Posts Tagged ‘new york times’

Dispatches from a runaway American dream

3 August 2010

Edward Luce’s recent Financial Times feature, “The crisis of middle-class America,” is a must-read.  It seems to be excerpted (lots of “. . .”), but it still contains a ton of detail about two seemingly comfortable middle-class families who’ve seen their living standards fall gradually and then, after the 2008 crisis, abruptly.  The piece is mostly a human-interest article, light on statistics and technical explanations, but there is this illuminating quote from Harvard economist Larry Katz:

‘“Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”’

Here’s hoping this article is part of a much longer series.  Although the early verdict on the 2000s seems about right — two recessions with a bubble-driven recovery in between — people still tend to view the 1980s and 1990s as Prosperity Decades.  Based on aggregates like rising real GDP and falling unemployment rates, they were, especially the ’90s.   And as the long economic expansion of the Clinton years took hold, the warnings of some economists of a “silent depression” of eroding real wages and disappearing middle-class jobs (especially for non-college-educated workers) became increasingly ignored.  Ditto for the wave of warnings about “downsizing” in the mid-’90s, as eloquently reported by The New York Times (and followed up a decade later in a book by William Baumol, Alan Blinder & Edward Wolff that seems to have gotten far too little attention).

Macroeconomics is the study of economic aggregates, so macroeconomists and the macro debate tend to focus on aggregate statistics, even though the bottom line would seem to be how individual people (be they rich, poor, middle class, black, white, old, young, etc.) are doing.  The debate over the economy’s performance during the 1980s, which inevitably took a partisan cast as a debate over Reaganomics, generally came down to aggregates.  On the pro side, an eight-year economic expansion, falling unemployment, low inflation, a booming stock market, and faster productivity growth than in the 1970s.  On the con side, unemployment and poverty rates that skyrocketed in the early ’80s recession and stayed high for much of the decade, rising inequality, and stagnant median real incomes.   Either way, people looked to aggregates, which left a lot out.  For example, were median incomes stagnant because the incomes of most people were stagnant or because there was a relative increase in the number of poor households even as other people’s incomes rose?  And how much of the decade’s prosperity trickled down to families who were at the bottom and middle rungs on the economic ladder when the decade began?  Based on the standard aggregated data, including the Census data on income percentiles, we don’t know, because we’re not comparing the same people over time.  Reagan defenders and others inclined to ignore the issue of inequality make that excuse again and again:  “It’s not the same people!”  Which is true but raises the question, So why don’t we just study the same people over time?

An ideal study would combine scores of case studies like the ones in the FT article with analysis of longitudinal data on particular families surveyed over time. There are longitudinal data sources out there (e.g., the National Longitudinal Study, the Panel Survey of Income Dynamics), but I confess I haven’t seen whatever macro studies have been done with them.  Seems to me way too much of what we “know” about the macroeconomy is based on aggregates like per-capita GDP and way too little on studies of actual households.  But the only to measure the American dream, I think, is one household (or one person) at a time.

Now here’s something you’ll really like . . . a July 1974 live version of the rock classic that inspired the title of this post:

Advertisements

After the binge, the purge

18 July 2010

The always excellent Roger Lowenstein has a piece in today’s NYT Magazine about the recent reluctance of the American consumer to spend.

He makes a point that I’d been making and fleshes it out rather well:

American households are rational to cut back on their spending right now, especially while so many of them are deeply in debt and face uncertain job and income prospects in the months, perhaps even years, ahead.

But while individually rational, it makes for a severe economic slump, since consumer spending (or, put differently, goods and services produced for consumers) is two-thirds of GDP.  Unless a new bubble comes along to delude consumers into thinking that their wealth in stocks/housing/other is rising so fast that it’s OK to spend more than their income, then we may not have found the bottom yet.

Consider:  At the peak of the bubble, in 2008, household debt was 136% of income.  After two years of retrenchment, it now stands at . . . 126% of income.  Lowenstein quotes an economist as saying that there is no clear-cut correct debt/income ratio, but it seems fair to say that over 100% is not sustainable.  Lowenstein notes that just getting it back to where it was in the year 2000, at plausible rates of “deleveraging” (paying down debt), would take about five years.  And he might have noted that 2000 was the height of the dot-com bubble; household debt in 2000 was nearly as high as household after-tax income.  People like to pass on something to their children and grandchildren, so the normal debt/income ratio would presumably be well under 100%.  You’d probably have to go back at least 15 years to find a normal, sustainable debt/income ratio.

Lowenstein quotes another economist as saying “deleveraging cycles” typically last about five to seven years.  And today’s debt/income ratio is not typical but is one of the highest on record.

