The Power and the Money

Dubai bailout, nothing to see

  No, really.  Here’s the opinion of a Saudi Arabian banker on the Dubai default, dated November 27th:  “We believe that Abu Dhabi will come to the rescue… but like all rescues it would have a price. In that case it may well be first of all a political price.” Why did they believe that Abu Dhabi would rescue it’s neighbor?  Simple:  ADIA, Abu Dhabi’s sovereign wealth fund, has enough assets that if it seemed like bailing out Dubai world might preserve market values, then ADIA had enough of a stake in those markets to make the bailout a paying proposition.  Saudi did too, but Abu Dhabi, unlike Saudi, could more easily extract political gains in addition to the economic returns from a bailout.  

Thus, the bailout.  Stocks still seem to have reacted well, despite its wholly predictable nature.  Ni modo.

Beer, banks, and revolution

  Doug Muir observes that breweries and banks seem to survive civil wars.  Now, Doug would never tell you, because he’s modest, but it so happens that he has a friend who’s a little bit knowledgeable about the effects of political violence and instability on economic activity.  His friend has even written an entire book about banking and instability. 

So, is Doug correct that banks and breweries tend to make it through political instability?  Short answer:  yes. 

Long answer:  well, let’s examine the data from one of the worst bouts of political instability to afflict any country with a substantial financial sector and developed manufacturing, at least outside the benighted continent of Europe.  Between 1910 and 1929, Mexico suffered a revolution, two insurgencies against the winner of the revolution, a counter-revolution, a counter-counter revolution, a civil war among the winners of the counter-counter-revolution, a military coup, another bout of civil war after an attempted coup by the Secretary of the Treasury, a presidential assasination, three more attempted coups, and a third civil war fought by angry Catholic guerrillas with a penchant for dynamiting passenger trains.  Among all that, what happened to the banks and breweries? 

Let’s start with the breweries.  Mexico’s domestic industry was created almost overnight during the last decade of the 19th century, with local monopolies established in virtually every major city by the 1900.  One of the industry’s leading firms (the Cervecería Cuauhtémoc of Monterrey, Nuevo León) came to control 28 percent of the national market.  It went on to spin off a glass bottle making company (Vidriera Monterrey) that quickly established itself as a domestic glass monopoly.  The other two major breweries were the Cervecería Moctezuma (of Orizaba, Veracruz) and the Compañía Cervecera de Toluca y México near Mexico City.  

During the civil wars, armed factions viewed factories as strategic assets that could be used to generate income for the army.  What typically occurred in occupied areas was that a faction would seize the factories and run them for its own benefit, or it would threaten to do so unless the management made a “loan” to the revolutionaries.  In April 1914 the forces of Pablo González took control of Monterrey.  For most of the year González occupied and ran the Cervecería Cuauhtémoc, where he continued to employ the brewery’s workforce.  By November the company’s stocks of raw materials had been used up. 

At that point, having extracted what he could from the operation, González returned the factory, apparently undamaged, to its owners.   

The upshot is that while production dropped during periods of generalized violence — 1914-19 and to a lesser extent 1922-24 — the breweries themselves pretty much came through intact.  In fact, beer was such a good market that the Cervecería Modelo started up in 1925, while the country was still rather unstable. 

So what about the banks?  Well, the banks didn’t fare that well during the civil wars.  They were where the money was. Governments and revolutionary factions plundered their cash reserves, forced them to make loans, and engaged in the unrestricted printing of currency.  It did not do good things for the banking system, which by 1916 ended up in government receivership — although in many cases the Carranza government wound up with little more than a Mexico City branch office and some papers.  On the other hand, the governments that came to power after 1916, however, regardless of their stated ideologies, all recognized that they needed a source of credit in order to restore political order.  

    

It took a while to put humpty-dumpty back together again.  A private banking system came back to life, but a December 1920 banking panic caused most of them to fail.  In 1921, President Álvaro Obregón announced that twelve banks would be returned to their owners; only five were able to reopen.  The government tried to regain access to foreign capital markets by restarting payments on the foreign debt, but the civil war triggered by Treasury Secretary Adolfo de la Huerta’s revolt put paid to that.  On the same day the revolt began, Banamex (the largest private bank, and one that existed before the Revolution) transferred $13.5 million to the International Bankers Committee.   The government simultaneously borrowed $5 million from the Huasteca Petroleum Company against future oil tax liabilities, with the intention of using the funds to make additional payments on the foreign debt.   Instead, the funds went to fight De la Huerta.  The diversion of funds meant that the government had to borrow from Banamex to pay foreign creditors ... on July 2nd, 1924, the government gave up and defaulted once again, this time for good.

In other words, this was not a healthy banking system.  A snapshot in 1917 would have showed it as pretty much dead ... but no matter how you put it, five banks did survive (including the two largest) and the system schlumped along despite the occasional civil war.  The government needed the bankers too much to kill the system dead.  In fact, it went out of its way to reactivate bank lending in 1925.

So how did they reactivate the banking system in 1925?  That’s another story.  The moral of this story is that Doug is right:  banks and breweries can survive even extreme levels of violence. 

The Chávez boom

 Back in the comments on the post about Venezuela’s electricity crisis, Scott expressed surprise at the claim that the Venezuelan economy has grown like gangbusters since 2002.  “Has growth really been that dramatic?” he asked.  “It doesn't square with a lot of what you read about Venezuela.” 

In point of fact, growth really has been that dramatic.  Last year, there was a back-and-forth between Francisco Rodríguez and Mark Weisbrot about the accomplishments of the Bolivarian Revolution.  There was an slight pin-angel quality to their dispute.  Rodríguez’s data on spending shares and literacy changes were fairly incontrovertible. Their dispute over inequality hinged over the treatment of zero-income households, but even if you throw them out of the sample you get generally stagnant inequality, which is less than revolutionary. 

Similarly, the two argued about the extent of poverty reduction, but Rodríguez’s point was that the Bolivarian Republic had done a lousy job of reducing poverty given the extent of economic growth, not that it had failed to reduce poverty.  In short, the dispute hinged on whether the country deserved a mulligan for the oil boom.   Rodríguez wanted to grade the government on a curve, Weisbrot didn’t. 

So how big was the oil boom?  Big.  Real GDP doubled between its nadir in the first quarter of 2003 (when the national oil company tried to overthrow the government) and the second quarter of 2008.  From a base of 100 in 2003, real private consumption leapt to 115 in 2004, 133 in ’05, 157 in ’06, 187 in ’07, and 202 in 2008.  Even the inequality measures that include zero-income households remained basically unchanged over this period (with a weird spike in 2005), indicating that the consumption boom was pretty well spread.  Poverty dropped from a peak of 55% in the second half of 2003 to 26% by the beginning of 2008; extreme poverty fell from 25% to 7% over the same period.  To be fair, the reduction in 2007 is really hard to measure, since the poverty basket uses official prices, and most staples have been rationed at the official price since then.  (Although Mickey-D’s has not been affected, as best as anyone can tell me.  Ditto most private markets.  Weird sort of socialism, that.  But I digress.)

There is some evidence that the boom bypassed the poorest of the poor:  The percentage of underweight babies born in Venezuela, for example, increased from 8.4 percent to 9.1 percent between 1999 and 2006. During the same period, the percentage of households without access to running water rose from 7.2 percent to 9.4 percent, and the percentage of families living in dwellings with earthen floors multiplied almost threefold, from 2.5 percent to 6.8 percent.  On the other side of the ledger, infant mortality dropped from 21.4 per 1000 live births in 1998 to 18.5 in 2003 and 14.2 in 2006, while the number of primary care physicians in the public sector rose twelvefold.  That said, the above is a red herring for the purposes of this post:  the point is not that the Bolivarian Revolution has been less than revolutionary; the point is that the country underwent a huge boom in 2002-08, and that boom trickled down to the bulk of the population, if not necessarily the poorest. 

The boom certainly translated into jobs.  Formal-sector employment grew 42% from 4.53 million in 2003 to 6.45 million in 2008; informal employment stayed basically unchanged, drifting up from 4.99 million to 5.02 million.  Public employment outpaced private, growing from 11.6% of total employment (formal and informal) to 16.6%, but since my readers are smarter than Michael Steele, they recognize that a job is in fact a job.

So, jobs, incomes, consumption, all way up.  Not as far up as in places that handled the hydrocarbon boom better, like Alberta or Trinidad or Bahrain, but still way up.  Which leaves me curious.  Scott, what did you read that left you with a different impression of economic conditions in Venezuela over the last half-decade?

The fall of the Soviet empire

   Kevin Drum repeats a claim that I’ve heard elsewhere:

“By 1989, the Soviet Union was so far in hock to western banks that they basically had Gorbachev by the balls.  He couldn't afford a repeat of 1956 or 1968, and when that became clear the jig was up.  Hungary went first, Berlin followed, and within a few months the Iron Curtain was on the ash heap of history.  In the end, it was hard currency, not ICBMs, that brought down the empire.”

 
I don’t understand this claim.  There are two premises behind it which do not make sense to me.  The first is that Western creditors would care if the Soviet Union cracked down in eastern Europe.  Why would they?  The only reason that I can think of would be if they believed that a crackdown made it more likely that Warsaw Pact regimes would default on their debts.  But why would a Soviet crackdown make default more likely? 

In fact, there seems to be some circular reasoning involved regarding Soviet debt.  The USSR had a reasonable debt burden until April 1989, when perestroika allowed Soviet enterprises to borrow in hard currency.  As a result, debt exploded.  But Moscow stopped taking Budapest’s calls in March!  The timing is off.

