Recession Buzz: August 2009

Monday, August 31, 2009

Why the Critics of a Public Option for Health Care Are Wrong

Without a public option, the other parties that comprise America's non-system of health care -- private insurers, doctors, hospitals, drug companies, and medical suppliers -- have little or no incentive to supply high-quality care at a lower cost than they do now.

Which is precisely why the public option has become such a lightening rod. The American Medical Association is dead-set against it, Big Pharma rejects it out of hand, and the biggest insurance companies won't consider it. No other issue in the current health-care debate is as fiercely opposed by the medical establishment and their lobbies now swarming over Capitol Hill. Of course, they don't want it. A public option would squeeze their profits and force them to undertake major reforms. That's the whole point.

Critics say the public option is really a Trojan horse for a government takeover of all of health insurance. But nothing could be further from the truth. It's an option. No one has to choose it. Individuals and families will merely be invited to compare costs and outcomes. Presumably they will choose the public plan only if it offers them and their families the best deal -- more and better health care for less.

Private insurers say a public option would have an unfair advantage in achieving this goal. Being the one public plan, it will have large economies of scale that will enable it to negotiate more favorable terms with pharmaceutical companies and other providers. But why, exactly, is this unfair? Isn't the whole point of cost containment to provide the public with health care on more favorable terms? If the public plan negotiates better terms -- thereby demonstrating that drug companies and other providers can meet them -- private plans could seek similar deals.

But, say the critics, the public plan starts off with an unfair advantage because it's likely to have lower administrative costs. That may be true -- Medicare's administrative costs per enrollee are a small fraction of typical private insurance costs -- but here again, why exactly is this unfair? Isn't one of the goals of health-care cost containment to lower administrative costs? If the public option pushes private plans to trim their bureaucracies and become more efficient, that's fine.

Critics complain that a public plan has an inherent advantage over private plans because the public won't have to show profits. But plenty of private plans are already not-for-profit. And if nonprofit plans can offer high-quality health care more cheaply than for-profit plans, why should for-profit plans be coddled? The public plan would merely force profit-making private plans to take whatever steps were necessary to become more competitive. Once again, that's a plus.

Critics charge that the public plan will be subsidized by the government. Here they have their facts wrong. Under every plan that's being discussed on Capitol Hill, subsidies go to individuals and families who need them in order to afford health care, not to a public plan. Individuals and families use the subsidies to shop for the best care they can find. They're free to choose the public plan, but that's only one option. They could take their subsidy and buy a private plan just as easily. Legislation should also make crystal clear that the public plan, for its part, may not dip into general revenues to cover its costs. It must pay for itself. And any government entity that oversees the health-insurance pool or acts as referee in setting ground rules for all plans must not favor the public plan.

Finally, critics say that because of its breadth and national reach, the public plan will be able to collect and analyze patient information on a large scale to discover the best ways to improve care. The public plan might even allow clinicians who form accountable-care organizations to keep a portion of the savings they generate. Those opposed to a public option ask how private plans can ever compete with all this. The answer is they can and should. It's the only way we have a prayer of taming health-care costs. But here's some good news for the private plans. The information gleaned by the public plan about best practices will be made available to the private plans as they try to achieve the same or better outputs.

As a practical matter, the choice people make between private plans and a public one is likely to function as a check on both. Such competition will encourage private plans to do better -- offering more value at less cost. At the same time, it will encourage the public plan to be as flexible as possible. In this way, private and public plans will offer one other benchmarks of what's possible and desirable.

Mr. Obama says he wants a public plan. But the strength of the opposition to it, along with his own commitment to making the emerging bill "bipartisan," is leading toward some oddball compromises. One would substitute nonprofit health insurance cooperatives for a public plan. But such cooperatives would lack the scale and authority to negotiate lower rates with drug companies and other providers, collect wide data on outcomes, or effect major change in the system.

Another emerging compromise is to hold off on a public option altogether unless or until private insurers fail to meet some targets for expanding coverage and lowering health-care costs years from now. But without a public option from the start, private insurers won't have the incentives or system-wide model they need to reach these targets. And in politics, years from now usually means never.

To get health care moving again in Congress, the president will have to be clear about how to deal with its costs and whether and how a public plan is to be included as an option. The two are intimately related. Enough talk. He should come out swinging for the public option.

Sunday, August 30, 2009

Saturday, August 29, 2009

Recession buzz

Chart 1 (click to enlarge)

Friday, August 28, 2009

Housing Bubble Sites

National Sites

Regional Sites

Thursday, August 27, 2009

Does the Obama Plan for Reforming Wall Street Measure Up?

In a word: No.

The plan doesn't stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn't require bankers to take their pay in long-term stock options or warrants, and it doesn't even hint that banks should go back to being partnerships instead of publicly-held corporations.

All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets.

