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June 19, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View


Eichengreen: China Needs a Service-Sector Revolution

Posted: 19 Jun 2010 01:36 AM PDT

With wages increasing in China, which has effects similar to a currency appreciation, will it be possible for China make the transition to an economy where the domestic service sector expands to take up the slack created as manufactured goods become more expensive and hence more difficult to export?:

China Needs a Service-Sector Revolution, by Barry Eichengreen, Commentary, Project Syndicate: China is getting its exchange-rate adjustment whether it likes it or not. While Chinese officials continue to mull the right time to let the renminbi rise, manufacturing workers are voting with their feet – and their picket lines.
Honda has offered its transmission-factory workers in China a 24% wage increase to head off a crippling strike. Foxconn, the Taiwanese contract manufacturer for Apple and Dell, has announced wage increases of as much as 70%. Shenzhen, to head off trouble, has announced a 16% increase in the minimum wage. Beijing's municipal authorities have preemptively boosted the city's minimum wage by 20%.
The result will be to raise the prices of China's exports and fuel demand for imports. The effect will be much the same as a currency appreciation. ... With exports of manufactures becoming more expensive, China will have to ... move ... toward the model of a more mature economy, in which employment is increasingly concentrated in the service sector. ...
But the bad news is that the transition now being asked of China – to shift toward services without experiencing a significant decline in economy-wide productivity growth – is unprecedented in Asia. Every high-growth, manufacturing-intensive Asian economy that has attempted it has suffered a massive slowdown. ...
Why is this? In countries that have traditionally emphasized manufacturing, the underdeveloped service sector is dominated by small enterprises – mom and pop stores. These lack the scale to be efficient...
In both Korea and Japan, large firms' entry into the service sector is impeded by restrictive regulation, for which small producers are an influential lobby. ... Foreign firms that are carriers of innovative organizational knowledge and technology are barred from coming in. Accountants, architects, attorneys, and engineers all then jump on the bandwagon, using restrictive licensing requirements to limit supply, competition, and foreign entry.
One can well imagine Chinese shopkeepers, butchers, and health-care workers following this example. The results would be devastating. ... Employing workers in sectors where their productivity is stagnant would not be a recipe for social stability. China needs to avoid the pattern by which past neglect of the service sector creates a class of incumbents who use political means to maintain their position. Perhaps China will succeed in avoiding this fate. Here at least may be one not-so-grim advantage to not being a democracy.

links for 2010-06-18

Posted: 18 Jun 2010 11:01 PM PDT

Lack of Workers is Not the Problem

Posted: 18 Jun 2010 03:42 PM PDT

Rand Paul is confused about the source of the unemployment problem:

Paul urges "tough love" for long-term jobless, Lexington Herald-Reader: Republican U.S. Senate candidate Rand Paul on Friday urged Americans who have been unemployed for many months to consider returning to the workforce in less desirable jobs rather than continue relying on government unemployment assistance.

"In Europe, they give about a year of unemployment. We're up to two years now in America," Paul said... "As bad as it sounds, ultimately we do have to sometimes accept a wage that's less than we had at our previous job in order to get back to work and allow the economy to get started again," Paul said. "Nobody likes that, but it may be one of the tough love things that has to happen."

The ratio of job seekers to job openings is currently around 5 to 1, which is extraordinarily high by historical standards. It's not a shortage of people willing to work that is causing the problem.

Update: I should have added that the problem is lack of demand, and raising interest rates/cutting the deficit, or any other removal of stimulus -- including the removal of social insurance programs such as unemployment insurance that function as automatic stabilizers -- will make things worse, not better. The economy could use a positive shock to demand right now, i.e more stimulus, but right now the battle is simply to maintain what's already in place.

Foreclosures and Race

Posted: 18 Jun 2010 12:42 PM PDT

Felix Salmon:

Are foreclosures racist?, by Felix Salmon: If you're a high-income Latino with a mortgage, you're almost twice as likely to be facing foreclosure than a high-income non-Hispanic white person. And in general, the foreclosure crisis is hitting blacks and Latinos much harder than it is whites, according to a startling new report from the Center for Responsible Lending.

Overall, there have been 790 foreclosures per 10,000 loans to blacks, and 769 for Hispanics — compared to just 452 to non-Hispanic whites. And within every income group, the disparities are startling: here's the chart. ...