In 1990, the collapse of Comecon led to a collapse of Soviet trade with eastern Europe, worsening the problem.  Except ... if the tanks had rolled, then Comecon would not have collapsed.  See here and here for contemporary discussions of the debt problem. 

Nor do I buy the possibility that creditors would have moral qualms.  They didn’t care about Georgia last year; would they really have cared about Hungary in 1989? 

But let us grant that creditors might have been upset at a crackdown.  Violence in Eastern Europe might have been unsettling, I can imagine that.  Only that brings us to the second premise of the “bankers killed Communism” argument, which is that western creditors held some sort of special leverage over the Soviet Union. 

Considering the frequency of sovereign default, and the willingness to restart lending afterwards, I have trouble understanding what exactly that leverage would be.  Say the Warsaw Pact countries defaulted in 1990.  Why would regimes capable of using tanks against their own people have found the consequences so unpalatable?  Perhaps they would fear economic sanctions ... but that gets us to a version of an argument in which Western governments killed Communism by their implied economic threats, not one in which bankers did it.

Truth be told, I tend to think that neither creditors nor Western governments had all that much to do with the fall of the Wall.  (I did not always believe the latter, as some readers of this blog can attest.)  But I could easily be wrong.  I have, after all, heard the “bankers did it” story elsewhere. Is there a more sophisticated version that addresses my concerns?

Health care reform, House version

  What’s in the health care reform bill?  It isn’t easy to get a concise version.  But my brother wants one.  So I spent my morning trying to put one together.  Here it is.  I am not 100% sure that all of this is correct, so I promise to update the body of the post should anyone bring any mistakes to my attention.

Subsidies:

The bill increases the limit for Medicaid to 150% of poverty, or $33,075 for a family of four. Right now the limit is at the poverty line (with some exceptions) or $22,050 for a family of four.

Families earning up to 400% of poverty ($88,200) will have their premiums and out-of-pocket expenses capped.  The cap starts at 3% of income for non-Medicaid-eligible families and rises to 10% for families earning between $77,175 and $88,200. 

Medicare will cover all prescriptions, eliminating the “donut hole.”  Currently annual drug expenses are covered up to $2,700, and coverage kicks in again at $6,100, but Medicare recipients are responsible for expenses in-between. Medicare will be allowed to negotiate prescription drug costs. 

Mandates:

Employers must offer insurance or pay a fee equal to a percentage of their payroll.  Businesses with less than $500,000 in payroll are exempt. The fee will start at 2% of marginal payroll and rise to 8% for firms with more than $1.5 million in wages. 

The penalty for failing to purchase insurance is set at 2.5% of income, up to a $750 per-person cap, or $3,000 for a family of four. 

Insurance reform:

Insurers will be prohibited from discriminating on the basis of pre-existing conditions.  Annual out-of-pocket costs will be capped on and lifetime benefit limits will be banned.  Age-related premium increases will be capped at 200%. 

All plans will have to meet a minimum “essential benefits” package.

A national Health Insurance Exchange will be created, which will provide a centralized market in which businesses with less than 100 employees and individuals can purchase coverage.  No plans traded on the exchange will be allowed to cover abortion.  Only legal residents of the United States will be allowed to purchase plans on the exchange.

The anti-trust exemption for insurance companies is eliminated.

A non-profit public plan will be available to anyone unable to purchase insurance on the exchanges or through their employer.

Revenue and cost reduction:

A 5.4% surtax will be imposed on incomes over $500,000 for single taxpayers, and $1 million for married couples. The fees mentioned under “mandates” will also generate revenue. 

The government currently reimburses private plans that supplement Medicare (called Medicare advantage) by about 14% (or $1,100 per recipient) compared to what it costs to insure the same services directly.  That difference will be eliminated. 

The plan is expected to generate a surplus through 2023.  (The annual surplus does not decline over time; rather, CBO projections end.)

Editorializing below the fold.

Regulation

  Doug Muir has occasionally discussed various conversational markers that indicate whether the person you are talking to is serious.  If he is up for it, I’d love to compile them and post a list.  He has suggested, among other things, the use of the word “socialism” to describe public policies that don’t actually involve nationalizing private companies and the placement of the phrase “international community” inside scare quotes. 

One vague marker of unseriousness is the claim that regulation is useless, because all regulations can be avoided.  As a specific warning, it is useful to keep in mind that regulations can be subverted.  As a general principle, it is deeply unserious.  I recently had a conversation in Baltimore, for example, in which somebody claimed that the only way one could regulate modern financial markets was a ban computers.  This showed ... well, I’m not sure what it showed.  But it wasn’t serious. 

(To be fair, the person who said it did not show the expected hypocrisy that normally flows from those who make such a claim, in which regulations seem to be simultaneously useless and destructive.)

That said, modern regulations often produce ironic effects.  As sympathetic as I am to what the government was attempting to do, this story actually made me chuckle.  Of course, a grump might say that the purpose of the regulations was not to limit bankers’ pay but to better align incentives, and such a grump would be correct.  An even grumpier grump might say that paying bankers’ in equity doesn't solve the underlying moral hazard, and such a grumpier grump would also be correct.  Finally, the most grumpy of grumps might say that if you’re gonna limit bankers’ pay, then you might as well go ahead and limit bankers’ pay and stop all this futzling around with compensation schemes.  And that grump would also be correct.

But still.  Even for a lib’rul, the story is pretty funny.  No?

Is the madre patria scamming the Républica Bolivariana? Probably not.

  Over at Caracas Chronicles, they’re perplexed by a deal just signed to build a combined-cycle gas turbine power plant in Cumaná, Venezuela.  The Spanish contractors, Iberdrola and Elecnor, want to charge €1.45 billion to build two 500-MW plants.  The cronologistas caraqueños have done some digging, and found that €1,450 per megawatt is a lot to charge for a CCGT installation.  The closest was a €1,225/megawatt project in Algeria.  The highest that I knew of before they started investigating was a UAE project that came in around €890. 

They conclude corruption.  Are they correct?

Well … maybe.  But to be fair, I suspect not.

Venezuela, you see, maintains exchange controls.  Official transactions need to be made at the approved exchange rate.  On the one hand, this shouldn’t bother the contractors all that much:  they’re getting paid in euros, and the price of imported equipment is the price of imported equipment regardless of the denomination.  The problem, however, is that the relative price of all of their domestically-sourced inputs will be much higher.

Think of it this way.  Imagine you imported €1000 worth of machinery to Venezuela in 2004, after paying Venezuelan tariffs (around 20 percent) and taxes.  In that same year, a manufacturing worker cost €7,388 to employ for a year at the official exchange rate.  You could buy a worker-year for 7 units of machinery.  By the middle of 2009, after several years of high inflation in Venezuela, that same worker cost €12,720 to employ — a worker-year now cost you the equivalent of 13 units of machinery.  Unless you figured out a way to use half as much labor as you did in 2004, your labor costs (in euros) have just doubled.  (All data comes from the Banco Central de Venezuela.)

In fact, the same problem applies for all domestic inputs.  According to the Venezuela central bank, the bolívar cost of construction materials (including taxes) rose 230% between 2004 and the middle of 2009, while the official exchange rate remained the same.  That’s going to further drive up your costs.  

If it turns out that the Bolivarian Republic has agreed to let the contractors use the parallel exchange rate to purchase bolívares, then this analysis goes out the window.  But if the contractors have to use the same exchange rate as everyone else when buying local inputs, then the price that they are charging for the plant seems entirely reasonable ... even without taking into account the political and economic risk.  (Will PDVSA pay everything up-front?  Will inflation in Venezuela accelerate?  Will there be labor trouble?)   

In other words, unless the contract exempts the Spanish companies from exchange controls, then I doubt that there is much corruption to be seen in this case.  Bad economic management yes, corruption no.   

Does anyone have more details about the contracts?

On the cost of financial crises

  In theory, it is very possible to be sanguine about the cost of financial collapses, whether triggered by irresponsible private risk-taking or irresponsible public borrowing.  A smart reader points out why:  “Fiscal problems are basically problems of social organization … putting the last point another way, bankruptcy does not destroy actual physical assets, land or human capital. It does damage trust, as the part of the social fabric embodied in the debts so vacated is shredded. But it leaves the existing productive assets intact, and trust can return quite quickly.”

This is a sensible theoretical prediction.  The problem is that there is evidence from the IMF that strongly suggest that the prediction is incorrect.  Recessions associated with financial collapses appear to permanently lower the trend rate of growth; the lost output is not regained even ten years later.  Samuel Brittan has more.

Since nothing is blown up in a recession, the suggestion is that the psychological effects can be long-lasting.  Economies don't invest more once the recession is over to make up for lost time. 

Of course, there are counterexamples:  Mexico in 1994, and Argentina returned to rapid growth after 2002.  In addition, the economy could probably do fine with a long-term inflation rate around 4 percent, which could do a lot to reduce past debt burdens as long as future borrowing stayed under control.  So perhaps the United States need not worry about our long-term fiscal problems.

Never predict, especially about the future.

Yglesias oversimplifies on the euro

  Matt Yglesias writes, “If anything euro membership seems harmful in the present circumstances. A fully independent small open economy like Ireland would have seen a swift and massive devaluation of its currency which would have reduced the need for a rise in unemployment.”

 
Unpack that statement.  What would have happened to a country like Ireland last year on a floating exchange rate?  A massive plunge in the currency.  What would that do?

1. Wreck the balance sheet of anyone who had borrowed in a foreign currency.
2. Caused large-scale bank failures.  (See #1 above.)
3. Fed inflationary fires.  Not always a bad thing, of course, but disruptive, and worse the smaller the economy.
4. Reduced real wages.  (See #3 above.)