Nor does the plan do anything to prevent banks from becoming too big to fail. It doesn't hint at a return to the days before the late 1990s when commercial banks were separate entities from investment banks -- before mammoth bank supermarkets like Citigroup came to be so tied up with so many other commercial and investment vehicles that they couldn't be allowed to go under. And there's not the slightest mention of antitrust, to break up the largest banks.

The plan does focus on a few conflicts of interest, such as how credit rating agencies are paid. And it does establish a new agency to oversee all forms of consumer loans -- thereby helping make sure borrowers know what they're getting into, and can comparison shop. But these are small potatoes relative to the size of the overall problem. The Fed is given new oversight powers, but there's no suggestion that regional Fed bank presidents, who already have a substantial oversight role, should be recruited from the ranks of people who are not bankers and don't have a big financial stake in keeping oversight to a minimum.

In short: It's a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 -- which lead to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 -- will repeat itself within a decade, if not sooner.

In fact, the banks that have repaid their TARP money are already planning to resume supersize bonuses, even though many of them are still awash in toxic assets and their non-performing loans are up. Bad credit-card and commercial property debts are mounting. Foreclosures are soaring. Yet several of the big banks are showing profits. How are they pulling this off? First, they strong-armed the Financial Accounting Standards Board into allowing them to assign whatever value they wanted to all the junk on their balance sheets. Then they played hardball with the Treasury staffers whose so-called "stress tests" lapsed into little more than negotiations over numbers and probabilities. (The national unemployment rate is already approaching the highest unemployment rate in the stress tests.) Then they convinced investors that financials have hit bottom and were now good bets. Presto!

Watch your wallets. The Street is up to its old tricks. And the White House's so-called reform is little more than a whitewash.

Wednesday, August 26, 2009

Tuesday, August 25, 2009

On college endowments

According to a study released yesterday by the National Association of College and University Business Officers (NACUBO), the endowment fund of Harvard University is worth $34.6 billion, a 19.8% percent higher than a year ago. 76 colleges and universities sit on endowments over $1b. Even more impressively, almost every one of the 733 institutions analyzed reports a double-digit increase in the value of its fund. (Look up the endowment of your alma mater here.)

Chart 1 (click to enlarge)

Monday, August 24, 2009

Nouriel Roubini: "clear by now that a severe U.S. recession is inevitable in next few months."

Nouriel Roubini, a leading economist at New York University, is now saying that a US Recession is almost here:

"It is increasingly clear by now that a severe U.S. recession is inevitable in next few months. Those of us who warned for the last 12 months about a combination of a worsening housing recession, a severe credit crunch and financial meltdown, high oil prices and a saving-less and debt-burdened consumers being on the ropes causing an economy-wide recession were repeatedly rebuffed the consensus view about a soft landing given the presumed resilience of the US consumer."

"But the evidence is now building that an ugly recession is inevitable."

Roubini is a smart economist who often goes against the consensus view.

Sunday, August 23, 2009

The Latest Public Option Bamboozle, and How to Recognize the Real Thing

Here's the latest contortion from Senate Dems trying to win over a few Republicans to a "public option:" Let nonprofits create health-care cooperatives, and call them the public option. Kent Conrad came up with this bamboozle. Finance chair Baucus is impressed, and some Republicans -- even Grassley -- seem interested. Watch your wallets.

Nonprofit health-care cooperatives won't have any real bargaining leverage to get lower prices because they'll be too small and too numerous. Pharma and Insurance know they can roll them. That's why the Conrad compromise is getting a good reception from across the aisle, just as Olympia Snowe's "trigger" (whereby no public option until some time down the pike, and only if Pharma and Insurance don't bring down and extend coverage a tad) is also gaining traction.

The truth is that there's only one "public option" that will truly bring down costs and premiums -- one that's national in scale and combines its bargaining power with Medicare, and is allowed to negotiate lower drug prices and lower doctor and hospital fees. And that's precisely what Pharma and Insurance detest, for exactly the same reason.

Whatever it's called -- public option or chopped liver -- it has to be able to squeeze Pharma, Insurance, and the rest of the medical-industrial complex. And the more likely it is to squeeze them, the more they'll fight it. And the greater the opposition from Republicans, and from Dems who either believe any bill has to have some Republican support or who have sold themselves out to the medical biggies.

As long as single payer is off the table, then we need a real public option. Don't be fooled by labels. Demand the real thing.

Saturday, August 22, 2009

Friday, August 21, 2009

In Spain, mortgage funding is different

Spain is different. The slogan, which the tourism industry used in the 1950s to celebrate the country’s identity and culture, is nowadays something of a joke. Among Spaniards, the old line is an expression of self-deprecation, of a sentiment of quirkiness and inferiority, which constitutes a fundamental part of the Spanish ethos. When it comes to funding mortgages, however, Spain is different in a good way.

Thursday, August 20, 2009

Happy Thanksgiving

Happy Thanksgiving to everyone! Enjoy!

Wednesday, August 19, 2009

The Great Debt Scare: Why Has It Returned?