I said before, we’re in a depression.  Still hoping to be proved wrong.

Oh well, at least we’re not in debt to the company store:

Warren Buffett defends snake-oil sales

4 May 2010

That’s my interpretation of this column, anyway.  The NYT‘s Andrew Ross Sorkin and all the other apologists for Goldman Sachs take a different view.

Buffett says the institutions who bought the reeking mortgage derivatives from Goldman have only themselves to blame.  They just got outsmarted.

Um, couldn’t we say the same about the lady who bought the kerosene-soaked sugar from the local grocer?

Why was Goldman selling toxic products in the first place?  If they knew they were toxic, isn’t that fraud?  Isn’t that the basis of the lawsuit?

I’d always liked Warren Buffett prior to reading this column, but now it’s hard not to conclude that he’s just like all the rest who would maintain that nobody on Wall Street bears any blame whatsoever for the financial crisis.  Buffett famously said a while back that derivatives were financial weapons of mass destruction.  Caveat emptor — said destruction can only be the buyer’s fault.

UPDATE, 7 May 2010:  Les Leopold, author of The Looting of America, says all this, and more, right here.

Obligatory song link:

Too big

22 April 2010

The NYT has a good piece on the prospects for federal breakups of the big banks.  It’s not part of the financial reform bill that the Senate Finance Committee just passed, or the one the House passed earlier, but a group of Democratic senators including Sherrod Brown of Ohio and Ted Kaufman of Delaware just introduced such a measure.

Some numbers to sink your teeth into, from the article:

The banking industry has become much more concentrated as it has grown in recent years. In 1995, the assets of the six largest banks were equivalent to 17 percent of G.D.P.; now they amount to 63 percent of G.D.P. Meanwhile, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000 and 24 percent in 1990.

UPDATE: Simon Johnson likes the Kaufman-Brown bill and discusses it at length here.  A longer post here about the specious arguments by two senators and Larry Summers in favor of preserving the size of the big banks.


Exiled From Main St. / Start Breaking Up

18 April 2010

Thomas Hoenig, president of the Kansas City Fed and one of the most incisive critics of the “too big to fail” policy, has an op-ed in today’s NYT about the current financial reform bill before Congress.  He says it does far too little to end “too big to fail” — while it sets up a mechanism for big failing financial institutions to be put under FDIC receivership, those financial institutions would still have the political clout to snag a bailout instead.

This may be true, but it seems to be a drawback in any financial reform bill that doesn’t call for the biggest financial institutions to be broken up into smaller ones that are not too big to fail, i.e., which can go bankrupt without significant systemic risk to the economy.  Koenig has spoken elsewhere on the need to break up the biggest banks.  It’s a position that finds favor among many liberal economists,including James Kwak of the Baseline Scenario (see previous link).  Rep. Paul Kanjorski of Scranton, PA has proposed an amendment to give the government power to preemptively break up any financial institution whose failure would impose giant costs on the U.S. economy, but the Senate Banking Committee apparently has nothing like that on the table yet.  Alas, the political clout of the big banks may well be enough to make bank size restrictions a non-starter in the Senate.  Simon Johnson of The Baseline Scenario says much the same thing here.

Hoenig says that another provision of the bill actually makes things worse by narrowing the Fed’s supervisory role to just the nation’s 12 largest banks, most of which are headquartered in NYC.  I do not know what the logic of this provision is, and Hoenig doesn’t say; maybe the idea is for the other banks to be supervised by the FDIC and/or other agencies instead.  Whatever it is, Hoenig thinks the Fed needs to give just as much attention to the other 6,700 as to the top 12.  As he points out, that would seem to be the whole point of having 11 regional Fed banks besides the one in New York.

UPDATE:  Simon Johnson puts it a lot more plainly right here.  For the record, Paul Krugman has his doubts that breaking up the banks would help much — see the last three paragraphs of this recent column.  I’m with Simon Johnson here.  By all means, crack down on fraudulent finance at institutions large and small, but I don’t see how you limit the power of the big banks without limiting their size, too.

If you think your cash is trash, sit next to me

28 January 2010

Here is another unpublished letter to the editor, this time to The New York Times, in response to a small bit of their roundtable op-ed “Questions for the Big Bankers.”  Some fine folks there, including Simon Johnson, Bethany MacLean (who wrote Enron: The Smartest Guys in the Room), and Liaquat Ahmed (who wrote The Lords of Finance, about the gold standard and the Great Depression), which made it all the more incredible to me that the piece opened with this astonishingly dumb question by James Grant:

Bankers are dealers in money. The Federal Reserve is a creator of money — since the crisis began in August 2007, it has conjured up $1.1 trillion. Given the ease with which these dollars are materialized on a computer screen, how can they be worth anything?

