President Obama and Big Business Get On Well – But When Will That Produce Jobs?

By Simon Johnson

President Obama is embarked on a major charm offensive with regard to the business sector, as seen for example in the appointments of Bill Daley (ex-JP Morgan; now White House chief of staff) and Jeff Immelt (still head of GE, now also the president’s top outside economic adviser). This should not be an uphill struggle – much of the corporate sector, particularly bigger and more global businesses, is doing well in terms of profits and presumably C-suite remuneration.

But when exactly will this approach deliver jobs and reduce unemployment? And it store up risks for the future?

Republican rhetoric over the past two years was relentless on one point – that the Obama administration was anti-business. Supposedly this White House attitude undermined private sector confidence and limited investment.

In reality, the opposite was the case.

Relative to any post-war recession, the rebound in profits during the Obama administration has been dramatic. To be sure, the end of 2008 was shocking to many entrepreneurs and executives – as credit was disrupted in much more dramatic fashion than they thought imaginable. Large and immediate cuts in employment followed.

But then the government saved the failing financial sector. The means were controversial but the end was essential – without private credit, the US economy would have fallen far and for a long time.

And profits rebounded almost at once. The financial sector recovered quickly on the back of implicit guarantees provided to our largest banks – really the only bad quarter was at the end of 2008 (hence the angst about bankers’ bonuses in 2009). But the nonfinancial sector has done even better. Profits for those private businesses fell by no more than 20 percent from top-to-bottom in the cycle and in 2010 through the third quarter (the latest available data in the BEA series) profits were back at the level of 2006. After the deep recessions of the early 1980s, for example, it took at least three times as long for profits to come back to the same extent. (I went through this comparison in more detail last week for the NYT’s Room for Debate).

And investment in plant and equipment has also recovered fast – this was the one bright part of the domestic economy in the past two years (with the other good relatively source of news being exports). Look around at the places you work and where you do business (or shop). Is there any indication they have cut back on information technology spending recently?

Overall, the policies of late 2008 and early 2009, including the much-debated fiscal stimulus, protected corporate sector profits to an impressive degree — despite the fact that this was the steepest recession of the past 70 years, profits fell only briefly and seem likely to be just as strong going forward as they were pre-crisis. Large global American-based companies, in particular, are well positioned to take advantage of growth in emerging markets such as India, China, and Brazil.

But the link between corporate performance — measured in terms of profit or executive pay for U.S. companies — and domestic employment has fundamentally changed in recent decades. At the very least, employment responds slower now than in previous cycles when output and sales recover. You should look immediately and regularly at this chart from the Calculated Risk blog. As the picture shows so vividly, we are still waiting for employment to turn back up decisively; compared with previous recessions, the delay is simply stunning.

Ideally, in a situation like this, we’d provide more stimulus to the economy in some form. But our monetary policy is already close to exerting its maximum efforts, and the scope for using fiscal policy was undermined by high deficits during the “boom” years of the 2000s – so there is no safe fiscal space for action (even if the politicians could agree on what to do.)

We are reduced to waiting for the private sector to recover enough to want to take on new employees. No one has a good answer for why this is so slow – perhaps because it is so easy and so cheap to hire workers in those very emerging markets that are now booming, or perhaps because the skill mix available at prevailing wages in some parts of the US is not exactly what employers want.

Or perhaps there are artificial barriers to entry at work, meaning that companies can effectively keep out new entrants – thus keeping profits artificially high and, at the sectoral level, limiting employment. The constraints on entrepreneurship in our post-credit crisis economy need careful scrutiny. Hopefully, the administration’s charm offensive will not prevent it from enforcing our anti-trust laws, which were more than slightly neglected in the Bush years.

Listening attentively to the nonfinancial sector makes sense in this situation; in return, corporate leaders need to focus on creating jobs in the United States.

But bending over backwards to accommodate the wishes of the financial sector is exactly what got us into this mess to start with. Allowing our largest banks to become even bigger and more dangerous would be a very bad mistake.