Those things are not good.  What would be good?  More competitive exports.  Problem is, the recent crisis occured in the context of a worldwide recession and a worldwide crash in the demand for manufactured goods.  Sure, a large-scale depreciation would affect the demand for Irish exports on the margin, but there is not a whole lot of reason to believe that said increase would be large.  In fact, given as Irish firms aimed at the domestic market use lots of imported inputs, it isn't clear that the negative effect on those firms might outweigh the positive effect on more export-oriented ones.   

This is not to claim that I know whether the euro was good or bad for Ireland.  Nor is it to claim that joining a larger monetary union is everywhere a good thing for peripheral small economies.  It is to  claim that Matt really doesn't have any grounds to make the strong statement in the converse.

Too bad Edward Hugh can't be bothered to come around here ... hint hint.

Public pension systems

  A few posts back, Megan McArdle took issue with my taking issue over her depiction of the social security reform debate of 2005.  (Follow that?)  Our differences fell into two boxes.  The first is whether the Bush Administration was willing to countenance payroll tax hikes.  She says that Andrew Biggs claims that they were.  On balance, I think she was right.  I found an L.A. Times piece from February 18, 2005, that claimed that the President “said earlier this week that he would not rule out paying those transition costs by raising the current wage cap of $90,000.”   The actual quote from President Bush is a little vaguer: “The one thing I'm not open-minded about is raising the payroll-tax rate, and all the other issues are on the table, and that's important for people to know.”  That said, the papers all seemed to think it was a genuine offer. 

In short, the Bush Administration showed some sign that it was willing to countenance a tax hike to pay for transition costs.  McArdle right, Maurer wrong.  That latter bit is sadly not uncommon.  I think Megan was too busy to point me to this post, which is where I think she got her claim from, but I understand.  She has a demanding job.  I do have to say, however, that Biggs’ account comes entirely from the same secondary sources that I’ve linked to here. 

The other debate was more abstruse.  “Carve-outs” and “add-ons” and other such wonkery.  The problem with such conservations is that all too often the conversators forget what exactly it is that public pensions systems do.   When you drill down into the issue, the difference between a pay-as-you-go (e.g., “paygo”) systems, like Social Security, and a privatized forced-saving scheme, like they have in Chile, becomes much less than it seems at first glance. 

So what is it that public pension systems actually do?

Long wonkish discussion below the fold.

Cost overruns in the oil sands

  As part of writing a book about the Panama Canal, Carlos and I had to do a lot of research into cost overruns on big infrastructure projects.  We found the usual horror stories.  The Panama Canal went over-budget by a factor of 2.0.  BART exceeded projections by 1.6, and the Washington Metro hit 1.8.  Miami’s Metrorail jumped the limit by 2.1, the Big Dig ran over by 2.9, and the Brooklyn-Queen Expressway beat its budget by an astonishing 5.1. 

Sounds bad, right?  And in the case of the BQE, it is bad.  But you haven't seen overruns until you've seen the private sector try build multi-billion dollar stuff in the Albertan oil sands.  Suncor's Millenium project ran over by 1.6, about the same as BART.  Shell's expansion of the Muskeg River mine has hit 2.2, and counting.  In 2008, Syncrude's Stage 3 expansion passed 2.4.  The Canadian Association of Petroleum Producers estimates that capital costs for ongoing projects are going to average as much as 2.7 times the 2005 projections. 

Not quite the Big Dig, but making the Panama Canal look good.  I have some thoughts as to why this happens, but before I reveal them, what do you think?

McArdle redefines centrism

  I am on record as liking Ms. McArdle's writing.  But this post is really stupid.  President Bush proposed a carve-out in social security with no way to pay for transition costs except via benefit cuts.  That is not a compromise.  It is also not true that the returns from a portfolio linked to the profits of publicly-traded companies is better than the returns from a portfolio linked to the general level of wages unless you believe that markets are irrational.  Had the GOP put forward an “add-on” proposal, which would have in essence raised payroll taxes to fund a tax-free system of private retirement accounts, it would have attracted a lot of Democratic support.  Even a voluntary add-on, in effect a giant investment tax-break, would have attracted such support.  But Bush drew strong redlines and held on to them for a very long time.  Democratic politicians were given no incentives to compromise, even though many (like Joe Lieberman) would have liked to.

It is entirely legitimate to favor a privatized pension system.  If the Bush proposal had materialized, the Republic would not have fallen.  But here McArdle confuses her own policy preference with the facts about a policy debate.  The truth is that President Bush put forward a near-maximalist proposal, the equivalent of Medicare-for-all, and refused to put forward a way to pay for it without cutting the system's payout formulas.  The fact that McArdle would prefer an even more maximalist proposal does not change that.  Nor does it change the fact that Social Security reform never even made it out of committee, let alone face a filibuster. 

I am, therefore, a bit puzzled by the post.  She seems to be looking for equivalence where there is none.  Strange, for a generally nonpartisan writer.

The value of hairshirts

  You ever have a thought that you were having trouble formalizing?  I’m there, and not just because I just got through spinning my wife around and yelling, “Jeter!  Jeter!”  Rather, it’s because I’m trying to express an argument that I think is wrong. 

Last week, I tried to understand why the Mexican federal government was busy cutting spending in the middle of a depression.  GDP is down 10 percent -- that’s a horrendous number, in the full depression zone, far worse than 1995.  Why would you cut spending in the middle of such a collapse, especially when the markets don't seem to be worried about the fiscal situation?  It has gone so far to prompt Mexican Ph.D. students at Ivy League universities to start wondering if the Labor Party has a point when it runs ads saying that things would have better under AMLO.   

Some smart observers whom I respect, however, support the government cuts.  Gancho draws attention to a column by Macario Schettino, an economic historian.  Schettino argues that Mexico's fiscal problem isn’t just a short-term problem caused by the Great Recession; rather, it’s a sign of long-term trouble, namely the decline of the country’s oil revenues:

“To respond to that we have only two options. One is to do the same as always, which we know how to do: fake change and place the country in debt. It’s a direct and, unlike on other occasions, short path off the cliff. ... The other path is more complicated. It implies recognizing the secular failure of a political project and making decisions of the same size as the crisis: historic.” 

But why can’t you have it both ways?  Run up the debt now, when doing so will prevent unnecessary suffering, and raise non-oil taxes later.  There isn’t any economic problem with that.  What I think Schettino fears is a political problem:  without economic pain now and a very hard budget constraint, the Mexican political system won’t make the tough decisions until it is too late. 

Of course, there is a slight contradiction in the sense that Mexico’s hard budget constraint is self-imposed.  Right now, Mexico still has oil revenues (albeit slowly declining) and the markets remain willing to lend.  Nothing is forcing (or even incentivizing) the government to refrain from borrowing more.  To use a strained analogy, Schettino seems to view the Mexican political system as a recovering drug addict who just got into a serious accident.  Painkillers would speed recovery and ease suffering, but he fears that their use could provoke a relapse.  The argument is a stronger version of the suggestions some of my colleagues (notably David Moss and Aldo Musacchio) made against Argentina’s debt repudiation back in 2005:  repudiation might make economic sense, but freedom from debt will also give the Argentine government freedom from the discipline imposed by the need to meet repayments.  That could open the door to damaging irresponsibility later.   In the Argentine case, Moss and Musacchio seem to have been more right than I was, as shown by the Argentine government’s subsequent faking of inflation statistics and general mismanagement under President Fernández.  

While the Argentine example is a strong one, I am not sure of the general principle.  Is a self-imposed constraint really a constraint?  Is the Mexican political system really so sclerotic that it needs a crisis now to avoid a crisis later?  And even if it is, why not wait for that hypothetical future crisis to arrive instead of plunging the country into a deeper depression now?  None of this is to say that I think the Schettino argument is specious.  It isn’t ... but I still don’t think it’s a good reason to cut government spending right now.   

But I’ve been wrong before. Does Mexico really need to impose pain on itself in order to reform?  Or is that just a good way to lose elections?  Thoughts welcome.

Una locura económica del gobierno mexicano

  Mexico should be in relatively good shape to fight the Great Recession.  The budget was basically balanced going in and bond traders have treated the country more favorably than the rest of Latin America.  The combination of NAFTA membership, the special relationship with the U.S., and the proven conservatism of the Mexican electorate do, in theory, allow the Mexican government to engage in fiscal pump-priming without confronting the dilemmas of emerging market Keynesianism.  In fact, the country’s sovereign bond spreads have returned to normal.  The government could stand to run a deficit much larger than 3.5 percent of GDP.   

Better still, as regards stimulus, Mexico has a bajillion shovel-ready projects.  The construction of the past five years has done an incredible amount to ease congestion in the D.F., but it still isn’t done.  Frex, while the overpasses built over the last five years are great, Circuito Interior still isn’t a freeway. 

The Metrobús has made my visits to the D.F. much much easier, now that it runs all the way south along Insurgentes, but there are many routes to be added.  Periférico’s second deck is a marvel, but it doesn’t go north of Viaducto.  The metro is awesome, but construction on Line 12 is only now getting underway.  Plus, well, the water supply needs work. 

And that’s just the capital!  There are also port and highway projects in Michoacán and Mexico State, the expansion of the Toluca airport, and umpty-scrump other things all laid out and ready to be built.  Not to mention the fact that one could and I would call improving the training of the Mexican military and national police an investment; ditto the expenditures needed for the nation’s courts and jails. 

Which makes this insane:

Translation:  “Cuts hit infrastructure:  Communications and Transport will take $12 billion in reduction, obliging contract cancellations.”  (Hit tip:  Gancho.) 