It’s the kind of thing I expect to hear from deficit hawks and chicken littles -- from the self-described "fiscally responsible" right, from the scolds Ross Perot and Pete Peterson, from my former cabinet colleague Bob Rubin. But yesterday I was shown slides developed by the putatively liberal Center for American Progress intended to make the point. And today’s front page story in the New York Times, by the eminent David Leonhardt, entitled "Sea of Red Ink: How It Spread From A Puddle," puts the issue right before our progressive noses, so to speak.

The Great Debt Scare is back.

Odd that it would return right now, when the economy is still mired in the worst depression since the Great one. After all, consumers are still deep in debt and incapable of buying. Unemployment continues to soar. Businesses still are not purchasing or investing, for lack of customers. Exports are still dead, because much of the global economy continues to shrink. So the purchaser of last resort -- the government -- has to create larger deficits if the economy is to get anywhere near full capacity, and start to grow again.

Odder still that the Debt Scare returns at the precise moment that bills are emerging from Congress on universal health care, which, by almost everyone’s reckoning, will not increase the long-term debt one bit because universal health care has to be paid for in the budget. In fact, universal health care will reduce the deficit and cumulative debt -- especially if it includes a public option capable of negotiating lower costs from drug makers, doctors, and insurers, and thereby reducing the future costs of Medicare and Medicaid.

Even odder that the Debt Scare rears its frightening head just as the President’s stimulus is moving into high gear with more spending on infrastructure. Every expert who has looked closely at the nation’s crumbling infrastructure knows how badly it suffers from decades of deferred maintenance -- bridges collapsing, water pipes bursting, sewers backed up, highways impassable, public transit in disrepair. The stimulus, along with the President’s long-term budget, also focus on the nation’s schools, as well as America’s capacity to reduce emissions of greenhouse gases. These public investments are as important to the nation’s future as are private investments.

First, some background: Deficit and debt numbers mean nothing in and of themselves. They take on meaning only in relation to something else. And the most important something else, in terms of deciding whether the nation can afford such deficits or debts, is the size of the national economy.

Pay close attention, in particular, to the debt/GDP ratio. True, that ratio is heading in the wrong direction right now. It may reach 70 percent by the end of 2010. That’s high, but it’s not high compared to the 120 percent it was in 1946, after the ravages of Depression and war.

Over time, the basic way America has reduced the debt/GDP ratio is by growing the U.S. economy. GDP growth makes even large debts manageable. When the economy is cooking, more people have jobs and better wages. So they pay more taxes. And they require less unemployment assistance and other social insurance. That’s why it’s so important now, in the depths of depression, that government, as purchaser of last resort, steps in and runs large deficits. Without large deficits this year and next, and perhaps the year after, the economy doesn’t have a prayer of getting back on a growth path, and the debt/GDP ratio could really get ugly.

That growth path, by the way, will be faster and stronger if the nation invests in our infrastructure, our schools, and our environment -- which is exactly what Obama aims to do. In this respect, national budgets are like family budgets. It’s dumb for an indebted family to borrow more money to take a world cruise. But it’s smart even for an indebted family to borrow money to send their kids to college. So too with the Obama budget. Public investments, just like family investments, build future wealth. They allow faster growth. They make the debt/GDP ratio even lower and more manageable over time.

Don't get me wrong. I'm not saying there's nothing to worry about when it comes to long-term deficit and debt projections. I'm just saying now's not the time to worry, and we ought to temper our worries by understanding the larger context.

Not every expert agrees that a deficit-driven stimulus is the best and fastest way to get the economy back on a growth track, or that public investments can speed growth. Conservative economists, Republicans, and many Wall Streeters are skeptical because they don’t think government can do anything well. But look at the record of the last seventy-five years -- look at how the nation got out of the Great Depression, and consider the critical role public investments have played since then in speeding the nation’s growth, investments such as the interstate highway system -- and you have ample evidence that the deficit hawks are wrong. They were wrong when they convinced Bill Clinton to chuck a large part of his investment agenda (the nation is now paying the price) and they're wrong now.

So, back to the mystery. Why are the ostensibly liberal Center for American Progress and New York Times participating in the Debt Scare right now? Is it possible that among the President’s top economic advisors and top ranking members the Fed are people who agree more with conservative Republicans and Wall Streeters on this issue than with the President? Is it conceivable that they are quietly encouraging the Debt Scare even in traditionally liberal precincts, in order to reduce support in the Democratic base for what Obama wants to accomplish? Hmmm.

Tuesday, August 18, 2009

Monday, August 17, 2009

Income mobility and education

Sunday, August 16, 2009

Economist: America's Vulnerable Economy

Saturday, August 15, 2009

How Pharma and Insurance Intend to Kill the Public Option, And What Obama and the Rest of Us Must Do

I'ved poked around Washington today, talking with friends on the Hill who confirm the worst: Big Pharma and Big Insurance are gaining ground in their campaign to kill the public option in the emerging health care bill.