An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

56 responses to “President Obama and Big Business Get On Well – But When Will That Produce Jobs?

  1. High profit margins represent a failure of capitalism.

    The whole point of free markets is that prices approach costs, because fat profits lead to competition which leads to margin compression.

    For some reason — and I am sure there are many theories — this mechanism has not been working for the past few years. Persistently high unemployment is one consequence. Overpriced, crappy goods for everybody else is another.

    Why are profit margins so high? Why is competition not happening? Serious question.

  2. FRAUD is preventing employment. They STILL keep saying that it wasn’t “illegal” – that’s how Nihilistic the monkey brains are…

    Taken from SANE Econ 101 ACCOUNTING practices, obviously no longer taught in ANY “education” system

    BTW – these RULES are what created all the wealth they are freekin’ STEALING – good lord, how many cocktails do you people have before posting…

    …..the following points “regulators and auditors” of ALL life-sustaining industries used to follow as evidence of FRAUD:

    1. complicated business arrangements that seem to serve little practical purpose
    2. changes in auditors, or frequent management disagreement with auditors
    3. financial figures that routinely match targets, particularly if the targets are overly aggressive
    4. unusual balance sheet changes
    5. unusual accounting policies
    6. reversing or changing contingent liability and other reserves to smooth out earnings
    7. frequent changes of estimates for no good reason
    8. frequent “management overrides”
    9. entries that hide a change in earnings or a failure to meet expectations
    10. entries that change a loss into income, or vice versa
    11. changes that affect compensation or compliance with regulatory requirements

  3. The American public intellectual Chris Hedges, makes an interesting distinction. He says he is not anti-capitalists. But there is globalized capitalism, regional capitalism and local capitalism. The questions is, where are the mechanisms to create strong regional and local economies?

  4. Bruce E. Woych

    The attempt at liberalization of the economy is not about creating jobs but about dismantling any government factor in the public sector. There is no interest in truth when the underlying directive is about purpose. The relentless drive to counter the legislated merits of the New Deal has never ceased.

    The attempt to capitalize the individual working class sector and control it is the objective and goal. With all the monetarization and easing that was paraschuted into the financial sector, we have experienced nothing but inverse proportions in respect to the infrastructure focus and job creation. Local economies are not on austerity they are on ventilators and life support!

    Place measurable methods and incentives that reward real job creation and punish idle money hoarding. Make the wealthy pay for the war costs. Establish search and seizure law against tax evasions off shore and over seas. Pull in the tax havens and get serious about holding money made in/on America and Americans accountable for their fair share of the levy. This idea that wealth is created by these parasites and predators is pure poppycock. They are sociopaths when it comes to hoarding, and we should do them the courtesy of curing them of the habit (since it seems to be very bad for our health…and public health should come under the heading of the public domain).

    Tax incentives for jobs / that’s the new deal! Make it real or quit your repetitive yapping!

  5. Bruce E. Woych

    http://www.opensecrets.org/news/2011/01/legislative-preview-state-of-the-union.html

    OpenSecrets.org Provides 2011 Legislative Preview Ahead of Barack Obama’s State of the Union Address
    By Michael Beckel, Evan Mackinder and Eric Chiu on January 25, 2011 12:15 PM

    http://www.opensecrets.org/news/2011/01/legislative-preview-state-of-the-union.html

  6. I wonder if the Obama Administration’s abject disregard for the situation of the people affected by the mortgage meltdown has any significance. The unemployed, underemployed, no-longer-employed, never-employed, foreclosed-on, to-be-foreclosed, lost-their-home, etc., are out of sight, out of mind. I feel in some sense that most people are breathing a sigh of relief that they survived, that they have a job, their house is secure, that the danger is past; they have forgotten about, or can’t afford to consider, the other fish in the school that got eaten by the housing shark. They were (are) the price you have to pay, but life goes on. I feel there is no longer a strong moral conviction that we are all in this boat together.

