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October 29, 2009

Economist's View - 5 new articles

GDP Growth 3.5% in 3rd Quarter

The stimulus package in action:

GDP Expanded 3.5% in 3rd Quarter, WSJ: The economy expanded in the third quarter after shrinking for four consecutive quarters, likely marking an end to the worst recession since World War II. But the recovery is expected to be slow, as the economy continues to fight rising unemployment and a persistent credit crunch.
Gross domestic product rose by a higher-than-expected seasonally adjusted 3.5% annual rate July through September, the Commerce Department said Thursday in its first estimate of third-quarter GDP. ... The rise in GDP was the first since the second quarter of 2008. It served as an unofficial confirmation that the longest and deepest recession since the Great Depression has ended. ...
The GDP gain was driven by consumer spending, which rose by 3.4% in the third quarter, compared with a 0.9% drop in the April-to-June period. Consumer spending contributed 2.36 percentage points to GDP growth.
Economists said the massive stimulus injected by the U.S. government, such as the cash for clunkers program that lifted car sales, helped boost consumer spending. Since the federal stimulus reached its maximum effect in the third quarter and the unemployment rate remains high, there's uncertainty over the sustainability of the recovery.
Price gauges showed the core inflation rate -- which strips out volatile food and energy prices and is closely watched by the Federal Reserve -- slid to 1.4% from 2.0% in the second quarter, in a sign that price pressures remain subdued. ...
While the economy has resumed rising, joblessness is still high. ... The number of U.S. workers filing new claims for jobless benefits fell slightly last week... Initial claims for jobless benefits declined by 1,000 to 530,000 in the week ended Oct. 24. The previous week's level was unrevised at 531,000. ... Claims still remain at a fairly high level, suggesting the job market has a long recovery ahead. ...

I hope we don't become overly optimistic and pull back on help for the economy too soon, we don't know for sure if the increase in growth is sustainable without help from the stimulus package, and I also hope that we don't forget about labor markets which are likely to lag far behind the recovery for output.

The "Moral Economy of the Crowd"

As I've noted here several times in the past, most recently with respect to health care, we do not always believe that the market system allocates goods and services equitably, and in those cases we often ration the good or service by means other than the price system.

Here's Daniel Little on the "moral economy of the crowd":

Fair prices?, by Daniel Little: We live in a society that embraces the market in a pretty broad way. We accept that virtually all goods and services are priced through the market at prices set competitively. We accept that sellers are looking to maximize profits through the prices, quantities, and quality of the goods and services that they sell us. We accept, though a bit less fully, the idea that wages are determined by the market -- a person's income is determined by what competing employers are willing to pay. And we have some level of trust that competition protects us against price-gouging, adulteration, exploitation, and other predatory practices. A prior posting questioned this logic when it comes to healthcare. Here I'd like to see whether there are other areas of dissent within American society over prices. Because of course it wasn't always so. E. P. Thompson's work on early modern Britain reminds us that there was a "moral economy of the crowd" that profoundly challenged the legitimacy of the market; that these popular moral ideas specifically and deeply challenged the idea of market-defined prices for life's necessities; and that the crowd demanded "fair prices" for food and housing (Customs in Common: Studies in Traditional Popular Culture). The moral economy of the crowd focused on the poor -- it assumed a minimum standard of living and demanded that the millers, merchants, and officials respect this standard by charging prices the poor could afford. And the rioting that took place in Poland in 1988 over meat prices or rice riots in Indonesia in 2008 are reminders that this kind of moral reasoning isn't merely part of a pre-modern sensibility. (For some quotes collected by E. P. Thompson from "moral economy" participants on the subject of fair prices see an earlier posting on anonymity.) So where do contemporary Americans show a degree of moral discomfort with prices and the market? Where does the moral appeal of the principles of market justice begin to break down -- principles such as "things are worth exactly what people are willing to pay for them" and "to each what his/her market-determined purchasing power permit him to buy"? There are a couple of obvious exceptions in contemporary acceptance of the market. One is the public outrage about executive compensation in banking and other corporations that we've seen in the past year. People seem to be morally offended at the idea that CEOs are taking tens or hundreds of millions of dollars in compensation -- even in companies approaching bankruptcy. Part of the outrage stems from the perception that the CEO can't have brought a commensurate gain to the company or its stockholders, witness the failing condition of many of these banks and companies. Part is a suspicion that there must be some kind of corrupt collusion going on in the background between corporate boards and CEOs. But the bottom line moral intuition seems to be something like this: nothing could justify a salary of $100 million, and executive compensation in that range is inherently unfair. And no argument proceeding simply along the lines of fair market competition -- "these are competitive rational firms that are offering these salaries, and therefore whatever they arrive at is fair" -- cuts much ice with the public. Here is another example of public divergence from acceptance of pure market outcomes: recent public outcries about college tuition. There is the common complaint that tuition is too high and students can't afford to attend. (This overlooks the important fact that public and private tuitions are almost an order of magnitude apart -- $6,000-12,000 versus $35,00-42,000!) But notice that this is a "fair price" argument that would be nonsensical when applied to the price of an iPod or a Lexus. People don't generally feel aggrieved because a luxury car or a consumer device is too expensive; they just don't buy it. It makes sense to express this complaint in application to college tuition because many of us think of college as a necessity of life that cannot fairly be allocated on the basis of ability to pay. (This explains why colleges offer need-based financial aid.) And this is a moral-economy argument. And what about that other necessity of life -- gasoline? Public complaints about $4/gallon gas were certainly loud a year ago. But they seem to have been grounded in something different -- the suspicion that the oil companies were manipulating prices and taking predatory profits -- rather than an assumption of a fair price determined by the needs of the poor. Finally, what about salaries and wages? How do we feel about the inequalities of compensation that exist within the American economy and our own places of work? Americans seem to accept a fairly wide range of salaries and wages when they believe that the differences correspond ultimately to the need for firms to recruit the most effective personnel possible -- a market justification for high salaries. But they seem to begin to feel morally aggrieved when the inequalities that emerge seem to exceed any possible correspondence to contribution, impact, or productivity. So -- we as Americans seem to have a guarded level of acceptance of the emergence of market-driven inequalities when it comes to compensation. One wonders whether deeper resentment about the workings of market forces will begin to surface in our society, as unemployment and economic recession settle upon us.