The "Disparity Ratio" here is essentially the likelihood of being foreclosed upon, compared to the likelihood of a similar-income non-Hispanic white being foreclosed on. It's interesting that the disparity ratio is pretty stable for blacks, but rises sharply with income for Latinos. I'll hazard a guess and say that this probably has something to do with a lot of middle- and high-income Latinos in California and Arizona being sold subprime mortgages, even when they qualified for a prime loan.

Why would Latinos be more susceptible to being taken advantage of in that way than non-Hispanic whites? Now I'm really speculating, but it stands to reason that financial sophistication is a function not only of your income today but also of your family's income when you were growing up. If rich Latinos are more likely to come from poor families than rich whites, then that might explain some of the disparity here.

Even so, it's very depressing to see the results here. Already the median non-Hispanic white family reported $171,200 in net worth versus only $28,300 for non-white and Hispanic families, and this crisis is only making matters worse. The CRL reports:

The indirect losses in wealth that result from foreclosures as a result of depreciation to nearby properties will disproportionately impact communities of color. We estimate that, between 2009 and 2012, $193 billion and $180 billion, respectively, will have been drained from African-American and Latino communities in these indirect "spillover" losses alone.

Those are really big numbers. One might have hoped that blacks and Hispanics might have been less badly hit by the foreclosure crisis simply by dint of their much lower levels of homeownership. But it seems that isn't the case.

I hope that someday people will realize that there is a story here about mortgages, foreclosures, and race. But it is not the story you hear, the one about politicians using the CRA, Fannie, and Freddie to force otherwise well-behaved financial institutions to make loans to unqualified borrowers. The story is an old one, it's about misbehavior in the private sector where one group of individuals takes advantage of another in the quest for profit. However, the claim that the government forced this behavior through the CRA, Fannie, and Freddie that isn't supported by the evidence. That's not to say that the government played no role in this outcome. Regulatory agencies were warned about this, but failed to intervene and stop the practice of selling subprime or other high cost, high profit mortgages to people who qualified for better terms, and to that extent the government did fall down on the job. It was this failure, not Fannie, Freddie, and the CRA, that allowed these ill-fitting but highly profitable mortgages to be made.

Update: From today's McClatchy News: Minorities hurt more by foreclosure crisis, study says:

...In addition, previous research by Ernst and others found that black and Latino borrowers were about 30 percent more likely to receive the highest-cost subprime loans when compared to white subprime borrowers with similar risk characteristics. This type of unscrupulous activity by mortgage brokers, combined with poor loan underwriting and a lack of industry oversight, caused the subprime market to crash with devastating impact on minority borrowers.

"These loans were clearly the most abusive mortgages in the marketplace and among the least-regulated, and they were most likely to be targeted to communities of color. So in essence, what we have is a recipe for what's come to pass," Ernst said. ...

Let me add that I was careful not to make the claim that selling subprime loans to buyers who qualified for better terms was the result of racism. I said the motivation was profit seeking behavior, and I don't see any need to take it beyond that.

Also, let me address this from Arnold Kling:

However, the main driver of defaults is not loan terms. It is the decline in home prices.

Isn't it shocks to income, things like unemployment, or other shocks to households such as divorce that drive foreclosures? I wonder which groups in society are more likely to become unemployed during a downturn? He also seems to be countering the racism explanation -- and some people may be making that charge -- but, again, that's not the argument I am making.

Finally, he asserts that the most likely explanation for the higher foreclosure rate is that

minorities might have had a higher propensity to jump into the housing market at the wrong time and to overpay for houses. This would mostly be due to lack of experience with the housing market, but it could also be a contagion effect as they saw friends and relatives taking the plunge into real estate.

The "lack of experience" argument he is making seems to me to be consistent with the explanation that unscrupulous lenders were seeking a profitable opportunity, and there weren't any regulations or other mechanisms in place to prevent these lenders from steering inexperienced buyers into the highest profit loans (or if there were, nobody to enforce them). If Arnold wants to call this "favorable discrimination," he can, but it's certainly not the term I'd use for it.

"Name That Stimulus Proponent"

Posted: 18 Jun 2010 10:17 AM PDT

Suggestions?:

Name That Stimulus Proponent, by Motoko Rich, Economix: The raging debate over what to do about the deficit is now getting its own lingo.

Mark Thoma, who blogs at Economist's View, has coined the catchy term "Austerians" for those deficit hawks who are exhorting governments to reduce their debt levels.

So what about the stimulus boosters on the other side? What shall we call them?

A few suggestions:

  • Stimulants
  • Stimubuffs
  • Stimu-plussers

What would you suggest?

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