Archive for the ‘ Business ’ Category

Defining Prosperity Down

OP-ED by Paul Krugman in the NYT:

I’m starting to have a sick feeling about prospects for American workers — but not, or not entirely, for the reasons you might think.

Yes, growth is slowing, and the odds are that unemployment will rise, not fall, in the months ahead. That’s bad. But what’s worse is the growing evidence that our governing elite just doesn’t care — that a once-unthinkable level of economic distress is in the process of becoming the new normal.

And I worry that those in power, rather than taking responsibility for job creation, will soon declare that high unemployment is “structural,” a permanent part of the economic landscape — and that by condemning large numbers of Americans to long-term joblessness, they’ll turn that excuse into dismal reality.

Not long ago, anyone predicting that one in six American workers would soon be unemployed or underemployed, and that the average unemployed worker would have been jobless for 35 weeks, would have been dismissed as outlandishly pessimistic — in part because if anything like that happened, policy makers would surely be pulling out all the stops on behalf of job creation.

But now it has happened, and what do we see?

First, we see Congress sitting on its hands, with Republicans and conservative Democrats refusing to spend anything to create jobs, and unwilling even to mitigate the suffering of the jobless.

We’re told that we can’t afford to help the unemployed — that we must get budget deficits down immediately or the “bond vigilantes” will send U.S. borrowing costs sky-high. Some of us have tried to point out that those bond vigilantes are, as far as anyone can tell, figments of the deficit hawks’ imagination — far from fleeing U.S. debt, investors have been buying it eagerly, driving interest rates to historic lows. But the fearmongers are unmoved: fighting deficits, they insist, must take priority over everything else — everything else, that is, except tax cuts for the rich, which must be extended, no matter how much red ink they create.

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Raise My Taxes, Mr. President!

Fareed Zakaria in Newsweek:

For the last few months, we have heard powerful, passionate arguments about the need to cut America’s massive budget deficit. Republican senators have claimed that we are in danger of permanently crippling the economy. Conservative economists and pundits warn of a Greece-like crisis, when America can borrow only at exorbitant interest rates. So when an opportunity presents itself to cut those deficits by about a third—more than $300 billion!—permanently and relatively easily, you would think that these very people would be in the lead. Far from it.

The Bush tax cuts remain the single largest cause of America’s structural deficit—that is, the deficit not caused by the collapse in tax revenues when the economy goes into recession. The Bush administration inherited budget surpluses from the Clinton administration. What turned these into deficits, even before the recession? There were three fundamental new costs—the tax cuts, the prescription-drug bill, and post-9/11 security spending (including the Iraq and Afghanistan wars). Of these the tax cuts were by far the largest, adding up to $2.3 trillion over 10 years. According to the Congressional Budget Office, nearly half the cost of all legislation enacted from 2001 to 2007 can be attributed to the tax cuts.

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The Third Depression

OP-ED by Paul Krugman in the NYT:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

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Do Economists Really Know What They’re Talking About?

The disconnect between economic theory and reality seems ominous.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. . . . Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. —English economist John Maynard Keynes (1883-1946)

Almost everyone wants the world’s governments to do more to revive ailing economies. No one wants a “double dip” recession. The Group of 20 Summit in Toronto was determined to avoid one. In major advanced countries—the 31 members of the Organization for Economic Cooperation and Development—unemployment stands at 46.5 million people, up about 50 percent since 2007. It’s not just that people lack work. Lengthy unemployment may erode skills, leading to downward mobility or permanent joblessness. But what more can governments do? It’s unclear. We may be reaching the limits of economics. As Keynes noted, political leaders are hostage to the ideas of economists—living and dead—and economists increasingly disagree about what to do. Granted, the initial response to the crisis (sharp cuts in interest rates, bank bailouts, stimulus spending) probably averted a depression. But the crisis has also battered the logic of all major theories: Keynesianism, monetarism and “rational expectations.” Economics has become the shaky science; its intellectual chaos provides context for today’s policy disputes at home and abroad.

Consider the matter of budgets. Would bigger deficits stimulate the economy and create jobs, as standard Keynesianism suggests? Or do exploding government debts threaten another financial crisis?

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The 70-30 nation

Lexington in the economist:

THE past couple of years have not been private enterprise’s finest hour. From the collapse of Lehman Brothers to the implosion of General Motors and Chrysler to BP’s oil spill in the Gulf of Mexico, one great firm after another that had boasted of making society richer has turned into an expensive liability for taxpayers at best or, at worst, a menace to the general prosperity or the environment. You might expect this sequence of calamities to have made people sourer towards capitalism and friendlier to the state. But in America, at least, you would be wrong. Americans remain deeply wedded to the free-enterprise system.

Even after the collapse of Wall Street and all that has followed, an overwhelming majority of Americans say in opinion polls that they prefer capitalism to socialism. Gallup found in January that 61% had a positive view of capitalism and about the same percentage had a negative view of socialism. In March last year the Pew Research Centre asked Americans whether they were better off in a free-market economy “even though there may be severe ups and downs from time to time”. Seventy percent answered in the affirmative. Most Americans also say their federal income taxes are too high. Even those who favour higher taxes on the rich think the top rate should be 20% or less.

If Americans will stand behind the free-enterprise system come what may, it makes sense for Barack Obama’s opponents to portray the president as a danger to it. “We are facing a ruthless secular-socialist machine that is alien to America’s history and traditions,” bellows Newt Gingrich, the hero of the Republican victory of 1994, as he flogs his latest book (“To Save America”). The Republicans are sure to do well in November’s mid-terms.

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India’s Edge Over China: Soft Power

John Lee for Businessweek:

While China’s neighbors look at the country’s rise with a mixture of apprehension and admiration, the story of India’s reemergence as a regional power is more attractive to many states in the region. After all, unlike China, India has no history of invasion or domination in East and Southeast Asia and does not have competing claims in the South China Sea with other Asian states. Moreover, “in today’s world,” India’s then-Minister of State for External Affairs Shashi Tharoor said in a speech last November, “it is not the size of the army that wins but the country that tells the better story.” As the world’s largest democracy, with a vibrant press and thriving entertainment industry, India has huge soft power advantages over China and its state-controlled media. The implication is India can take advantage of that goodwill as Asia’s two giants battle for influence in the region and around the world.

Tharoor is correct to refer to India’s soft-power advantages. But goodwill towards India and the enormous potential of Indian soft power—the ability to influence the behavior of other states through attraction and cooptation rather than military force or economic inducement—does not arise simply from the growing popularity of Bollywood movies or the fact that Indian contestants (along with those from Venezuela) have won more Miss World contests than any other country. The fact that one likes Indian culture may not necessarily lead foreign governments to accede and acquiesce to Indian foreign policy objectives.

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