    In spite of Mr. Obama’s eloquent speech here in Tucson, he has never acknowledged to the degree required, to my satisfaction anyway, the distress and ruined lives caused by this ‘recession’ nor did he try in any meaningful way to help. Now he has shifted gears to get re-elected, apparently forgetting about the price many people are paying.

    That’s the drag on the economy: all the dead and dying fish. Until we come to terms with this situation I don’t feel we can repair the damage and again be a great nation.

  7. desi girl, lloyd b worshiper

    ok, so the ‘nonfinancial sector has done even better’ but ‘bending over backwards to accommodate the wishes of the financial sector’ is stopping job creation?.

    Huh?? What?? Maybe today’s snowstorm was also created by the large banks!!

    Simon, what kind of lala logic are you trying on your lapdogs?

    Maybe it is time to open your mind and try to think about the fact the folks who matter are in Davos at the same time you are whining on bloomberg that nobody wants to talk to you.

  8. Listening to Obama’s state of the union speech was like walking backwards in time, but without having a soul left on my shoeless feet. Two years, just two darn years we’ve gone from change to poverty except for the almighty ones[?] who promised our resurrection on high hopes, and yes we can – for as we’ve been implicitly told, we need at minimum another coupled more two years? Imagine, just imagine how far our prosperity has come in just 730 short calendar days – elected two years…so long ago, calling to arms yesteryears “Roosevelt’s Renaissance Affinity”- so forever it seems lost in neverland on the backstreets of some USA! All promises…all high hopes, and a bucket of change – what’s new is the tarnish has got a new sheen? The government signs created in mid-2009 with your tax dollars working here, and there – creating jobs for unemployed are still collecting dust, and nobodies interested [%] in “yes we can” hyperbole, piled on high by sweat that never met its destiny’s shovel…breaking the threshold of newfound prosperity. Ready made jobs were buried, and laid to rest by the “Hope to Rope a Dope”…Big Six”, sanctioned by the trickle up past shedding not a pence of remorse, from Reagonomics, to Bushism, and Clintonism, gladly accepted and entrenched by Obamaism?
    Wind, Solar,…Nuclear, Clean and Dirty Coal, and Frackin Natural Gas to meet the insurgent foes we’ve faced a quarter century ago. Oh how I wished I’d been born yesterday so my countries goals could hasten yet another decade or so to fill this empty void, “now that we them all”…need them all so, so bad?
    Let us lower the quarter century “Corporate Tax Rate” that our wayward “Multi Nat’l Corp’s” can come back home…our lost prodigal sons, and daughters – in fact lets give them a tax exemption if not just for today [?], but for the next two years…what do you say? Their profits are waning as the child labor has grownup and have found newborns to the west that will put their margins too the test. So let’s lower that rate as the Bush Tax Break’s in which I thought I should had never reneged – I swear it will be just til I’m re-elected in 2012.
    Lastly, I’d say…we need more free trade so open the gates to Columbia’s cocaine [?], and Panama’s human traffic trade [?], while giving the South Korean’s one more shot at nailing our automobile gains to the South-Asian bilateral gains. Trust me [?], Bill,Timmy, and Ben – we’ll get you working again when your houses will be worth the almighty Japanese Yen?

    Thankyou Simon, and James

  9. Simon Johnson, Your claim that nothing can be done is nonsense. (“No one has a good answer for why this is so slow”). Please go and study some Modern Monetary Theory (MMT). We MMT advocates know exactly what to do.

    In particular, you say “there is no safe fiscal space for action (even if the politicians could agree on what to do.)”. Why? Presumably the suggestion is that the national debt is already too high. Well first, the debt was double its present level relative to GDP just after WWII, and that produced no problems. Second, it is perfectly feasible to have additional defcit or stimulus accumulate as extra monetary base rather than extra national debt (for those who have a phobia about debt).

    Actually Keyes advocated the “extra monetary base” rather than extra debt option anyway. I.e. there is not much difference between Keynes and MMT.

    In short, the answer to the problem was set out best part of a century ago. Unfortunately this message has been buried by the rantings of present day loud mouthed ignoramouses, whose message you seem to have fallen for.