You know why, of course. They don't want a public option that would compete with private insurers and use its bargaining power to negotiate better rates with drug companies. They argue that would be unfair. Unfair? Unfair to give more people better health care at lower cost? To Pharma and Insurance, "unfair" is anything that undermines their profits.

So they're pulling out all the stops -- pushing Democrats and a handful of so-called "moderate" Republicans who say they're in favor of a public option to support legislation that would include it in name only. One of their proposals is to break up the public option into small pieces under multiple regional third-party administrators that would have little or no bargaining leverage. A second is to give the public option to the states where Big Pharma and Big Insurance can easily buy off legislators and officials, as they've been doing for years. A third is bind the public plan to the same rules private insurers have already wangled, thereby making it impossible for the public plan to put competitive pressure on the insurers.

Max Baucus, Chair of Senate Finance (now exactly why does the Senate Finance Committee have so much say over health care?) hasn't shown his cards but staffers tell me he's more than happy to sign on to any one of these. But Baucus is waiting for more support from his colleagues, and none of the three proposals has emerged as the leading candidate for those who want to kill the public option without showing they're killing it. Meanwhile, Ted Kennedy and his staff are still pushing for a full public option, but with Kennedy ailing, he might not be able to round up the votes. (Kennedy's health committee released a draft of a bill today, which contains the full public option.)

Enter Olympia Snowe. Her move is important, not because she's Republican (the Senate needs only 51 votes to pass this) but because she's well-respected and considered non-partisan, and therefore offers some cover to Democrats who may need it. Last night Snowe hosted a private meeting between members and staffers about a new proposal Pharma and Insurance are floating, and apparently she's already gained the tentative support of several Democrats (including Ron Wyden and Thomas Carper). Under Snowe's proposal, the public option would kick in years from now, but it would be triggered only if insurance companies fail to bring down healthcare costs and expand coverage in he meantime.

What's the catch? First, these conditions are likely to be achieved by other pieces of the emerging legislation; for example, computerized records will bring down costs a tad, and a mandate requiring everyone to have coverage will automatically expand coverage. If it ever comes to it, Pharma and Insurance can argue that their mere participation fulfills their part of the bargain, so no public option will need to be triggered. Second, as Pharma and Insurance well know, "years from now" in legislative terms means never. There will never be a better time than now to enact a public option. If it's not included, in a few years the public's attention will be elsewhere.

Much the same dynamic is occurring in the House. Two members who had originally supported single payer told me that Pharma and Insurance have launched the same strategy there, and many House members are looking to see what happens in the Senate. Snowe's "trigger" is already buzzing among members.

All this will be decided within days or weeks. And once those who want to kill the public option without their fingerprints on the murder weapon begin to agree on a proposal -- Snowe's "trigger" or any other -- the public option will be very hard to revive. The White House must now insist on a genuine public option. And you, dear reader, must insist as well.

This is it, folks. The concrete is being mixed and about to be poured. And after it's poured and hardens, universal health care will be with us for years to come in whatever form it now takes. Let your representative and senators know you want a public option without conditions or triggers -- one that gives the public insurer bargaining leverage over drug companies, and pushes insurers to do what they've promised to do. Don't wait until the concrete hardens and we've lost this battle.

Friday, August 14, 2009

Thursday, August 13, 2009

Personal bankruptcy and consumption smoothing

The welfare effects of bankruptcy legislation are not correctly understood. Policymakers and the general public think, for the most part, that laws that protect borrowers in the event of default are beneficial to consumers. In practice, however, those laws have negative effects on the households that need credit most — and, ironically, those whom the legislation was intended to protect.

Traditionally, Chapter 7 has been the most popular type of bankruptcy filing. Under that section of the Bankruptcy Code, a filer relinquishes her assets, minus a certain exempted amount, and in return is discharged from her unsecured debt (credit card debt, personal loans, student loans, etc.).

State law sets those exempted amounts. In Illinois, for instance, exemptions are: $7,500 for home equity, $1,200 for motor vehicles, $750 for tools of the trade, and $2,000 for any other generic property. So suppose that you file for bankruptcy in the “Land of Lincoln,” and that you have $20,000 worth of home equity, and a car with a market value of $600. Then you can sell the house and keep $7,500 of the proceeds, and sell your car and keep the $600 (since that’s below the $1,200 limit).

Since 1978, with the passage of the Bankruptcy Reform Act (BRA), there’s also a federal exemption. Some states allow filers to choose between the state and the federal amounts. Obviously, if given the opportunity, filers use whichever is highest.

There is an enormous disparity of bankruptcy exemptions across states, even after accounting for the existence of the federal limits. For example, in 2006 the states of Texas, Florida, Oklahoma, Iowa, Kansas, South Dakota, and the District of Columbia, all allowed for an unlimited homestead exemption. In the states of Ohio and Virginia, at the other extreme, the limit is set at $5,000 (and those states don’t allow for the application of the federal exemption). The map below shows the maximum exemption that a married homeowner could claim in 2003, after combining homestead and non-homestead amounts, and taking the highest of the state and federal limit (where the federal limit is available). The limits also vary over time, although high-exemption states tend to remain the same over the years.

