent, shampoo and other household staples. Then, as cheaper store brands gained traction in the aisles, P&G began offering lower-priced versions of some products -- Charmin toilet paper, Bounty paper towels -- to suit leaner budgets.

The trend is not limited to consumer staples. In what I think is an underreported story, the new housing market too is shifting toward the low end:

Frugal first-time buyers are driving the new-home market with purchases of low-priced houses with no frills. Sales of new homes costing less than $200,000 jumped to 47 percent of all transactions in June, up from 39 percent in May, U.S. Commerce Department data show. Homes under $200,000 accounted for almost half of the sales in the first six months of this year, the biggest share for a first half in five years.

It is often forgotten that the composition of new home construction is likely to change as builders shift to producing what people can actually afford, which is very different from what was being produced during the height of the housing bubble. The new housing will yield thinner profit margins for everyone in the supply chain, and will not generate as much wealth when they do appreciate at some point in the future. Moreover, a rebounding new home market for all housing types will place severe downward pressure on existing home prices, as builders will benefit from now lower land and construction costs. The point of which is that a recovery in new home sales is not a recovery for housing or the economy overall.

And if you had any residual doubt that household spending was still challenged, that doubt should be dispelled by the Federal Reserve read on consumer credit:

Consumer credit in the U.S. declined in June for a fifth straight month as banks maintained tough lending terms and households remained reluctant to borrow money for major purchases.

Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.

To be sure, the pace of the decline should lessen in July as the impact of the cash for clunkers sales becomes more evident, but this would really be further evidence of consumer weakness - the only way to induce households to loosen the purse strings is to give them free money. Like the improvements seen in new home sales, an ongoing testament to the importance of government spending in keeping the economy afloat. It is not clear that all sectors realize that importance. An interesting local tidbit:

Production has resumed at Monaco RV, eight months after the plant was idled, a spokesman said Thursday.

About 400 workers are back at work at the Coburg factory, producing about seven recreational vehicles per day, said Roy Wiley, spokesman for Illinois-based Navistar International, the new parent company of Monaco RV. He said he wasn't sure if workers were building towable RVs, motor coaches or a combination of both.

Even though there are no indications that the RV market has begun to recover, Navistar decided to resume production at the plant about two weeks ago because "you need inventory," Wiley said.

Apparently, Navistar plans to increase inventory on the "if you build it they will buy it" philosophy. But like overpriced housing and luxury goods, RV sales are dependent on cheap credit and bad judgment. At least with a house you have hope of recovering your nominal losses if you hold on long enough; not so with RVs, which are only an exercise in depreciation tables.

The pattern of data and anecdotal evidence on the consumer is that the worst fears of a return to Depression-era spending patterns have not been realized, households have measurably changed their behavior, which coupled with what are likely permanently stricter underwriting conditions, point to a very real structural change in the evolution of economic activity going forward. It is simply increasingly difficult to believe we can return to a pattern of growth dependent on escalating importance of consumer spending in the mix of economic activity. Structural change is at hand, which will leave some dangerous economic waters to navigate.

Which leads us to the policy event of the week, the Federal Reserve meeting scheduled for Tuesday and Wednesday. The subsequent statement will have to address the improving economic data without setting expectations that a rate hike is imminent, or even under consideration for early next year as some suspect. To be sure, there will be some V-shapers on the FOMC looking to roll back policy accommodation at first hint of economic growth. But I have to imagine that Federal Reserve Chairman Ben Bernanke walked away with not one, but two basic rules from his studies on the Great Depression and Japan. The first is to respond forcefully at the first stages of a financial crisis. The second is to recognize the fragility of the subsequent recovery and NOT rush to normalize policy, thereby setting the stage for stop-start policy efforts. No one should be under the delusion that the current economic environment is the product of anything other than the massive efforts of federal authorities to keep the system afloat. Low interest rates, support of securitization markets, free money for cars and houses, fiscal stimulus, etc. Bernanke simply will not be inclined to rock the boat at such an early stage of the recovery.

What the Fed is likely to signal is that they do not intend to extend the Treasury purchase program at its expiration:

The Federal Reserve is set to halt its purchases of up to $300 billion in U.S. Treasuries in mid- September as scheduled, and will probably announce the decision next week, two former central bank governors said.

Still, I would not discount the possibility that the program could make a fresh appearance in the future; the future of monetary policy is dependent on the path of job growth. Six months of jobless recovery as the economy limps along could easily prompt the Fed into additional easing. Remember, that was the pattern in the wake of the 2001 recession, a recession that did not end for many until the housing bubble took hold. It is tough to see a fresh domestic bubble emerging, and thus tough to see how sustainable, organic growth develops. And thus tough to see a Fed not more inclined to offer additional gas rather than step on the brake.

Bottom Line: For those still fretting that the economy remains poised for the ultimate end-times collapse, you need to remember the following: In aggregate, nothing truly bad will happen as long as the Federal Reserve can print money and the US Treasury can spend it. We simply have not hit that wall yet (although one can see it coming, as the history of monetary policy for the last two decades is one of diminishing returns - it apparently takes more to accomplish less). At the same token, acceptance of the reality that the recession is set to end does not oblige one to adopt a V-shaped outlook. Far from it, as patterns of consumer spending and labor market activity, not to mention the undeniable impact of government support, all point to a tepid recovery characterized by a jobless recession. Such an outcome, however, will not be proven or denied by the end of the year at the earliest.


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