It seems crazy.  First, the cuts are only 0.7% of the country’s (shrinking) GDP.  Second, Mexico needs infrastructure, and now is exactly the right time to build it, when costs are low.  Third, there is no evidence that investors are panicking.  Fourth, Mexico is not the United States:  AFAIK, there is no big constituency for Hooverism and hairshirt economics for it’s own sake.  So the politics don’t figure either, at least AFAICT. 

In other words, WTF?  I do not understand what the Calderón Administration is trying to accomplish.  They should be expanding their stimulus program, not cutting it.  If markets panic, then they can retrench, but right now they seem to trying to get out ahead of some sort of investor concern that just isn’t materializing. 

Explanations?  Or have I got it wrong?

More high-speed rail in Brazil

  More on the Philippines will be forthcoming, but first we have news on Brazil's high-speed rail project, aka the TAV.  It looks like it will probably go ahead, with the first tenders out next month.  The route will connect Rio and Campinas via São Paulo, passing through both of the big cities' international airports.  (I don't know how the TAV will fit in with the planned express train between Guarulhos Airport and downtown S.P.)  The construction cost is estimated at R$34.6 billion, and operating costs are expected to be around R$214,000 per mile, with total running costs around R$1.1 million per mile. 

Currently around 7.3 million people travel between the two cities every year, 60% of them by air.  The planners expect that the TAV will immediately capture 3.5 million Rio-S.P. passengers.  By 2014, they expect that number to rise to 6.4 million, plus an additional 11.8 million travelling intermediate routes. 

Do those numbers make sense?  Let's ignore the S.P.-Campinas portion; if some part of the project is not going to get built, it'll probably be that one.  We have an estimated construction cost of R$27.9 billion.  Brazilian government bonds yield about 13% in local currency.  Inflation is running around 5%, so let's say a quick-and-very-dirty capex of R$2.2 billion.  Add to that an operating cost around R$0.3 billion per year.  So, total costs of R$2.5 billion per year, divided by 18.2 million passengers:  R$138 per passenger ... much less than the R$400 that the plane will cost you.  (On average, of course; you can get deals if you're lucky, but the flying experience in Brazil makes the U.S. feel smooth and comfy.)

For our American readers, R$138 is about $72; not an unreasonable number.  It is also probably an overestimate, considering as our capex estimate is unrealistically high and the Brazilians' own running-cost numbers are off the charts in international terms. The unanswered question, in my mind, is whether the system will attract 12 million people to take those regional trips. 

Even so, the numbers on this project look sensible, especially given the environmental benefits from getting people out of their cars and the economic benefits of freeing up space at the region's big airports.  And then there is the value of saved time.  This is a project that seems to work as a commercial proposition.  The positive externalities are gravy.  Unlike the Argentine tren a ninguna parte, the Brazilian TAV actually travels between two large and interconnected cities in a rapidly growing urban corridor. 

I am a passenger rail skeptic, more so in countries like Brazil, which desperately need things like cargo trains and school buildings.  But this doesn't seem to be just a World Cup prestige project (although there is that) but a fairly smart expenditure of public money. 

Maybe the future really will get to Brazil.  A bit late, but better than never.

The economic history blog

  Some interesting stuff, some boring stuff, according to taste, but all good stuff.  Found here.

How Canada works

  Want to know more?  I'm not sure that everything in the series is correct, but it's a good place to start learning more about how the country formerly known as a “Dominion” regulates its economy.

Speaking of which, y'all really do need a name.  Just plain “Canada,” well, it lacks dignity.  Get a “Commonwealth” up in here, or maybe a “Federation.”  Something, people. 

National health care, updated

  Megan McArdle, whom I respect, linked to a piece by Glenn Reynolds that basically says that his wife and father would be dead while his daughter and mother would have a much-impaired quality of life under socialized medicine.

But I have a question.  Two, actually.

(1)  The treatments for Reynolds' mother (hip replacement) and father (radioactive prostate cancer implants) were developed for a patient pool that is mostly subject to Medicare.  Which is socialized medicine by most definitions.  Why doesn't that fact show that the argument is fallacious?

(2)  If other countries generally force healthy young women to die or live impaired lives, why doesn't that show up in any of the comparative quality-of-life studies?

A third, fourth, and fifth might be:  Does Ms. McArdle really believe this argument?  If so, why?  And what does it have to do with any of the actual health care reforms that are on the table?

Meanwhile, Matt Yglesias points out why I have trouble staying friends with doctrinnaire libertarians.  This one's for you, Guy.

UPDATE:  Matt Miller has an interesting column in today's Financial Times.  He points out that save for the public option, the current reform plan essentially extends coverage using a basic template designed by Mitt Romney in Massachusetts.  In addition, one of the financing plans on the table (not my preferred one, I must admit, nor the President's) was basically proposed by John McCain.  Finally, the eye-popping cost is propaganda, caused by people's emotional reaction to the t-word; the right way to think about the cost is that it is 0.5% of GDP or 3% of total healthcare spending.  In short, the way to a compromise that should attract lots of Republican votes is obvious.

But I will add that since we aren't going to get any Republican votes, I will be very annoyed at my party and President should we get a bill that does not include a public option and that is not financed by a surtax on high earners like, uh ... really? ... my wife and me.

Great debate attempt #5

  Childless households making $200,000 a year in expensive Northeastern cities are undertaxed, and the acquaintance mentioned here gets no sympathy from me.  He is getting all bent out of shape about a tax rise of a couple hundred dollars:  4 percent of his income above $200,000.  Maybe.  And I lived in New York, I have friends living in New York, and no, it isn't that much more incomprehensibly expensive than Boston. 

My wife and I are in that category.  We are undertaxed. 

Sometimes the attitudes of my fellow citizens can be very depressing.

Great debate attempt #4: Some behavior really is random

  A few years ago, me and a friend scribbled down something we called “A pure theory of relationships,” based on a simple game-theory-based hostage model that we developed for this book. It was a joke, not meant for prime time or to be taken seriously.

And now I find that people are in fact using their time to seriously develop such models.  Me, I agree with James Kwak.  People are complicated, often driven by desires they don't understand, and small events can lead to behavior that is effectively random.  There are human situations in which people with the exact same set of outwardly observable characteristics will behave completely differently, and human situations in which a small unobservable change will cause the exact same person to behave entirely out of character.  Then add in the fact that some behavior (like, say, smoking) is addictive for some people but not for others, and exposure to the addictive trigger by the susceptible is a stochastic process. Trying to come up with a reduced-form model to predict such behavior strikes me as nuts.  Sure, you can come up with some sort of probalistic model for large populations, which is useful ... but not what the new modellers are trying to accomplish.

But what do I know? 

How can financial speculation affect oil prices?

  The Obama Administration just announced that they may limit the ability of financial companies to engage in speculative trading in oil futures.  The reason is the recent run-up in oil prices.  I don’thave a problem with the idea.  After all, I am a conservative of a sort, in the sense that I like to limit the animal spirits of those crazy market types on principle. 

But still, I don’t understand the point.  The reason why I don’t understand the point is that I don't understand how futures trading can drive up the spot price.  That doesn't mean that it can’t; that just means I don’t understand how it might in the absence of a rise in actual oil inventories. 

What’s a futures contract?  Simply put, it’s an agreement to sell a given quantity of oil at a given price at a given date in the future.  So let’s say you and I strike up a contract that says that I will sell a barrel of oil to you at $100 in a year.  How do I make good on that contract?  One way is to run out into the market, buy a barrel of oil, and sit on it.  That will drive up the price of oil, got it, very clear.  When a year rolls around, I sell you that barrel for $100. 

A second way is to wait around until the contract is due, buy oil at whatever the market price happens to be, and then sell it to you for $100.  I do not understand how doing so could possibly drive up the price of oil.  I can vaguely sort of see how it might increase volatility:  trading on the futures market presumably reveals information (if only information about the neuroses of futures traders) and that information will be used by traders on the spot market.  When they use that new information, prices will move.  More information revelation, more price volatility. 

But seriously, people aren't worried about short-term volatility.  They'’e worried about big run ups and sudden falls.  I don't see how you can blame the speculators for those, absent big swings in inventories. 

In fact, inventory changes in the oil market tend to run against price swings.  During the recent price plunge, unsold oil piled up in stockpiles and supertankers all over the planet.  Those stockpilers were going long on oil, but in the context of falling prices.  Now that the price has risen, those stockpiles are shrinking ... and some analysts (not entirely coherently) blame the price rise on the inventory fall.

Am I missing something, or is this whole speculation story nonsensical?

The new math

  I have a friend who is a professor of economics at Oxford. One of his students appears to have discovered an astounding new property of natural logs on an exam. It revolutionizes our understanding of, well, everything. 

Why costs rise

  Why do so many big projects regularly come in above budget?  Corruption?  Stupidity?  Or something else?  Well, I vote for “something else.”  Let's consider the French nuclear reactor project at Flamanville, which I had the honor to visit.

EDF initially costed the reactor in 2005 at €3.3 billion.  It is now estimated to cost €4.0 billion.  What happened?  Well, according to EDF, costs rose by €250 million due to inflation.  Special escalator clauses tied to the price of particular commodities (like steel) caused another €150 million.  Finally, an additional €300 million came from “évolutions techniques et réglementaires,” a fancy way of saying, “We learned on the job that some things are a little more complicated than we thought, but mostly the regulator kept changing the goal posts.” 

Considering that the head of L’Autorité de sûreté nucléaire, André-Claude Lacoste, actually said, “We wanted to show an example,” in regards to the construction of the first new reactor in 20 years, I find that last quite believable. 