Bankruptcy exemptions under Chapter 7 of the Bankruptcy Code
(in 2003, for a home owner)
Click to enlarge

Wednesday, August 12, 2009

More Americans Expecting Recession in The Next Year

More Americans are expecting a recession in the next year. Consumers are waking up to the reality that the economy has a significant chance of recession next year.

The economic mood took a sharp turn for the worse over the past month, with 40 percent of Americans expecting a recession in the next year, according to a Reuters / Zogby poll released Wednesday.

That was a big rise from a month earlier, when 31 percent of the likely voters polled predicted a recession. The darker mood came as mounting concerns about housing and credit markets pounded Wall Street, and oil prices approached $100 per barrel.

That was a big rise from a month earlier, when 31 percent of the likely voters polled predicted a recession. The darker mood came as mounting concerns about housing and credit markets pounded Wall Street, and oil prices approached $100 per barrel. (CNBC 1/21/07)

Recession times are increasingly being expected. The coming holiday spending season will likely provide important clues to where consumer spending is headed. Consumer spending is about 70% of the US's GDP. Consumer spending is a key factor in a forecasting a recession.

Tuesday, August 11, 2009

The Future of Manufacturing, GM, and American Workers (Part II)

Symbolic analysts have been hit by the current downturn, just as everyone else has. But over the long term, symbolic analysts will do just fine – as long as they stay away from job functions that are becoming routinized. They will continue to benefit from economic change. Computer technology gives them more tools for thinking, creating and communicating. The global market gives them more potential customers for their insights.

To be sure, symbolic analysts are popping up all over the world. More than half of all Fortune 500 companies say they're outsourcing some software development or expanding their own development centers outside the U.S. But apart from recessions, demand for symbolic analysts in the U.S. will continue to grow faster than the supply. Innovation creates that demand, and demand for it, in turn, generates more innovation.

It's simply wrong to assume a zero-sum game among nations. There is no finite amount of symbolic-analytic work to be parceled out around the globe. There is no limit to the capacity of the human brain to discover new problems needing to be solved, or to create better solutions to old problems. And no limit to the number of problems needing solutions.

In decades to come, nations with the highest percentages of their working populations able to do symbolic-analytic tasks will have the highest standard of living and be the most competitive internationally.

America’s biggest challenge is to educate more of our people sufficiently to excel at such tasks. We do remarkably well with the children from relatively affluent families. Our universities are the envy of the world. and no other nation surpasses us in providing intellectual and creative experience within entire regions specializing in one or another kind of symbolic analytic work (LA for music and film, Silicon Valley for software and the Internet, greater Boston for bio-med engineering, and so on).

But we’re in danger of losing ground because too many of our kids, especially those from lower-middle class and poor families, can’t get the foundational education they need. The consequence is a yawning gap in income and wealth which continues to widen. More and more of our working people finds themselves in the local service economy -- in hotels, hospitals, restaurant chains, and big-box retailers -- earning low wages with little or no benefits. Unions could help raise their wages by giving them more bargaining leverage. A higher minimum wage and larger Earned Income Tax Credit could help as well.

Not all of our young people can or should receive a four-year college degree, but we can do far better for them than we're doing now. At the least, every young person should have access to a year or two beyond high school, in order to gain a certificate attesting to their expertise in a particular area of technical competence. Technicians who install, upgrade, and service automated and computerized machinery -- office technicians, auto technicians, computer technicians, environmental technicians -- will be in ever-greater demand.

Some argue that even if I’m correct about all this, the erosion of traditional manufacturing impedes the capacity of Americans to learn important symbolic-analytic tasks, because such learning depends on an intimate understanding of the manufacturing process. This may be true for a few of these tasks: manufacturing engineers surely need to know manufacturing inside out and some design engineers need that knowledge as well. But most symbolic analysts do not. Whatever they need to learn about manufacturing can usually be discovered online.

Others argue we need more manufacturing in the U.S. because our national security depends on it. That seems doubtful. U.S. military contractors subcontract all over the world. As long as they diversify their sources so as not to be dependent on one location or country, we’re safe. In the unlikely event that much of the rest of the world where manufacturing is now done suddenly turns on us, we can create the factories and equipment we need. We’ve mobilized for war before, quite successfully.

Still others say that eventually the dollar will drop so low that global firms will find it profitable to locate traditional manufacturing assembly in the United States. Don't hold your breath. But if and when that should happen, Americans will be far poorer than even low-wage workers are today, because everything we purchase from anywhere will be far more costly.

Obviously, the market is fallible, as we’ve recently and painfully experienced. And sometimes we need to consider what’s good for our economy and society as a whole regardless of where the market may lead us. But that’s exactly where I depart from those who believe we need to protect or bring back traditional manufacturing in the United States. To do so would be enormously costly. I just don’t get how those costs can possibly be justified.

Tomorrow: Where does GM come in?