  10. @ Per Kurowski

    The questions is, where are the mechanisms to create strong regional and local economies?

  11. @ Ralph Musgrave

    My question was: But what about rampant inflation that critics of MMT so fear? Then I found an answer on your blog.

    “The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A.” — Ralphonomics

  12. MUSGRAVE’S LAW

    The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

    The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A.

  13. So Desi Girl,

    Completing the right-wing free market project and the dismantling of “big government” are the solutions to unemployment?

  14. Bayard Waterbury

    The reason for this is, at least in part, due to the suppression of competition which is due to many factors, among them, the cost of regulatory compliance, the constraint of markets by rules, laws and taxation which favor established companies and not startups in specific markets. You are exactly right about what the results of a truly free market should be, but, remember that the big boys (the wealthy and corporate elite) sponsor our Congress and regulatory sector (and invade the last by control of the first), and get the things changed that favor the successful going concerns over the startups. This is emblematic of plutocratic rule, and something that Simon has reminded us of on more than one occasion.

  15. Bayard Waterbury

    One of the major reasons for the continued economic downturn has to do with a sector crushed by the housing bubble and to which the government has paid little attention vis a vis other economic sectors. Sure, we need to strengthen our trade agenda, look for ways to innovate and bring back manufacturing, and many other things, like dealing with immigration and education. But, the biggest reason for the incredibly slow recovery in employment is housing. With the markets plummeting in value almost everywhere, with foreclosures rising and staying high, there are legions of unemployed in everything related to real estate, from construction workers and real estate agents to the real estate legal community, to mortgage lenders’ staff, etc. This was a huge industry that has truly fallen to depression era numbers by comparison to most other economic sectors. Also, as a byproduct of this downturn, tax revenues, many of them tied directly to education (school taxes are frequently a 75% component of local county and municipal taxes) have fallen off a cliff, and many of those who remain in their homes are going to see substantial increases to offset the losses of those and other revenue. This area is largely overlooked, and is the biggest reason why layoffs will continue in jobs supported by real property tax revenues. So long as the foreclosures continue unabated, these things will continue, and the problem may even get worse, because it is very much an economic cancer. I haven’t seen any real solutions even suggested, let alone discussed.

  16. The thing I find most fascinating about all this is the “free ride” that Jeffrey Immelt has gotten. Does no one remember this?

    SEC Charges General Electric With Accounting Fraud

    http://www.sec.gov/news/press/2009/2009-178.htm

    This isn’t business friendly. This is out-and-out corruption friendly.

  17. Wow, even a prestigious university, located in the north-east, requires a free trade pact with the rest of the country! And it has a thriving cocaine industry! That’s awful news for Colombia’s drug cartels. (Damn U.S. self sufficiency.)

    Jobs growth occurs when and where incentives are there to encourage entities with capital to invest their capitol there. Frankly, the only non-military based industry, where America excels, relative to the rest of the world, is in innovations. Most of us — including world citizens that reside in the U.S. are not of said ilk.

    Most of us are competing on a, low and mostly, leveled playing field. Those who are not should expect to join the club soon enough.

  18. “Investment in plants and equipment has also recovered fast – this was the one bright part of the domestic economy in the last two years…”

    This does not necessarily imply new jobs becvause it may well be labor-saving technology that the companies are investing in. In fact, existing industries are using new technology to eliminate jobs or are being distrupted by new startups ( Netflix) while new industries (Google, Facebook, biotech sector) are already technology-intensive and create very few jobs. This trend may accelerate in the future as artificial intelligence and robotics get better.

    For a great overview of this, see this book:

    “The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future”

    A free PDF is also available here: http://www.thelightsinthetunnel.com

    Also see the author’s blog at http://econfuture.wordpress.com.

    I think the issues raised in this book are among the most important that we will have to confront as a society. I encourage everyone to read it…

  19. Job generation? That could start the day bank regulators come to understand that capital requirements for banks based on for instance job creation, make a lot more sense than capital requirements based on risks publicly perceived by the credit rating agencies and thereby perceived by all.