More Doug in Senegal, and why you shouldn’t worry about the deficit

  It seems as though I start a lot of posts with the words “it seems.”  I will try to rectify this in the future. 

Ditto, “so,” a verbal tic I blame on my unbridled admiration for Doug Muir, who has, by the way, written a little more about Senegal.  He tells us about the Mourides, a powerful Muslim sect of which I am embarrassed to say I knew nothing.  He bemoans the crappy state of Dakar’s airport, and receives in turn a useful warning from Bernard.  Finally, he wraps his trip with a discussion of W, railroads, France, birds, the CFA franc (e.g., France yet again, although he doesn’t say so), the weather, the expats, and the clothes.  I am pretending not to be annoyed at not getting a shout-out on the France tip, which means that pique is not the reason why I am not explaining the story of the Senegalese railroads under French colonial rule. 

Which brings us to the U.S. federal deficit.  You hear a lot of worring about how interest rates are going to rise from all this wild borrowing.  Where will the money come from?  We are doomed, doomed!!  No links, because I actually like and respect many of the people doing the worrying.  But they need not.

I just had a colleague in my office with the latest BEA numbers, worrying about just that.   Where will the money come from?  So I pulled out a spreadsheet and showed him.  In the first quarter of 2009, annualized personal savings came to $620 billion, or 5.7% of personal income.  Total savings (again, annualized) came to $1,273 billion, or 9.1% of GDP. 

Personal savings is only going up.  If we assume that nominal GDP growth is flat in 2010 (meaning, most likely, that real GDP keeps falling), a rise in the personal savings rate to 10% will produce $468 billion of additional savings.  Retained earning are also likely to rise, say from 4.6% to 5.0% of GDP.  That’s another $47 billion.  Total of $515 billion in new savings ... just as the federal deficit is projected to fall by $393 billion.  Plenty of wiggle room should private investment rise (one can hope) or the current account deficit fall (which seems likely).  A rise in real interest rates does not seem like something we need to worry about.

Rather, what we need to worry about is a continuing shortfall in demand.  What if Americans don’t substitute domestic consumption for imports?  Final demand will fall.  What if domestic investment doesn’t quickly rebound?  (It was $2 trillion in 2008, a full 25% higher than in the beginning of 2009.)  Final demand will fall.  In that situation, we might be wishing for another round of stimulus, rather than worrying about the deficit. 

UPDATE:  The May numbers just came out from the BEA.  Looks like the personal savings rate hit 6.9% that month.  We are on track to exceed 10 percent in 2009, and in my opinion the country will permanently return to 1970s savings levels.  That said, past performance does not always predict future results.  Any counterarguments?

Growth is good

  I temporarily moved to Santiago in late 1991.  For the first few months, I had a room in a house owned by an elderly couple way out in upscale suburb called Las Condes, beyond the end of the metro.  (There were only two metro lines.)  Back then, it was a neighborhood of single and double-family homes.  Apoquindo Avenue was essentially a suburban strip, densely built-up by American standards, with the occasional high-rise and pedestrian-friendly sidewalks, but a suburban strip nonetheless.

I wouldn't've recognized the neighborhood (since I couldn't remember the name of the damned cross-street to save my life) if it hadn't been for the minor miracle that the Pizza Hut on the corner of Apoquindo and Capitanía was still there.  But I remembered the house was on Nevería, a block from the street that hit Apoquindo at the Pizza Hut, and with the cross-street I could locate it.  So I went looking.  And what did I find?  Big apartment buildings! 

Could that kind of change happen in America?  I have my doubts.  In my last post, I briefly discussed the high cost of American zoning laws.  Such laws prevent wholescale changes in land use, causing cities to sprawl more than they would have otherwise.  In other words, they lock in the existing pattern of land use, preventing the kind of wholescale change that in past decades gave us such delights as the boulevards of Queens and Wilshire, where high-rise corridors sprouted along formerly suburban strips.  Today, I don't know if that happens at all, with the exception of a few downtown districts.  When densification pressure starts in an American neighborhood characterized by single-family homes, zoning changes usually squash it, the way New York City has moved to protect the pristine environment of Queens from an onslaught of apartments.  Let alone, say, the Bay Area.  Imagine Palo Alto filled with high-rises and three times the population.

And no, Houston is not an exception.

Sometimes, libertarians have a point

  The New York Times today published a story on how foreclosures in New England are disproportionately hitting old triple-deckers.  “Triple-deckers” are squat three-story buildings common to the region (pictured below).  Most of them are condominiums these days, but many are owned by the resident of one of the units, who rents out the other two, or by absentee landlords. 

Unfortunately, the author didn't limit herself to simply stating that the foreclosures have disproportionately hit triple-deckers.  Instead, she decided to write a fact-free piece that implies, without any hard evidence, that the housing collapse is threatening to destroy the triple-decker, and with it, tear apart the urban fabric of New England.  What percentage of triple-deckers have are foreclosed?  We don't know.  What percentage of foreclosed triple-deckers are vacant?  We don't know.  We do hear stories about abandoned lots in New Bedford ... but New Bedford has been declining for decades.  Has the recent housing bubble really worsened things?  We have no idea.  It is a remarkably badly-written article. 

But there is one thing mentioned which, if true, is completely insane: 

Modern zoning laws, Ms. Friedman said, would never allow three units on such small lots.  “If we have four three-deckers on 12,000 square feet and could only get two on that amount of land now,” Ms. Friedman said, “we are losing six units. So it’s very important to us to sustain them.”

Can that be serious?  Boston zoning laws require less density than currently exists?  That is flat-out crazy.  I am not opposed to all zoning laws, of course.  I would hate to have somebody block out my ability to see the sun, for example.  But that is just egregious.  Of course, it’s only a problem if there is in fact demand for housing in the parts of Boston where buildings are being abandoned ... so I doubt the premise.  Ms. Friedman is probably worried about the housing for other reasons. 

That said, the general point holds.  Zoning is very costly in this country.  I do not approve. 

Philippine economy watch

  The latest figures indicate that the Philippine economy has started to shrink.  Truth be told, I'm surprised that it took so long.  The Philippines may be relatively less dependent on exports, but 38% of your economy is still 38% of your economy.  Meanwhile, the country is highly dependent on remittances sent home.  Latin American countries have seen such inflows plummet.  In the P.I., though, they've held up. 

Luckily for the Philippines, there isn't too much evidence that the place suffers from the strictures of emerging-market Keynesianism.  The yields on Philippine bonds rose at the bad economic news, presumably on anticipation of more government debt issues to combat the downturn, but only by 5 basis points.  That really is not a lot.  So, not much sign of crowding-out so far.

The peso fell, but that's probably a good thing.  It's good because it gives exports a filip and increases the domestic value of remittances.  It's bad because as of 2007 the Philippines owed to foreigners $23 billion in debt securities and $40 billion in other debts. 

We will see how it shakes out. 

High speed rail in Brazil

  I spent last week frantically writing about imperialism.  I need to spend this week frantically writing about nuclear power.  Instead I'm here writing about ... well ... high speed rail.

As our regular readers know, high-speed rail is dead in Argentina.  But it seems as though Brazil plans to have a line running between Rio de Janeiro and São Paulo by the time the 2014 World Cup rolls around.   Now, it isn't immediately a bad idea.  It will take about 80 minutes to cover the 258 miles between the two cities on the express train, which is competitive with the 55 minute flight, especially given the São Paulo airport mess.  Congonhas is overcrowded (when I lived in Brazil, I lived right next to the airport, with planes roaring right overhead) and Guarulhos may as well be on Mars.  In addition, unlike Rosario, Rio de Janeiro is a major metropolis and the traffic between the two places is massive, about 7 million transits per year, with an additional 11 million going between São Paulo and Campinas. 

So even given all the other infrastructure needs that Brazil has, this project can't be dismissed out of hand.

The catch?  The cost keeps skyrocketing.  The initial estimate was $11 billion; a new more-detailed report just upped that to $15 billion, with a worst-case estimate heading over $20 billion.  The financing will be via a public-private partnership, but they typically involve very large explicit or implicit government outlays. 

What do you think about the idea?  Should a country like Brazil build an HST?

Imperialism can pay ... the imperialized

  The French empire in Africa never really ended.  In 1960, the autonomous territories of the “French Community” got seats in the United Nations, but for most the change was less than dramatic.  Only Mali dropped the use of the old colonial currency.  The new African governments increased trade restrictions, bit by bit, and the French market closed to their exports, bit by bit, but Paris fought hard to keep the European market open for a very long time.  The Yaoundé and Lomé conventions granted the “associated” states preferential access to what later became the E.U. 

Empire didn’t go away in another more visible manner:   French troops remained on the continent, French nationals staffed the governments and newly-created armies, French companies (often state-owned) dominated the export industries, and France knocked over more than a few recalcitrant governments while propping up others. 

Niger, where the French found uranium, made for a particularly egregious example.  In 1963, French troops rescued the government of President Hamani Diori from a coup.  In 1969, the French discovered uranium, and two French companies got exclusive rights.  In March 1974, French, Nigerien, and Gabonese representatives meant in Niger’s capital to discuss Diori’s insistance that the country’s uranium contracts be renegotiated.  Coincidentally, Diori fell to a coup the next month.  It seems that all of Diori’s French military advisors had gone on vacation and no one picked up the phone in Paris when news of the violence arrived.  The New York Times went so far as to accuse France of abetting the coup because Diori wanted to give uranium concessions to Exxon.  The next guy kicked French troops out of the country, but the French remained in control of the mines ... and their troops came back in 1981 anyway.