Monday, August 10, 2009

Who's Paying For Your Fix?

by Kate Duncan

May/Jun 2003 Issue

Unless your morning latte was a fair trade blend, it probably cost more than what the farmer who picked the beans earns in a day.

Conventional coffee prices are at their lowest in a century, even below the cost of production. Farmers have been leaving the fruit to rot on the tree, pulling the kids out of school, abandoning the family land and pouring into the cities to find non-existent work. That’s why, as the most heavily traded commodity after oil, and the most common beverage after water, coffee is a major focus of the fair trade movement.

If your morning latte was a fair trade brew, it means the person who farmed the beans is earning enough to support his family. This is all well and good, but the way fair trade is usually explained - with prices, numbers and statistics - ignores it’s lasting benefits. The true point of fair trade is the cultural, communal, and environmental stability it bolsters.

A farmer who sells through fair trade is a member of a cooperative that is a vehicle for community empowerment. And not just a neighborhood watch: The people typically organized via fair trade are those whom the free market has filtered to the lowest economic stratum. Rather than maneuvering them into a position where they’re forced to take what they can get, fair trade recognizes farmers as equal partners, a platform from which they can command more control over their business and lives.

'Fair trade is a different kind of business relationship between the producer and buyer, which has been an inspiration to help these communities pull together instead of caving to the pressure of all the things trying to blow them apart,' says Monika Firl. Monika heads up producer relations for Cooperative Coffees, and as such, led half a dozen coffee roasters and me (as a grateful representative of Idyll Development Foundation, one of Cooperative Coffee’s funders) on a buying trip to farmers’ co-ops in Nicaragua, Guatemala, and Mexico in February, where we were able to see the effect for ourselves. [Clamor]

Sunday, August 9, 2009

A bash for confidence indexes

Every month the University of Michigan and the Conference Board conduct a survey of households’ confidence on the state of the economy. Each pollster asks several questions and summarizes the results with an index, which is closely watched for signs of consumer distress. Last November, the Michigan index fell by 4.8 points from October; the Conference Board Index dipped by 7.9 points. Supposedly this is bad news because worried consumers are thrifty consumers. Don’t let the surveys fool you: they are almost complete rubbish — unless you know how to use them.

Saturday, August 8, 2009

Economy Slowing Says Calculated Risk

Great Blogger, Calculated Risk "Clearly the economy is slowing sharply"

Friday, August 7, 2009

The Future of Manufacturing, GM, and American Workers (Part I)

What's the Administration's specific aim in bailing out GM? I'll give you my theory later.

For now, though, some background. First and most broadly, it doesn't make sense for America to try to maintain or enlarge manufacturing as a portion of the economy. Even if the U.S. were to seal its borders and bar any manufactured goods from coming in from abroad--something I don't recommend--we'd still be losing manufacturing jobs. That's mainly because of technology.

When we think of manufacturing jobs, we tend to imagine old-time assembly lines populated by millions of blue-collar workers who had well-paying jobs with good benefits. But that picture no longer describes most manufacturing. I recently toured a U.S. factory containing two employees and 400 computerized robots. The two live people sat in front of computer screens and instructed the robots. In a few years this factory won't have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots.

Factory jobs are vanishing all over the world. Even China is losing them. The Chinese are doing more manufacturing than ever, but they're also becoming far more efficient at it. They've shuttered most of the old state-run factories. Their new factories are chock full of automated and computerized machines. As a result, they don't need as many manufacturing workers as before.

Economists at Alliance Capital Management took a look at employment trends in twenty large economies and found that between 1995 and 2002--before the asset bubble and subsequent bust--twenty-two million manufacturing jobs disappeared. The United States wasn't even the biggest loser. We lost about 11% of our manufacturing jobs in that period, but the Japanese lost 16% of theirs. Even developing nations lost factory jobs: Brazil suffered a 20% decline, and China had a 15% drop.

What happened to manufacturing? In two words, higher productivity. As productivity rises, employment falls because fewer people are needed. In this, manufacturing is following the same trend as agriculture. A century ago, almost 30% of adult Americans worked on a farm. Nowadays, fewer than 5% do. That doesn't mean the U.S. failed at agriculture. Quite the opposite. American agriculture is a huge success story. America can generate far larger crops than a century ago with far fewer people. New technologies, more efficient machines, new methods of fertilizing, better systems of crop rotation, and efficiencies of large scale have all made farming much more productive.

Manufacturing is analogous. In America and elsewhere around the world, it's a success. Since 1995, even as manufacturing employment has dropped around the world, global industrial output has risen more than 30%.

We should stop pining after the days when millions of Americans stood along assembly lines and continuously bolted, fit, soldered or clamped what went by. Those days are over. And stop blaming poor nations whose workers get very low wages. Of course their wages are low; these nations are poor. They can become more prosperous only by exporting to rich nations. When America blocks their exports by erecting tariffs and subsidizing our domestic industries, we prevent them from doing better. Helping poorer nations become more prosperous is not only in the interest of humanity but also wise because it lessens global instability.