  20. interesting article .. according to my study of business .. thanks
    best regards from Indonesia

  21. All those things sound LIKE a friendly coupe to me. Unless you are a rope or fence walker.

  22. That must be why it is said that “Febuary is the most taxing month of the year”.

  23. In particular, you say “there is no safe fiscal space for action (even if the politicians could agree on what to do.)”. Why?

    I can see you are already getting off track with your premise so I will stop you right here and tell you WHY?
    It is simply that the lawyers have taken you to court over the “ring around your collar” issue. And it appears you missed the memo.

  24. “The link between corporate performance — measured in terms of profit or executive pay for U.S. companies — and domestic employment has fundamentally changed in recent decades”

    Simon, do you have a graph of corporate profits vs. unemployment over the years? That would certainly show whether something has changed in the relationship.

  25. One idea – perhaps there is a disconnect between profits and employment because corporations have perfected how to maximize profits through better technology, outsourcing, and stealth quality reduction?

  26. In order to promote ‘quality’ job growth, especially jobs that do the most good to reduce unemployment and raise the average income of workers, I would like to see a maximum reduction in payroll taxes for workers that make just over the median income, with a ‘penalty function’ to discourage both minimum wage job and high income job creation. And of course, if I were king, I would tax bonuses (and capital gains) at a marginal tax rate that is as high as that imposed on upper income tax brackets for regular earnings (say 50%).

    This would be a step towards greater justice. The rich fancy that they owe nothing to society, but it is society that enables them to exist at all. The most motivated individual cannot gain affluence without a market, and a market requires consumers. Globalization (i.e., the need to no longer take care of domestic factory workers because the labor you need is provided more cheaply in other countries) has sadly undermined this ‘giving something back’ sentiment.

    Deprive a person of something to live for, and you create a person with nothing to lose. Terrorism 101.

  27. p.s. I realize that the marginal tax rate is well below 50% at present…should have written:

    “would tax bonuses (and capital gains) at a marginal tax rate that is as high IF NOT HIGHER THAN that imposed on upper income tax brackets…”

  28. State-owned banks could be a place to start. Naked Capitalism has a piece on this at http://tinyurl.com/684tg5c

    Or, check out http://www.public-banking.com for more.

  29. Would it be helpful if a reasonable amount of the money that is flowing (and for the past 30 years has flowed) to the highest 10%–even highest 1%–were instead equitably directed to the remaining 90%–or 99%? (See “Winner-Take-All Politics”)

    This suggests that we may not see much change in unemployment unless or until money generated in the US economy is more equitably distributed.

    Additionally, a recent publication (“The Spirit Factor”) suggests that we are spending significant amounts of time and money addressing problems in our society (disease, teen pregnancy, crime, mental illness, and more) that are directly related to the degree of inequality in income between our citizens.

  30. Let me ask you… where do you think the funds are most likely to flow if the regulators give huge incentives by means of much lower capital requirements for banks when they lend to whatever is triple-A rated than when they lent to those who are perceived as riskier?

    If you want to talk about regressive and arbitrary discrimination there you have it… the problem here is that the owners of this blog are generous in their criticism of banks but extremely stingy when it comes to criticizing the regulators.

  31. Stephen A. Boyko

    @ Bruce E. Woych: re the “cost of war”

    Excerpt from a somewhat dated “Winds of Change” By Stephen A. Boyko and Merle Coe, Sept. 2005

    “The U.S. is strongly committed to protecting its “oil pipeline.” Notwithstanding the fact that the price of a barrel of oil has doubled in two years, imported oil remains an important economic input. The U.S imports about 50 percent of its total demand or 4.2 billion barrels of oil annually. At the recent market price range of $60-to-65 per barrel, this equates to an annual expenditure in the range of $250-to-275 billion. Expendi¬tures for imported oil dwarf the total amount spent on foreign aid, exceed the budget deficit, approach the trade deficit, and, are a sizable per¬cent¬age of Gross Domestic Product.