So what did the combination of continuing French intervention and French uranium mining mean for Niger?  An unexpected answer below the fold. 

Venezuela cede

  The Bolivarian Republic just settled with the Argentine owners of Ternium over Sidor, its Venezuelan steel unit.  The Venezuelan government nationalized Sidor in 2008.  Chávez offered $800 million.  Ternium scoffed and asked for $4 billion.  They just decided upon $1.97 billion.  Is that a fair price?

Ternium bought Sidor for $1.79 billion in 1997 and subsequently invested a lot of money, but that doesn't really tell you anything.  On the other hand, Sidor enjoyed revenues of $2.4 billion in 2007.  At a discount rate of 10 percent, the agreed-upon price implies a Sidor profit margin of 8 percent, which is consistent with the steel industry's average margin during the 2001 recession.  Conversely, at a profit margin of 16 percent, about what the industry earns in a boom, the implied discount rate is 19 percent ... which seems reasonable for a high-risk area like Venezuela.  (Bernard?) 

Upon announcement of the deal, the price of Ternium shares jumped 49 percent, to $15.67.  That said, the stock peaked at $45.18 on July 2, 2008, before sliding to $34.01 on August 8, and then collapsing to $4.65 by November 20.  The problem with interpreting that price collapse as evidence that the offered price isn't fair?  President Chávez announced the nationalization in April. 

In other words, the price appears to be fair.  Another demonstration of the power of ICSID?  Perhaps. We don't know if the Venezuelan government offered more money out of fear of an adverse arbitration result, or if it offered more money at the urging of the “semi-dictator” of Argentina, or it offered more money because the President of the Bolivarian Republic decided that it was simply the right thing to do. 

But we do know that the foreign oil companies can go to ICSID, and that Caracas seems to be a bit worried about the prospect.  We also know that Cemex is pursuing the ICSID route.  So we will see if the empire strikes back at the Revolution.

P.S.  FWIW, Argentine embassy accounts in France remain frozen.

Back to Santiago

  The last time I was in Santiago de Chile was in 1991. It was a bad year.  The First Gulf War ended in February. The U.S. economy was in the toilet.  Unable to afford school fees, saddled with a large short-term debt dumped on me due to a bit of ... ah ... creative financing by a ... hmm ... unrelated family member, and needing to save to pay for my long-anticipated trip to South America, I stopped out of school and wound up doing odd jobs that paid enough to keep me sleeping in my car. Which was a 1980 Plymouth Champ.  If Marcia still comes here, she can probably say more about this period than I remember.  Or necessarily want to.

It wasn't the greatest time to decide to go gallivanting off to Santiago, but I managed to get enough money together enough to go.  I don't remember a whole lot.  I have a journal from the period, but the young fellow who wrote in it seems quite alien.  (At some point around 1995 the writer becomes a recognizable version of me.  Stupider and ignorant, but clearly me.  Before that ... who was that guy??) 

So now it turns out that I'll be headed back to Santiago for a few days next month.  It will be interesting to see all the changes.  In that vein, I'm going to begin an intermittent series of posts about Chile, starting with the following chart (you can click on it to have an expanded version pop up): 

It shows the PPP-adjusted GDP per worker (in 2000 dollars) for the United States and Chile between 1950 and 2008.  The data come from the Penn World Tables through 2003; afterwards, the U.S. data are from the Global Financial Statistics database (dividing real GDP by total employment) while the Chilean figures are derived from the Instituto Nacional de Estadísticas, under the somewhat heroic assumption that the growth in Chilean GDP per worker in 2004 pesos is the same as its growth in PPP-adjusted 2000 dollars.  Anyway, the approximation is good enough for a blog post, and unlikely to change this picture much.  (Besides which, I know how the PWT figures are produced, and they're not much more accurate.)

The data show that Chile had an economy about half as productive as the United States at the middle of the last century.  Chile more-or-less maintained that ratio until the economic collapse that hit at the tail end of the Allende presidency and the first few years of the Pinochet dictatorship.  There was a rapid recovery afterwards, but the economy went right into another tailspin in 1982.  The solid growth rates since then have only taken the country back up to the same relative position that it held at the end of World War 2. 

That said, the place is lot richer than it was when I was there in 1991.  Your average Chilean worker produces more than half again as much as he or she produced back then.  But what does that mean on the ground?

Right about now, Doug would probably turn to the human development indices.  Infant mortality, life expectancy, income equality, that sort of thing.  Me, I make like Gary Numan and look at cars.  The following chart ...

The President is smart!

  Regardless of your politics, it is refreshing to have a president who can talk intelligently about economic issues.  It is very hard to imagine George Bush having such a conversation, but that isn't the problem.  The problem is that it is also very hard to imagine Bobby Jindal having such a conversation, although he is also clearly a very intelligent man.  Could he do so and survive a Republican primary?

Baumol’s disease, perfect competition, and finance

  A colleague points out that Baumol’s model requires perfect competition.  If profits have risen in the financial industry, then it’s probably not the explanation. 

The above graph from Simon Johnson does not at first glance seem consistent with a diagnosis of Baumol’s disease.  The rub is that I don’t know what profits consist of in the financial services sector.  Are we sure that all profits are indeed profits, and not disguised labor payments?

If we are, then we may have to abandon the Baumol hypothesis.  Help?  Anyone? 

Baumol’s disease and the financial industry

  The Baumol effect (or “disease”) suggests that the parts of the economy with the slowest productivity growth are likely to grow the fastest.  Howzat, you ask?  Well, say productivity grows in widget-making but not in article-writing.  The cost of writing articles will rise, because the only way you'll get RA's to write them for you necessary research assistance is to pay higher wages.  Otherwise they'll all go away and make widgets.  So (if you make a bunch of other assumptions that I won’t get into here) the amount of money spent on article-writing will rise.

Simon Johnson recently published a disconcerting chart that showed finance profits rising dramatically as a % of all corporate profits, starting in the 1980s and peaking in 2006 at a rather mind-boggling 41 percent.  I’m honestly not sure how to think about that, so I went to the BEA and downloaded data on the financial industry’s share of value-added and employment.  That produced this chart, of data between 1948 and 2007:

 

Finance’s share of GDP grows monotonically over the last sixty years.  Employment in finance, however, grows about as fast as value-added until the 1980s, when it starts to accelerate, and the 1990s, when it takes off. 

There are three ways to think about this, it seems.  One is that productivity within the financial sector grew dramatically in the 1990s.  “Financial innovation” and the like, whatever that is.

The second is that the financial industry became much less competitive in the 1990s.  The bankers managed to extract rents from the rest of society and increase their share of the pie without producing any equivalent benefit.  Some of those rents went to finance employees, while others went to the firms’ owners and creditors, but is was all about the rents.

The third is that the relative productivity of the financial industry collapsed during the 1990s.  Capital and skilled labor could earn a lot more elsewhere, so the financiers needed to offer them more in order to keep their services.  Some of the higher cost per financial-service went to capital and some to labor, but the growth of the sector was due to Baumol’s disease.

The $64,000 — $64 billion, $6.4 trillion, whatever — question is:  how can you distinguish between these three different hypotheses? 

And the meta-question:  does knowing which of the three best fits the facts change the analysis of the financial collapse?  That is, does the question matter?

From Russia, without love? Or a Greek tragedy?

  There is no official definition of “depression.”  Tim Kehoe says a 20% deviation from trend growth over a decade.  Richard Sylla says double-digit unemployment for a period of months.  Brad Delong says unemployment staying in double-digits for three years, or peaking above 12%.  Michael Bordo says a two-year continuous output decline of at least 10%.  By any of those definitions, Finland suffered a depression in 1991-93, or even 1991-96. 

So what caused it?  Well, there was a discussion about that somewhere, but I can't find it.  Anyway, you can sum up the evolution of the conventional wisdom as follows:  “We thought it was the collapse of the Soviet Union, but then we figured out that it was actually caused by a banking crisis.”  Blaming it on the Soviet collapse exculpates Finns:  it all came from Russia.  Blaming it on the banks turns the episode into a Greek tragedy, which Finns unknowingly brought upon themselves. 

Evidence for the banking-crisis hypothesis can be found here and here.  (Another hypothesis holds that Finnish workers decided to take an extended vacation because managers forgot how to run their firms and the government raised taxes.  No, seriously.  I don't have a whole lot to say about that.) 

Now, however, a Ukrainian, a Mexican, and an American have entered the fray to argue that, no, it was indeed the sudden collapse of trade with the Soviet Union what caused the Finnish depression of 1991-96.  Their paper is here.  The argument is pretty simple.  (1) Yeah, there were some signs of financial weakness before 1991, but let's not get crazy.  (2)  Trade shock.  Huuuuuge.  Plus, when you look at the industries that went under first and fastest, it was the ones that relied on the Soviet trade.  (3)  The banking system didn't fall apart until after the trade shock.  Absolutely, it was a weak system, but few systems could have handled a shock that big.

Basically, they argue that you don't have to assume a lot of friction in the real economy to get a slow recovery from a trade shock of the magnitude that hit Finland in 1991. 

But there is that nagging question:  why did Sweden go into a (much less serious) recession around the same time?  Could the Soviet trade shock have precipitated the Swedish crisis somehow?  Or is all just a coincidence, kind of like a man getting hit head-on by a truck and then having a bicycle ride over his hand? 

It's an interesting paper, even if it turns out to be wrong.  Thoughts?

What's the matter with Texas?

  Nothing, really.  Oh, the governor seems to have gone a little crazy, but that's because his party has decided to do its damndest to commit suicide, and he's got to be crazy in order to win the primary.  Have you read its platform? 

