February 2nd, 2010
In a sign that the financial sector has returned to stable operation, the Federal Reserve closed many special lending programs started in the midst of the financial crisis in 2008:
Monday saw the end of initiatives aimed at supporting various parts of the commercial-paper market, where companies get short-term financing, along with programs to ensure key investment banks could get liquidity. Also shuttered: currency swap arrangement the Fed had with other major central banks.
Over the next several months other emergency lending programs will also make their last stands. The end of these facilities represents a move by policy makers to normalize their relationship with healing financial markets. Emergency aid withdrawn, an eventual tightening in monetary policy will follow.
Posted in: The Financial Crisis | Comments Off
January 10th, 2010
The Bureau of Labor Statistics reported Friday that the economy lost 85,000 jobs in the month of December. The unemployment rate stayed unchanged at 10.0 percent. Now, two years after the start of the recession, the National Bureau of Economic Research has not yet declared it over, which makes it the longest recession since the Great Depression of 1929-1933. Recessions have averaged about 11 months in length since the creation of the Federal Reserve. The latest jobs report indicates that unemployment might remain high because of a structural, rather than a cyclical, shift in employment.
Cyclical unemployment stems from businesses’ inability to forecast the ebb and flow of demand. In times where demand unexpectedly decreases, inventories go unsold, so businesses produce less and lay off employees. When demand returns, they hire workers to fill the same positions and replenish their inventories. Structural unemployment occurs when demand shifts permanently. The jobs that existed before the recession won’t return in the next phase of the business cycle, nor will the cycle progress until new businesses or industries to meet the permanently shifted demand.
In December, 6.1 million unemployed workers had been without a job for 27 weeks or longer — up from the month before and over twice as many as in 2008. Long-term unemployment accounts for 40 percent of the jobless. Additionally, 2.5 million people were marginally attached to the labor force, i.e. they had looked for a job in the past year, but not in the past month. More than a third of those marginally attached had given up looking for work because they believe that there are no jobs available for them. The underemployment rate, which includes the workers with part-time jobs who want full-time jobs, stands at 17.3 percent — up from 17.2 percent last month and 13.7 percent a year ago. All of these points are consistent with structural unemployment where jobs lost do not return.
If that’s the case, then government subsidies to struggling firms prevent the recovery by delaying the shift from failing to productive firms and industries. Welfare transfer payments to individuals won’t help people find jobs in the new industries as much as increased funding for education and retraining.
Tags: bls, business cycle, cyclical unemployment, structural unemployment, unemployment
Posted in: Economic Indicators | Comments Off
January 5th, 2010
On New Years’s Day, Colorado lowered its minimum wage, the first state in the nation to do so. Colorado ties its minimum wage to the state’s consumer price index, which fell 0.6% over the past year. To accurately adjust for the change in prices, Colorado’s minimum wage should have fallen four cents, from $7.28 to $7.24, but it cannot go below the federal minimum of $7.25.
“It is hard to make it, hard to get by,” said John Mullen, 50, an out-of-work construction worker waiting for a bus on a bitterly cold New Year’s Eve in Denver. Mullen said he remembers making minimum wage at a factory and having enough for small comforts.
“You’d get paid every Friday, have enough money to go catch a poker game or take your girl out to a dinner,” Mullen said. “But the law is the law. What can you do?”
Others said that even a tiny drop for the lowest-paid workers will be felt.
“Yeah, it’s 3 cents an hour. But that 3 cents an hour adds up at the end of 12 months,” said 59-year-old Gary Foeller of Denver, a house painter who hasn’t worked in weeks but usually earns more than the minimum wage when he has a job.
The 3-penny difference would amount to about $62 a year for someone who works 40 hours a week and doesn’t take time off.
But remember, the minimum wage decreased because the price of goods fell. So while someone making the minimum would earn $62.40 less over the year, that same person would, on average, spend $83.20 less to purchase the same goods. In effect, someone making the minimum will have an extra $20.80 to spend over the year.
While the nominal minimum wage — the minimum wage in terms of dollars — might have fallen, the real minimum wage — the minimum wage in terms of goods — has risen.