Want to blame something? Blame new knowledge. Knowledge created the electronic gadgets and software that can now do almost any routine task. This goes well beyond the factory floor. America also used to have lots of elevator operators, telephone operators, bank tellers and service-station attendants. Remember? Most have been replaced by technology. Supermarket check-out clerks are being replaced by automatic scanners. The Internet has taken over the routine tasks of travel agents, real estate brokers, stock brokers and even accountants. With digitization and high-speed data networks a lot of back office work can now be done more cheaply abroad.

Any job that's even slightly routine is disappearing from the U.S. But this doesn't mean we are left with fewer jobs. It means only that we have fewer routine jobs, including traditional manufacturing. When the U.S. economy gets back on track, many routine jobs won't be returning--but new jobs will take their place. A quarter of all Americans now work in jobs that weren't listed in the Census Bureau's occupation codes in 1967. Technophobes, neo-Luddites and anti-globalists be warned: You're on the wrong side of history. You see only the loss of old jobs. You're overlooking all the new ones.

The reason they're so easy to overlook is that so much of the new value added is invisible. A growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering. Or for high-level sales, marketing and advertising. They're composers, writers and producers. They're lawyers, journalists, doctors and management consultants. I call this "symbolic analytic" work because most of it has to do with analyzing, manipulating and communicating through numbers, shapes, words, ideas.

Symbolic-analytic work can't be directly touched or held in your hands, as goods that come out of factories can be. In fact, many of these tasks are officially classified as services rather than manufacturing. Yet almost whatever consumers buy these days, they're paying more for these sorts of tasks than for the physical material or its assemblage. On the back of every iPod is the notice "Designed by Apple in California, Assembled in China." You can bet iPod's design garners a bigger share of the iPod's purchase price than its assembly.

The biggest challenge we face over the long term -- beyond the current depression -- isn't how to bring manufacturing back. It's how to improve the earnings of America's expanding army of low-wage workers who are doing personal service jobs in hotels, hospitals, big-box retail stores, restaurant chains, and all the other businesses that need bodies but not high skills. More on that to come.

Thursday, August 6, 2009

Wednesday, August 5, 2009

EZer taxes

Imagine if you didn’t have to file a tax return. Imagine if, come T-day, the only thing you needed to do to comply with your tax obligations was to sign a form and mail it. And imagine if this could be done without changing a comma of the tax code. This is not a pipe dream—millions of citizens in different parts of the world already do it.

Austan Goolsbee, professor at the University of Chicago Graduate School of Business and head economic adviser to Barack Obama, is proposing to let the Internal Revenue Service, America’s tax man, put together drafts of individual tax returns and mail them to taxpayers. Experts know the system as “Tax Agency Reconciliation” (TAR). Goolsbee has had the good sense to re-baptize as “Simple Return.”

Tax collection agencies receive all the information they need to fill out the returns of many taxpayers. By law, employers and financial institutions send the data to them. The time spent by filers collecting statements, putting the numbers in the right boxes of the tax form, figuring out the standard deductions and exemptions, and calculating the tax bill--not to mention the fees paid to tax prepapers--are thus a waste.

Sweden and Denmark use the system. In Spain, with seven years of TAR experience, some filers can even request and confirm their pre-filled tax returns by sending a text message. Some Spaniards don’t even have to sacrifice precious TV time: they can do their taxes through their interactive, digital TV sets. (I encourage readers who know of other countries in the EZer Club to let me know in the comments or by e-mail. I’d like to make a list. If you respond, please specify whether the country does TAR or exact withholding.)

Tuesday, August 4, 2009

Risk Factors For A 2008 Recession

Here are the top risk factors for 2008 US Recession:

Continuing Housing Bust
High Oil Prices
Security Issues
Credit Crunch
High Consumer Debt
Large Trade Deficit
Consumer Spending is slowing (it makes up 70% of the US GDP)
Commercial Construction decline

Monday, August 3, 2009

Sotomayor and the Republicans

Put on your seatbelts. Many Republicans have been itching for this fight. They figure if they can make Sonia Sotomayor appear "too liberal," "too activist," or "intemperate" -- and cause Obama to withdraw her nomination, or if they can defeat her outright -- they can slow the Obamomentum that's leading to universal health care, cap-and-trade, more spending on education, and higher taxes on the rich. This would also give them a crack at winning back a number of seats next November, which they know they can't win if their major issues are torture and taxes and if their major spokesmen are Dick Cheney and Rush Limbaugh.

But if they choose to vilify Sotomayor, Republicans take a huge gamble. They could lose even more women and Hispanic voters in 2010 and beyond. And they could alienate even more Independents already turned off by the Republican "just-say-no" approach to almost everything.