    But where is the approximate $200 billion spent on military services required to protect the pipeline? The longer American military personnel are used to protect vulnerable oil installations in conflict-prone countries, the more persuasive becomes the argument to include the growing militarization of our foreign energy policy in the price at the pump. While the current price of gas nears the March 1981, all-time high, inflation-adjusted price of $3.12 a gallon, if the military costs were allocated as a direct tax on oil imports, the price consumers could pay for a gallon of gasoline could be as high as $5.20.”

    Conclusion: you cannot have a market economy without transparency

  32. Do not get tied up in the mechanics of technical issues in the economy since one gets further from the larger macro focus needed to make sense of the overall situation. It seems replies to Prof Johnson aim to show “how smart” they are. The deep rot in USA in the political economy (Congress,courts, commerce and Wall St) is there to observe and reflect on while the technical micro arguments pale in the road back to employment.

  33. While some take their aim on correcting everything throwing away everything, others try to correct something keeping what could be kept. Sometimes the first are right, sometimes the others… it is hard for us to know who and when. By the way by not caring about the small technicalities you might be strengthening the positions of those you believe wrong. This crisis, for instance, was caused by the fact that most of those who were on the look-out for inequalities were busy fighting their traditional foes, such as the bankers, and never really bothered to see what the regulators did… they still don’t. It is easier to go for the easy.

  34. “If we can’t beat em` join em`?”

    “But when will it produce jobs?”

    Questions, and answers that could be solved by simply holding, “Emergency Talks/Negotiations” with our true capitalist friends: Australia, EU, UK, USA & Canada! Why not?
    Whose to say we must follow the letter of the law regarding what capitalism really is in todays global economy. It certainly doesn’t quack like a duck anymore – more like a sucking sound to me.
    These Chinese and Emerging Markets are physically, and literally eating our unborn childrens’ lunch! Yes, I said lunch, by subsidizing through their opaque, and nefarious off-key banking systems, circumventing Int’l Trade Laws with “Their” unrealistic competitive advantages for themselves as we can only cry foul, pathetic! But as it is, we stand back like buffoons waiting for our great leaders to BS us once again. Let’s do to them what they’re doing to us – call their bluff if must be. If not – it surely and certainly will be just a slow death for freedom as we know it?
    Why can’t the United States and others mentioned, start plowing money into our industries to keep them in America. If we don’t get a handle on this global dilemma that we’ve gotten ourselves into, free “So-Called” Capitalism will be a thing of the past!
    Yes indeed, the Chinese hy-brid economic model has turned out to be the success story of the 21st century, and for that matter, as far into the future we can see.
    Capitalism makes for democracy if played on a level field, but *our* freefall-freedom once called capitalism via democracy is in a morass of deceit, perpetuated by ideologies from the same group doing business for us overseas with a layered caste of old fashion “Robber Barron’s” born of the USA!
    If socialism is the answer for sustaining our way of life, I’d say let’s give it a shot of equity from our Communistic Federal Reserve Banking System riding on the back of our US Treasury? What say you Andrew Jackson?

    Ref: “Solar Panel Maker Moves Work to China” (NY Times-1/14/11)

    http://www.nytimes.com/2011/01/15/business/energy-enviroment/15solar.html

    PS. Canada has its “Tar Sands” oil pipe-line ready to (regulation?) go, but we don’t care about $250 bbl. Arab Oil…do we?

    God Bless you, Julian Assange!

  35. Schumpeter disagrees with you. In capitalism, prices approach costs, but never get there, because costs are a moving target. Partial monopolies are the natural state, and provide the economic profits that drive innovation and creative destruction.

    Milton Friedman, oddly, argued that govt. attempts to prevent monopoly are generally worse than monopoly itself, which would tend to diminish over time if left alone. (I do not recall him applying the same logic to labor unions.) Special interest group theorists, like Mancur Olson, argued the opposite – that monopolies reinforce themselves over time, often using non-economic institutions to perpetuate themselves.