But Texans aren't crazy.  First, the percent who support secession is less than the Crazification Factor.  Second, if you'd asked the question in November 2004, I think you could've easily gotten a similar percentage of Californians or New Englanders to say they support taking up their marbles and leaving.  Remember the "United States of Canada"?    Finally, unlike most of the red states, Texas does in fact generally pay more to the federal government in taxes than it gets back.  Red are payments, blue are receipts, all data in 2008 dollars.

Now, these figures are rough estimates.  Pre-2005, the data are from the Tax Foundation; for 2006-07, they come from me using the same methodology.  And they leave out a lot.  Frex, a lot of federal spending comes from borrowing, rather than taxes, and these figures have made no attempt to allocate the future tax liabilities generated by borrowing.  They also leave out a chunk of federal spending:  mostly interest payments, which aren't allocated to states (and much of which goes to foreigners), but also foreign aid and imports purchased by the federal government. 

In addition, of course, joining a fiscal federation gets you more than just net tax payments.  It makes Keynesian policy much easier:  European countries, for example, have trouble using this tool because so much of any stimulus will leak away to the neighbors.  It adds insurance against asymmetric macroeconomic shocks:  if something bad happens to the economy of your jurisdiction, your residents will pay fewer federal taxes and get more federal benefits.  Finally, it allows for economies of scale in the provision of public services.  All three are why it probably makes economic sense for Iceland to become a Commonwealth, even at a fiscal cost of $109 million per year. 

In short, (1) Texans are no crazier than anyone else, and (2) the Republican Party is really going off the rails.  It isn't just Governor Perry; it's state legislatures in Georgia, Oklahoma, and South Dakota, which have taken to voting in favor of secession.  In another country, these might be worrying in terms of national unity.  In this one, there's no worry about national unity.  (Although I recommend these comic books anyway.)  Rather, there is a worry about the emergence of a de facto one-party democracy.  I know I've got readers who still aren't sure that the GOP isn't in on the road to suicide, but even they have to admit that the Tea Parties and aftermath are a big step down that path.  Right?

Greece in recession

  The Greek economy is slowing, but it is not in recession.  Yet Athens looks like a city in the midst of a severe recession. 

Not in this picture, of course.  This picture is lovely.  Albeit not really because of Athens.

But on the drive in from the airport, you pass myriad empty storefronts, abandoned buildings, and what appear to be stopped construction sites.  

Downtown, you see much of the same.  Even brand-new construction looks empty.  When the storefronts are filled, you can spot tell-tale signs of empty offices.  And then there's the petty vandalism that haunts downtown:  graffiti on private structures, cracked windows, run-down buildings.  All the telltale signs of property owners who have decided for whatever reason that proper maintenance does not pay a sufficiently high return.  

If it had just been the central city, we would have concluded that Athens suffers from a European version of the American disease.  Or that it was just the after-effect of the December riots.  The thing is, the signs of economic distress are worse in the suburbs.  It honestly looks like someplace that suffered from a real estate bubble that has now collapsed. 

Of course, the central city doesn't look so good either.  It looks like someplace where rioters might indeed attack businesses with petrol bombs. 

That said, downtown Athens is not out-of-control the way much of New York City was in the 1970s and 1980s.  For example, when we got off the bus, the first thing that greeted us was a police raid against African street merchants selling counterfeit luggage.  Yet the prevalence of graffiti also suggests that the police (and the public) is fairly lax about enforcing standards; it's not something you see in Boston or London or Paris, not to the same extent, and not on private property.  (Although, once again, much of New York's outer boroughs looked like this back in the 1980s.) 

In other words, while the Greek economy might not yet officially be in recession, our careful powers of observation lead us to predict that the numbers are going to get much worse very quickly, as the statisticians catch up with reality.

So what's happening?  And what is to be done?

Happy tax day!

  So today is tax day in the United States.  I feel like celebrating.  Man, taxes are low in this country.

Democracy and the modern central bank

 Libertarians, like Marxists and deep greens, generally drive me nuts.  Why?  Well, they have no objective function outside their beliefs about social organization.  Their preferred way of organizing society is good regardless of the outcome ... something especially infuriating when they refuse to admit it, and insist, fairly crazily, that their desired form of social organization will produce good outcomes and we can't compare the “really existing libertarianism” that the U.S. and much of Europe lived under before 1914 (or 1933) because it wasn't perfect super libertarianism.  Something about the ICC, or maybe the Homestead Act.  I don't know.  Aargh. 

Megan McArdle is not like that at all.  She's a very smart non-doctrinaire libertarian.  She certainly makes you think, even when she's infuriating, and I don't get the impression that she would refuse to change her opinions in the face of facts. 

Here she isn't discussing libertarianism.  Rather, she's thinking about democracy as a way of organizing society.  Her conclusion is that small-d democracy isn't compatible with modern central banking, because “what the Fed is doing now is not much different from what most [non-democratic ideologues] want the Supreme Court to do on some issue or another:  rule it out of the bounds of majority debate.” 

But that's just wrong!  The Fed can be abolished at any moment.  All you need is 218 representatives, 60 senators, and the president to say so.  Less drastically, the Fed's mandate can be changed.  In fact, Congress has done exactly that.  In institutional terms, the Federal Reserve is not one of the undemocratic parts of the American constitution, for the simple reason that it's not in the American constitution.  The only reason that the Fed behaves independently is because there is a democratic consensus in this country that it should. 

The Federal Reserve is like the EPA, or OSHA, or the FAA, or the military.  A somewhat autonomous organization with a mission set by elected officials, plenty of oversight all the way, and an ever-existent possibility of abolition.  I don't see anything undemocratic about it. 

Am I wrong?

Observatorio Argentino 10: French lawyers declare war!

  It seems as though some French lawyers have decided to do a Rogers on the Argentine Republic. 

A few years ago, in 2005, Argentina repudiated a big chunk of its foreign debts.  Since then, the jilted bondholders have been trying to get it back.  On April 7th, the famous NML-Elliott announced that their lawyers managed to get a French bailiff to put a stay on all Argentine accounts in the country.   “The frozen assets in France are not diplomatic, and therefore are not protected by sovereign immunity,” said an Elliott spokesperson. 

Well, Buenos Aires wasn't going to take this lying down.  Elliott had already tied up funds held in France by the Banco Hipotécario and Banco Central.  The Argentine embassador to France, Luis Ureta, complained to the French foreign ministry.  The French diplomats were not happy to hear the news.  “On Monday night, a bucket of cold water landed on the heads of the diplomats at the Latin American Desk of the French foreign ministry,” was how La Nación described it.  The Argentines asked France to unfreeze the accounts “by any means necessary.”  (Argentines are not Filipinos:  I don't think the phrasing was deliberate.)

The French response?  Well ... it was rather American, actually.  A spokesman expressed support for the Argentine position, and then told the Argentine government that if they didn't like it, it was up to them to appeal.  In the interim, the Argentine embassador is paying for burnt-out light bulbs and the like out of his own pocket.  I suppose the embassy employees are getting paid back in Argentina and withdrawing their salaries out of ATMs, or some such.  The account itself is only a million euros or so, but man is it a pain to have to run a big office without any access to, you know, modern finance. (Although many Argentines have some recent experience of doing exactly that.)

Anyway, it's a bit of mess.  Argentina has already lost access to several hundred million dollars worth of bank accounts and all of the nationalized pension funds held abroad.  About the only bright light in the legal firmament is that a New York judge just declared that the recently-nationalized Aerolineas Argentinas is “not an alter ego or agent of the Republic, and the recognition of Aerolíneas’s independent status won't serve as a fraud or injustice against the Republic’s creditors.”  So that's one bright spot.  

In other news, I've added an “empire” tag to this blog.  I'm still not sure what I mean by it, but once I figure that out, I'll try to reclassify past posts appropriately.  Suggestions?

Oh, and go listen to Will.  I need help with this stuff!

When lawyers declare war!

  You know, the more I learn, the more I think that President Correa of Ecuador is really playing with fire in defaulting on his debts.  Brazil is mad at him, and you don't want to get the new imperial rulers of South America mad at you.  But more importantly, he's got his American creditors mad at you ... and it seems as though those creditors may have a rather powerful legal recourse.  It'll all depend on the definition of a “central bank.”

But let's start at the beginning.  What happens when lawyers declare war on a country?  Well, remember this post, on the U.S. sanctions against Manuel “La Piña” Noriega ?  Turns out that the sanctions weren't really Elliot Abrams' idea.  Rather, the credit goes to a lawyer, William Rogers, acting on behalf of his client, former President Eric Delvalle of Panama. 

La Piña, you see, had an anger-management problem.  He decapitated Hugo Spadafora, one of his political opponents.  When the President of Panama, Nicolás Barletta, made the mistake of thinking that he, you know, ran the country, and decided to investigate the head-chopping, Noriega locked him in his office and threatened his family.  At 3am, President Barletta appeared on national television and offered his resignation, which the National Assemby accepted in a late-night emergency session.  Eric Delvalle, the education minister, then became President.  A little while later, Delvalle decided to pass on to La Piña an American offer to let him peacefully resign with all his ill-gotten gains.  In response, Pineapple-face ejected Delvalle from the presidency.  Delvalle got word that he was going to be arrested the next day, and managed to make it to an American military base.  His ambassador-at-large hired Rogers, and then ...

Things could be worse

  A while ago I posted a chart that seemed to show that employment losses in this recession rivalled the early stages of the Great Depression.  That chart is true.  By the measure of “total employment,” things don't look all that out of line. 