"China to Investigate US Car Subsidies"

China sends a message:

China to investigate US car subsidies, by Sarah O'Connor: China is preparing to launch a trade investigation into whether US carmakers are being unfairly subsidised by the US government...
The move comes at a time of heightened trade tensions between the two countries after the US imposed duties on Chinese tires last month. Many warned this would prompt Beijing to retaliate.
Few vehicles are actually exported from the US to China, but the move would have symbolic power by turning the tables on Washington. ... The investigation could lead to import duties. ...
China has already told the US that it has received a petition for an investigation, which ... would formally launch on Wednesday. Before that, the two countries will negotiate. Top US government officials are already in China for trade talks this week, and Barack Obama, US president, is due to visit the country next month.
China had notified the US it had received anti-dumping and countervailing duty petitions on cars, a spokeswoman for the United States Trade Representative said.
World Trade Organization rules require China to invite the US to consult on the countervailing duty petition before initiating any investigation... The countries expect to consult over coming days. ...
China has received an anti-dumping petition as well, which asks for investigation into whether US car exports are being sold at unfairly low pries. ...

Feldstein: America's Healthcare Debate

Martin Feldstein says bond markets disagree with him, so they must be wrong:

The global impact of America's healthcare debate, Commentary, Project Syndicate: Since assuming the presidency earlier this year, Barack Obama's ... proposals are meeting strong opposition from fiscally-conservative Democrats as well as from Republicans, owing to their potential impact on future fiscal deficits. ...
[A]n overwhelming majority of Americans are insured, with government a major financier of healthcare. But there remain about 54 million individuals who are not formally insured, and some insured individuals still face the risk of financially ruinous medical costs if they have very expensive medical treatment.
Obama campaigned on the goals that everyone should have health insurance, that high medical costs should not bankrupt anyone... But, rather than producing a specific proposal, he left it to Congress to design the legislation. ...
In fact, there is a strong risk that this legislation would ultimately add to the fiscal deficit. Increasing the number of insured by 35 million and broadening protection for some who are now insured implies increased demand for healthcare, which could raise the cost of care paid for by the government as well as by private healthcare buyers. In addition, both sources of financing are also uncertain. ...
In considering the fiscal implications of Obama's health proposals, it is important that the current legislation would still leave 25 million individuals without insurance.
How much would it cost to insure them if the gross cost is now projected at US$800bil for the easier-to-insure 35 million? And how could that cost be financed...? Closing that gap could add more than $1 trillion to the government's cost over the next 10 years.
It is clear that there is a significant danger that the current legislation would add substantially to future US deficits – and establish a precedent for even more expensive expansions of healthcare in the future.
This would come on top of the currently projected fiscal deficits in both the near term and over the coming decade – and before America's demographic shift substantially raises the cost of Social Security and Medicare.

Surprisingly, the bond market still seems almost oblivious to this risk. But holders of US debt worldwide have every reason to be concerned.

The bond markets are right.

links for 2009-10-28

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