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December 1, 2009

Economist's View - 4 new articles

The Ascent, Fall, and Limits of Dubai

Kenneth Rogoff and Edward Glaeser on Dubai. They are both more optimistic about Dubai's future than I thought they'd be:

The Limits of Dubai, by Kenneth Rogoff, Commentary, Project Syndicate: Global investors are in a giant huff over Dubai's decision to allow ... Dubai World to seek a six-month standstill (implying at least partial default) on payments on some $26 billion in debt. What exactly did investors expect when they purchased bonds in companies with names like "Limitless World," one of Dubai World's bankrupt real-estate subsidiaries? Talk about a bubble mentality. ...
There are those that revel in what they see as a come-uppance for brash Dubai's outsized ambitions. I, for one, do not share this view. Yes, Dubai, with its man-made islands, hotels simulating Venice, and roof-top tennis courts, is a real-world castle in the sand. Yet, Dubai has also shown the rest of the Middle East what entrepreneurial spirit can accomplish.
Its airport has become a global hub... And, with its relatively open goods and capital markets, Dubai has become a trading hub not only for the entire Middle East, but also for parts of Africa and Asia. ... Yes, Dubai is certainly an autocratic state where finances are tightly and secretively controlled..., a central reason why the Dubai World default came as such a shock.
But, in many ways, Dubai's rulers have been remarkably tolerant of free expression. ... Anyone familiar with Dubai understands that ... a much broader embrace of creativity that has allowed the country to court elite foreign professionals in finance and other industries. ...
Unfortunately, Dubai ultimately proved subject to the laws of financial gravity. This time was not different. Massive speculation and borrowing led to excessive debt burdens and ultimately, to default.
Is this the end of the road for Dubai's epic growth? I doubt it. Countries throughout the world and throughout history have defaulted on their debts and lived to talk about it, even prosper. ...
Will there be contagion to vulnerable countries in Europe and elsewhere? Not just yet. While the Dubai case is not different, it is special, so the effect on investor confidence should remain contained... But investors are learning the hard way that no country's possibilities and resources are limitless.

Edward Glaeser:

The Ascent, and Fall, of Dubai, by Edward L. Glaeser, Economix: Last Wednesday, the government of Dubai announced the restructuring of Dubai World...
Dubai World has more in common with ambitious American real estate developers than with the sovereign wealth fund of neighboring Abu Dhabi, which takes ... vast oil earnings and invests them worldwide. Dubai has few petrodollars and Dubai World is borrowing billions to build a glittering commercial metropolis on the edge of sand and sea. The glint of hubris has long shone off the glass walls of Dubai's soaring skyscrapers, but overreaching ambition always lies behind the creation of great cities. ...
In 1985, the emir decreed the opening of the Jebel Ali Free Zone, which is now also part of Dubai World. The Free Zone offers easy permitting, good infrastructure and little taxation, right next to a port with easy access to the Middle East and to India. ...
Dubai's leader, Mohammed bin Rashid al-Maktoum, has long understood that in an age of mobile talent, Dubai must be an attractive place for consumption as well as production — a consumer city. Dubai's long-run success depends on attracting skilled workers who will not stay in a city that offers only sun-baked purgatory. For a decade, the sheik has tried to promote ... Dubai ... into a place of pleasure with soaring skyscrapers, vast malls and spectacular luxury hotels. ... Dubai recognizes the opportunity that comes from the strictness of neighboring Islamic states. Pleasure can be a comparative advantage of Dubai...
While Dubai's good infrastructure, pro-business government and consumer amenities may enable the city to eventually succeed..., Dubai has now massively overbuilt relative to the level of current demand. Dubai now has the tallest building in the world, and 11 skyscrapers that are taller than any European building.
Fifty-story buildings are an efficient way to deliver plenty of space, but extreme height is far more expensive and a bellwether of irrational exuberance. ...
Great cities have long been built by great gamblers, and Dubai's sheik may well be the second greatest city-builder — after the Chinese government — of our age. Many of those gamblers have ended up bankrupt, but their structural legacies remain, providing the space that connects humanity and facilitates the success of our urban world.
Even if Dubai's real estate prices continue to drop, which is certainly quite possible, there will remain a strong incentive to fill its buildings. If the structures remain occupied, then Dubai, and its sheik's dream of a great metropolis, will survive.


"A Lost Decade for Private Sector Jobs"

Private sector employment is lower than it was a decade ago:

A Lost Decade for Private Sector Jobs, by Jon Hilsenrath, Real Time Economics: To mark this week's focus on the dismal state of the U.S. job market, check out the following chart, which shows the trajectory of private sector U.S. employment since 1998. It tells a story of a lost decade for U.S. workers.

The U.S. now produces fewer private sector jobs than it did a decade ago. This been the case since August, and it's getting worse. ... Not since the Labor Department began tracking payroll employment in 1939 has there been such a stretch with no net job gains. ...
With the economy recovering from last year's shock, private sector firms might start hiring again. But it likely will take months if not years to make up this gap.
How to explain the gap? One obvious answer is that the U.S. has suffered through two recessions during this stretch. The first, in 2001, was short and mild but included more than two years of job cuts. The second one starting in 2007 has been long and brutal. The other answer is that the U.S. has enjoyed a big burst of productivity growth during this stretch — which means firms are producing more with fewer workers. In the long-run this is supposed to be a good development because it leads to profit and income gains. But the short-term costs are looking increasingly more debilitating.
It's worth nothing that overall employment is higher than it was a decade ago, but that's only because the government has produced two million additional jobs during that stretch. You can expect both sides of Washington's political spectrum to spin the lost decade for jobs in their own direction. Republicans will use it to blast Mr. Obama's big government approach — though it's worth remembering that most of these jobs were lost when a Republican controlled the White House. Democrats will use the data to demonstrate the benefits of a helping government hand in down economic times. ...

The administration is holding a jobs summit later this week, but the fear is that it is more for show than anything else, and it is not clear what, if anything, will come of it. If so, that's a mistake. The administration needs to do more than just acknowledge that it "feels your pain," it needs to alleviate some of the problem with a jobs program that produces results. The midterm elections are less than a year away, and there's every indication that when the election is held the employment problem will still be present and that could be problematic for Democrats.

I don't like using the election as a reason and motivation to do something about this problem, the struggles that the unemployed face should be enough on its own to motivate action, but if elections are what it takes to move congress and the administration to do something about this, then I suppose we'll have to settle for that. But given the lags in the process of creating jobs, I'd say six months is optimistic, there's only a month or two left before it will be too late to do anything in time to affect employment before the election. And if it doesn't get done in time to help congress get votes, it's unlikely it will get done at all no matter how bad the problem gets.

One final note. Timidity the first time around -- even if it was driven by political realities -- is part of the problem. With a more aggressive package employment would likely be much improved right now, but unfortunately that's not the policy that was implemented. If the administration puts a jobs program in place that is too reserved and does little to help with employment, that will make its political problems even worse since it will appear that its job policy was largely a failure. If it does move on a jobs program -- as it should -- it needs to be sufficiently aggressive and it needs to target jobs directly. Then we should all cross our fingers, not because of worry over the election (though losing ground would be a big disappointment for Democrats), but in the hopes that jobs will come to households struggling to make ends meet.

[Note: A version of this is also posted at MoneyWatch.]


CBO: Estimated Impact of the American Recovery and Reinvestment Act

The CBO says the stimulus package worked. See " Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output as of September 2009, CBO."

Here's the key table from the report:

ARRA-effects [click to enlarge]


links for 2009-11-30

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