But the U.S. economy was much more agricultural back then.  In fact, a full 36% of all employment in 1929 was agricultural.  (That figure still startles me, as much as I know that it shouldn't.)  Agricultural employment was far more resistant to the ravages of the Depression, even if agricultural incomes were not. 

If you restrict yourself to nonfarm employment, which is what Justin Fox did, you get a somewhat more reassuring figure.  We don't seem to be tracking the Depression, and the many interventions of 2008 and 2009 have done more than a little good:

I suspect that the 1929 data are seasonally-adjusted, since the NBER cites the source as:  “For raw data: Survey of Current Business, March and August 1941; For adjusted data:  Federal Reserve Bulletin, June 1941.”  But since that is ambiguous, I included the unadjusted modern data in green.  It doesn't really change anything ... except inasmuch as all the people laid off after the Christmas rush in 2007 slowly went back to work over the next few months (as is standard), whereas that is not happening in 2008-09. 

So, yes, we're now officially worse than 1981-82.  By this point then, recovery had set in.  But we aren't close to a second Great Depression.

In this country.  Worldwide, not so clear.

The end of the Chimerican balance of terror

  There is some evidence that the era of the “financial balance of terror” between the United States and the People’s Republic is coming to an end.  The financial balance of terror, also called “Chimerica” by Niall Ferguson, are names for the situation in which the U.S. depends on massive inflows of capital from China to keep interest rates low, and China depends on massive outflows of goods to the United States to keep its people employed.  China sells widgets to the U.S. and buys dollar-denominated debt, in the process keeping the price of the dollar high and U.S. interest rates low. 

The balance of terror recently made an appearance in a discussion thread on Charlie’s blog.  The idea was that Chinese holdings of U.S. debt limit American freedom of action ... although the Chinese, of course, would be damaged by an attempt to use their leverage. 

I contend that the balance of terror is rapidly coming to an end, to China’s relative disadvantage.  Emphasis on relative, of course, because everyone will ultimately benefit from getting out of this rather insane situation in which poor countries lend huge sums to rich ones.

Consider the recent indirect exchange between the President of the United States and the Chinese government.  China worried about the value of its Treasury holdings.  The President said, “Pshaw,” and went on to tell the G-20 that they could not expect the world of America as a consumer of last resort to return, and the Chinese president seemed to agree.  Meanwhile, the head of Chinese central bank emulated St. Augustine.  “America should buy less, and we should consume more, but not yet.” 

In other words, the Chinese are starting to flex their muscles just as they begin to atrophy.  More below the fold.

Why is trade collapsing?

 Hans-Joachim Voth has a blog.  I recommend it.  He's one of the smartest economic historians that I know, and his insights are worth reading. 

Here he speculates that the collapse in Chinese exports may be due to an inability to get trade credit.  We here at TPTM wondered about the same phenomenon a while ago.

“Now, it's one thing that big-ticket capital items like printing presses are not selling quickly (the same thing is hammering German machinery exports). But Chinese exports? A quarter fewer DVD-players, shoes, and toys? The demand elasticity for these goods cannot possibly be high enough to get declines on this order of magnitude. Incomes are down a few percentage points at most in developed countries, where the bulk of Chinese exports go. My guess is that it's export financing that has taken a hit.”

I'm not so sure.  A lot of Chinese exports are consumer durables:  televisions, radios, phones.  They are the kind of purchase that can easily be postponed.  Imagine you run a delivery service, and your guys have thirty cellphones, three of which you replace every year.  Now, times are bad, so you only replace the one that actually got crushed by a motorbike.  Demand for cellphones just dropped by two-thirds.  Even the stuff that aren't consumer durables per se kinda are:  most people in the developed world can easily postpone the purchase of a T-shirt. 

Like this one.  The purchase of which probably should have been postponed.  But it was a gift, and just as with Che Guevara images, I can't resist the irony.

 

Department of WTF, once more

  These are not like things.  The data do not say what the people making the connection seem to think that they say. 

Observatorio Argentino 9: A tale of two depressions

  Argentina seems to be slipping into its third major economic contraction in less than two decades.  (Actually, this may be the fourth.)  Leticia Arroyo asks:  what happened the last two times?

You can blame Mexico (not Canada, sadly) for the 1994 contraction.  Investors dumped their Argentine holdings in response to the mess in Mexico and as a result Argentine interest rates spiked and economic activity fell.  Argentina pegged its peso to the dollar at the time.  The peg survived the contraction, but recovery was slow and halting.   

The 2001-02 collapse was a different animal. 

It is harder to assign blame than one might think.  Argentina's internal and external accounts didn't look that bad in 1999 or 2000 or 2001.  (They didn't look that good either, but nothing to justify the scale of the calamity that followed.)  Investors, foreign and domestic, started to worry about a devaluation, charging the Argentine government higher and higher interest rates every time it had to refinance.  Why did they start worrying?  I am honestly not sure.

That said, what was clear by 2001 was that the currency peg had become too restrictive, but the government had no clear plan to transition out of it.   Fully dollarize, in order to end speculation of a future devaluation?  Devalue early?  Devalue, then dollarize?  The government punted.  People became more and more convinced that there would be a devaluation.  Speculation became widespread, and I mean crazily widespread, unimaginably widespread:  nobody wanted to accept pesos that could lose two-thirds of their value at any moment, and nobody wanted to spend dollars that might jump by two-thirds in local terms at any moment.  Call it hedging, call it speculation, call it crazy, but do the math:  by the time December 2001 rolled around, huge chunks of the Argentine economy had been reduced to barter. 

This sort of thing seems like a real fear in several Eastern European countries right now. 

Macroblogging

 Greg Clark says some very smart things here.  Money quote:

The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1.  What is the multiplier from government spending?  Does government spending crowd out private spending?  How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.    

The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s.  There has essentially been no advance in our knowledge in 80 years.

It has seen people like Brad De Long accuse distinguished macro-economists like Eugene Fama and John Cochrane of the University of Chicago of at least one “elementary, freshman mistake.”

It has seen Treasury Secretary Timothy Geithner, guided by Larry Summers, one of the most respected economists of our time, produce a bailout plan for the US financial system stunning in its faltering vagueness.

Bizarrely, suddenly everyone is interested in economics, but most academic economists are ill-equipped to address these issues.

For the record, Fama did make several freshman mistakes.  Short version from a slow-bear B-school prof:  people can lend idle cash, people can write debt contracts without cash changing hands, and people can convert illiquid collateral into liquid obligations without printing money. 

Maybe I will start macroblogging!  Greg Clark says I'm “fully an equal of Summers and Geithner”!  Or not.

Aaaaaaaugh!!!

  I'm on record as predicting three years ago that China's boom would come to an end within five years, as the country lost competitiveness either because the yuan shot upwards or domestic inflation raising dollar wage rates. 

I didn't expect China's boom to come to an end like this picture from Brad Setser:

Man oh man.  Looks like they really did make only high-elasticity commodity-like manufacturers. 

And read the link.  The combination of an increasing trade surplus with falling exports and imports bodes quite ill for the world economy.  Especially if it give evil people like me more pernicious ideas.

But still.  What's causing the export cliff dive?  China isn't alone; international trade everywhere outside the eurozone seems to be falling.  Can it really all be a lack of trade credit?  Help!

Pobre México gordo

  An unwanted sign of North American convergence has been the convergence of the Mexican waistline with the American one. 

Today's Financial Times ran a story about obesity in Mexico.  The figures are sobering, and obvious to anyone who rides a pesero in Mexico City, although you could miss it in Polanco or Condesa.  4.1 million 5-to-11 year olds — 26% of the total — are overweight or obese.  Two-thirds of male adults are overweight, as are 71.9% of females. 

We wrote a bit about this in Mexico since 1980, especially in chapter 6.  Diabetes was the number-one killer when we wrote.  What we didn't know was that treating diabetes consumes one-third of the health budget, according to the FT.  Now, I still don't know that we know that, and I don't trust the FT's numbers.  But I believe the trend.

The future in most countries, I think, is going to be Big Government.  Soon what you eat and how you eat it will be taxed and regulated.  I don't particularly like the idea.  I used to be a heavy drinker, by American standards if not by European or Mexican ones, and the only reason I don't smoke a cigar or two every day is that my wife won't let me.  (That's also why I'm no longer a heavy drinker, in fact.)  But the fact is that nobody pays for their own health treatment in later life:  either an insurance company does, or, if you're under insured, the United States will pick up the tab.  So unless some sort of miracle Singularity-related program activity comes along to either make us all capable of pigging out and staying thin, or making it healthy to carry about lots of excess adipose tissue, Big Government is going to get what you eat. 

Or so I think at this particular moment.  As those of you who've known me know, I change my mind a lot.  It may be the only way in which I resemble Andrew Sullivan.  So, in that vein, counterarguments?

How bad is it?

  We really need a labor economist.  Anyone?  Anyone?  Kaplan?

Calculated risk produced a chart based on a chart published by Barry Ritholtz.   It shows the peak-to-recovery job losses for the recessions back to 1948.  So far, it's been about as bad as 1981-82.  I thought it would be interesting to add 1929 and 1937.  How does the situation look compared to the opening months of the Great Depression and the so-called “Roosevelt recession” of 1937? 

To do that, I had to use the “total employment” series from the BLS Current Population Survey in order to make the post-1939 numbers comparable to the Depression-era data.  What I got looked somewhat different from the charts currently running around the internets. 

The big red line is the current downturn.

Qualitatively, the above picture gives the same picture as the other charts.  The current downturn is more-or-less tracking 1981, 1974, 1957, and 1948, all pretty bad recessions.  And since past performance does not predict future results, we are not promised the same sort of rapid recovery we saw from those four.

But two things surprised me, and are very different from the other data.