Posted in: Unconventional Wisdom | No Comments »
December 28th, 2009
From Peter Wallinson:
It’s a favorite government trick to announce bad news on a Friday afternoon, so it appears in Saturday’s paper, the least likely edition to be read. By Sunday and Monday, it’s old news. The Obama Treasury just went one better, announcing on Christmas Eve that they were uncapping the amount they believe will have to be invested in Fannie and Freddie. The Bush Treasury first estimated the government-sponsored enterprises’ (GSEs) losses at $100 billion each. The Obama administration, which has been using the GSEs to stabilize the housing market by reducing their underwriting standards, upped the ante to $200 billion each. Now the administration has thrown in the towel completely, and dropped a large lump of coal in each taxpayer’s stocking—it won’t even try to estimate the total losses of Fannie and Freddie.
The phrase “capitalism on the way up, socialism on the way down” comes to mind.
Tags: deficit, fannie and freddie, peter wallinson, treasury
Posted in: The Financial Crisis | No Comments »
December 24th, 2009
Joel Waldfogel, in his new book Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays, argues that we should give up giving gifts at Christmas time because we inevitably waste money on gifts that others don’t want. From the publisher:
When we buy for ourselves, every dollar we spend produces at least a dollar in satisfaction, because we shop carefully and purchase items that are worth more than they cost. Gift giving is different. We make less-informed choices, max out on credit to buy gifts worth less than the money spent, and leave recipients less than satisfied, creating what Waldfogel calls “deadweight loss.”
I’ll admit that I haven’t read the book, so there may be more to Waldfogel’s argument in the book, but I have a few issues with the main thesis.
First, the actual economic transaction between the retailer and the gift-giver creates value. When we go to the store to purchase a gift, say for $20, we value giving that gift more than the $20 we use to purchase it. So, without taking into account how much the receiver values the gift, the transaction creates positive economic value.
More generally though, by focusing on gifts as a method of allocating resources, Waldfogel misses the point of giving gifts at Christmas. The Christmas gifts we give each other symbolize the gift humanity received from God. As Dan Ariely points out in Predictably Irrational, the symbolic exchange of gifts is a perfectly rational exchange, governed not by a market mechanism, but by social expectations. Indeed, under the assumption that individuals maximize value, no one would ever give away anything of value for free. Economists like to think of people as rational utility-maximizers, mostly to simplify mathematical models. That assumption doesn’t always hold.
However, Waldfogel does correctly discern that individuals can choose best what goods benefit them the most. His logic applies to government welfare programs that collect taxes in order to spend money on goods that people may or may not want.
Posted in: Uncategorized | No Comments »
Federalism: New Arguments for an Old Idea
January 27th, 2010
Two good pieces have come out recently advocating distributing power away from the federal government in Washington towards the states and the counties: one by Alex Castellanos and the other by Arnold Kling. Castellanos writes to give the GOP a message for the 2010 electoral cycle that can reach the ears of the Millennial generation. He puts the ideas of individual liberty and free markets in terms of networks, such as Facebook. Free markets work, he argues, because their network-like structure allows coordination among individuals more efficiently than a hierarchical, top-down, command structure.
Kling, on the other hand, notes that those hierarchical command structures simply don’t work. A national government must institute a uniform policy, which can never satisfy everyone in a large country like the United States. State governments can create a variety of policies, each tailored to the different preferences of their residents. State and local governments can also respond more quickly to policy challenges because of the reduced chain of command.
Yet, neither of these articles presents any radically new ideas. James Madison outlined the federal nature of the Constitution in Federalist No. 10 and Federalist No. 39. In the Federalist No. 10, Madison argues for a large nation, so as to diminish the influence of any one faction in the body politic. With many competing interests, a government could not pass laws that benefited one group at the expense of another, such as the recent Senate heath care bill where all 49 states would pay for the costs of Nebraska’s heath care.
In Federalist No. 39, Madison explains how the Constitution conforms to republican principles and creates a government that is neither wholly federal nor wholly national. Though the federal government derives some of its powers directly from the people, but it mostly coordinates actions between the states and leaves most of the powers of government to the states:
You can find the complete Federalist Papers here: It’s like an owner’s manual for the Republic.
Tags: alex castellanos, arnold kling, federalism, federalist paper, free market, james madsion, networks
Posted in: Commentary | Comments Off