So here was my reply:

Editor:

James Grant says the Federal Reserve has created $1.1 trillion in new money since 2007 and asks how it can possibly be worth anything.  If Mr. Grant thinks that dollars have become worthless, then, considering that money is fungible, I want him to know that I would be happy to take the worthless dollars in his bank account off his hands.

Sincerely,

Ranjit S. Dighe
Oswego, N.Y.

Quote of the day

24 January 2010

Where only so much credit is due:

“Preventing the collapse of the financial system should probably seen as being comparable to a major league outfielder catching a long fly ball. It’s not that easy, but major league outfielders do it.”

Dean Baker, taking issue with the NYT’s contention that Tim Geithner and Larry Summers have gotten too little credit for preventing an all-out financial collapse in the USA.  Baker points out that no major country saw its financial system collapse in this crisis, so the US performance in this regard was nothing special by today’s standards.

A fate worse than debt

21 June 2009

To paraphrase Benjamin Franklin, a nation that chooses deficit reduction over its economic health will soon have neither.

A story that I’d missed a couple days ago was the results of new polls from the NYT and the WSJ, allegedly finding Americans to be apoplectic about the federal budget deficit and down, down, down on the $787 spending stimulus.  The poll results are described by Catherine Rampell of Economix, Paul Krugman on his blog, and Andrew Leonard on Salon.  Considering the disastrous effects of budget cutting during the Great Depression (first in 1932 under Hoover, then in 1937 under FDR), the results does not seem to bode well for future recovery efforts.  “A nation of Herbert Hoovers” was Salon‘s headline.

It’s easy to read these poll results and conclude that Americans want the economy placed on a starvation diet.  But is that the correct conclusion?  Rampell takes a closer look at the NYT poll and isn’t so sure.  She points out another question, which asks what America’s biggest problem is, and notes that only 2% say the budget deficit.  That puts it well behind the economy (38%), jobs (19%), and “health care” (7%).   An accompanying chart of Gallup poll results since the 1930s show that not since the mid-1990s has the budget deficit been seen as the nation’s top problem by more than 5% of the public.

(more…)

Bill Clinton accepts some blame for the crisis

27 May 2009

It’s part of a lengthy cover story in Sunday’s New York Times Magazine.  There’s a good synopsis of it here in The New Republic online, and another one by NYT economics writer David Leonhardt, with annotations, here on the Times‘s Economix blog.  Some highlights:

Clinton says he totally blew it in acceding to Greenspan’s call that derivatives should be unregulated.

He also says that his backing of Gramm-Leach-Bliley (i.e., allowing banks and investment banks and insurance companies to merge) would have been wise only if, as he expected, there was going to be appropriate regulation and oversight of the new financial supermarkets.  Had he known there would be none in the next two presidential terms, he would have opposed it.

Very interesting.  He’s a lot more open about his administration’s shortcomings in this department than, say, Larry Summers has been.  Just in the little bits I saw, Clinton is thoughtful and persuasive.

He also touches on the important distinction between regulations/prohibitions and oversight, with financial supermarkets as a case in point.  When you can count on having good regulators who provide adequate oversight, then you can allow certain activities that might otherwise better be prohibited.  Then again, is “deregulation with proper oversight” too clever by half (not to mention oxymoronic)?  We shouldn’t be learning about this policy approach a decade after these deregulatory policies were put in place.  Who was speaking up for proper oversight during the Bush years?

Aieeee, AIG! (Part 2)

18 March 2009

Excellent-sounding suggestion about how to stop those abonimable AIG bonuses, from Bill Black, Tom Ferguson, Rob Johnson, and Walker Todd (The Huffington Post, 16 March 2009).  Even if it doesn’t succeed in stopping the bonuses, their suggestion to break off AIG’s toxic Financial Products Division (like a hedge fund attached to an insurance company, as Ben Bernanke described it) from AIG’s main business, and then treat the Financial Products Division like the bankrupt entity it is, is very appealing.

Dean Baker makes much the same point:  bankrupt companies don’t get to pay bonuses.

The NYT has another sensible editorial about AIG and who it’s been paying off with the $170 billion in bailouts it’s received so far.   Under the bailout, the company has been paying off many credit default swap (CDS) holders in full, which is a great way to burn through hundreds of billions of dollars with lightning speed.   And now we know that a good chunk of those billions went to CDS creditors like Goldman Sachs who, like AIG, are wards of the state.  (To be fair, a substantial but smaller amount of CDS payouts went to state governments.)  The only relief I can think of is Herb Stein’s old line:  the good thing about something that can’t go on indefinitely is that it won’t.

(more…)