Besides, it will be hard for Republicans to pigeonhole Sotomayor. Although as an appellate judge she has sided with defendants, inmates, convicted felons, and environmentalists, she has also taken decidedly conservative stances. In 2002, she ruled against an abortion rights group that claimed the so-called "Mexico City Policy," prohibiting U.S. funding for foreign groups performing or supporting abortion services, violated their First Amendment rights. She reasoned that the government is "free to favor the anti-abortion position over the pro-choice position." In a 2004 case she ruled in favor of anti-abortion protesters who claimed a city had improperly trained police officers who allegedly used excessive force on them. And she has ruled against a number of minority plaintiffs in discrimination cases.

And she has an impeccable upward-through-education-and-hard-work pedigree: She grew up in public housing in the Bronx, the daughter of a factory worker, and got a law degree from Yale.

Still, never underestimate the Republicans' capacity for taking big political risks that turn out badly. Remember Sarah Palin? Republicans may figure that they're so badly decimated already, so marginalized and irrelevant, there's little to lose and possibly much to gain by going negative on Sotomayor and unleashing their terror-TV and rant-radio attack dogs. It's also possible that without much remaining of any moderate view inside their own ranks, Republicans may simply lack the wisdom -- dare I call it judiciousness? -- to opt for a more sensible strategy.

Sunday, August 2, 2009

Sugar Giants Shove Their Sweetener

by Chris Tenove

Jul/Aug 2003 Issue

What does anybody know about the sugar industry? The people who put the frosting on the frosted flakes keep a low profile and are happy when folks are too busy eating to ask a lot of questions. Now, though, a dust-up with the World Health Organization (WHO) has flushed them into the limelight, where they're pitting profits against public health.

The conflict was inflamed by a new set of dietary guidelines drawn from two years of research by the WHO and the UN Food and Agricultural Organization. The guidelines are part of a worldwide strategy to tame the swelling epidemic of obesity, diabetes, osteoporosis and cardiovascular diseases. One recommendation is that free sugars (i.e. sugar added to foods) should make up no more than 10 percent of our daily caloric intake. The sugar lobby reacted to that suggestion like a toddler asked to hand back his Halloween booty...

'It was particularly stupid for them to put in writing that they're going to try to get Congress to take away WHO's money,' says Michael Jacobsen, executive director of the Center for Science in the Public Interest. 'It gave consumers a chance to see the kind of bullying that is usually done behind closed doors.' [Adbusters]

Saturday, August 1, 2009

The fiscal stimulus: ineffective or wrong?

The latest economic data show that output growth has weakened and unemployment is creeping up. The government is worried, with good reason, that the economy is going through a pronounced slowdown, perhaps even a recession. To limit the damage, Congress yesterday approved a battery of fiscal measures. By my reckoning, however, the plan will at best provide a short-lived nudge to consumption, but not employment; at worst, it’ll do nothing.

Starting in May, the government will send $600 checks to individuals ($1,200 for couples and an extra $300 for each child). People who earn too little to pay income taxes, but make more than $3,000, will receive a $300 payment. Payments will total $106 billion and will add to the budget deficit.

Cash outlays are supposed to boost private consumption expenditures and accelerate overall growth. $106b may seem a small stimulus for a $14 trillion economy, but the payments are expected to have a “multiplier effect”: higher demand will prompt businesses to hire more workers, and increased employment will further stimulate private consumption, which in turn will induce more hiring. The process continues ad infinitum. The outlays, therefore, can have a final effect on aggregate demand that is many times bigger than the initial stimulus —hence the name “multiplier.”

The effectiveness of the measure hinges on two factors. First, the fraction of the government outlays that will be spent immediately. According to Bruce Bartlett, previous experiences with tax rebates in 1975 and 2001 indicate that it's small. The recent study by Elmendorf and Furman indicates that it's a 50 percent.

The second requirement, which has received less attention, is that businesses will respond to the initial surge in demand by hiring new workers. If they don’t, then the fiscal package will have no second-round impact on demand, and the stimulus to consumption will total just $50b.

Because the first two quarters of 2008 will be marked by considerable uncertainty about the course of the economy in the medium term, the announcement of the fiscal plan will not have an immediate effect on hiring. Manufacturers may ratchet up their inventories, in anticipation of the small jolt of demand in May, but they will do so by using overtime and temp workers, rather than hiring permanent employees. In the services sector, we won’t see any change in employment until the late spring, and even then employers will similarly meet spikes in demand with overtime hours and temp workers, at least initially. If, come June, forecasts have improved, we may see employment pick up over the fall. But by then the effect of the government checks will have played out. In conclusion, the fiscal package won’t provide any significant boost to employment.

A less obvious reason to reject the stimulus is that the slowdown in aggregate demand is necessary, even healthy. Most of the growth experienced between 2002 and 2006 was based on low interest rates, over-valued real estate, and loose lending standards.

Chart 1, from a story by Michael Mandel at BusinessWeek, tells it all. Mandel estimates that, “if consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.” That extra spending was financed with debt. Quite literally, Americans were borrowing their prosperity from the future —not exactly a sustainable growth path.

Chart 1 (left) and 2 (right). Click to enlarge.