    Also, free markets and capitalism are not necessarily the same thing. Private ownership and disposition of capital can exist without free markets. We had capitalism from 1945 through 1975, but if you think we had free markets, you don’t know history. Look at the advisory committee structure in the department of commerce, which was the heir to the war materials board system from WWII. Nor was the interwar period governed by ‘free markets’ (note the tariff structure, the disposition of federal lands at a time when land accounted for a majority of wealth, state land and use rights grants, etc). We’ve NEVER had free markets.

    Yet, the mythology of free markets persists, a paean to the glory days of yester-year. Yet so many folks remain deeply in love, which is always easy when one hasn’t met the object of one’s affection.

  36. “It is easier to go for the easy.” Per Kurowski, truer words than this were never said.

    You and some others who comment here have great technical knowledge and professional experience of economics.

    Some of the rest of us have just been kicked in the hind end by the economy. We’re trying to make sense of all this as best we can. Very few of us in this latter category are able to devote full-time to studying the subject.

    So, I have a question for you about regulators. I know the ratings agencies were major (bad) actors in this. To my knowledge, they are all corporations and not employed by the government. To make things worse, they are actually paid by the entities they rate.

    Do you consider the ratings agencies to be regulators?

    Precisely who or what are the regulators? I mean, I’ve heard of the SEC, the CFTC, of course the FDIC, and an alphabet soup of others…Can you be more specific about which regulators you hold responsible?

    Also, if I may ask, why were there so few economists who foresaw this crisis and sounded an alarm?

  37. James,

    Sorry, I do not get this post: how else would an economy like the US recover from this kind of a shock? There were (1) too many workers in industries exposed to competition from countries with lower factor cost (with or without unfair practices, that does not matter) and (2) too many in uneconomic residential construction and everything associated with that. Also we have (3) the long term efficiency benefits of information technology, which may now be at the stage where more jobs are destroyed than created.

    There is nothing in the US standard policy repertoire (and hence the national execution capability) that would deal with (3) and that may actually be a good thing, (1) is a matter of free trade, that probably benefits consumers and voters more than protectionism and (2) is a transition phenomenon that will keep the normal rate of unemployment a few points higher than the long term trend for at least three years. What is also missing from the picture is accurate data about illegal immigration in- and outflows. Maybe they find the US still mere attractive than their homelands. We know that youngsters (especially ones with unattractive education profiles and no working experience) are having a hard time, but that appears to be the same in Europe too, where the policy repertoire is far more labor-friendly.

    So, just hold your breath and wait till it is over. All the President can do is to have uplifting rhetoric that does not scare investors. He has a fair chance of being a one term president and his saving grace is that the Republicans prefer him to their own stash of candidates, a la Clinton. Usually the US does better economically under divided government, as is to be expected of a market economy.

  38. You are right that that may be the most sticky part of the employment problem, but there are no available solutions as far as I know. What would you do? It is not something that could be solved by some kind of New Deal. Keep in mind that we have another “bubble”, that is the gvt’s spending on active warfare. Some day that will end and while the core defense budget appears to be sacred for the future, the extraordinary spending (like Iraq and Afghanistan) will end some day. So far, that is in fact subsidized employment on a very large scale, without any productivity benefit…

  39. i suspect the natural state of capitalism and business is monopoly. the unnatural state isn’t. there is nothing in the normal capitalist business state that will discourage a monopoly. hence the reason it seems to appear over and over again. even when regulations were almost non-existent (consider rail roads from the 19th century among others)

  40. well we can praise the financial sector for the jobs it has created. we can note the jobs they have destroyed (current recession is their creation lock stock and barrel). so far they have destroyed 8 million jobs and counting. haven’t created much. and thats just the jobs from the recession. never mind the jobs that have caused to be exported.

  41. “Do you consider the ratings agencies to be regulators?”

    Look at them as private agents to which the regulators had outsourced without a contract the function of trying to determine the risk of default because that is what they had been doing for a long while… because asking their own professionals to do that would have created a lot of protest about government intervention… as many would then, instead of de-regulations, be calling it the mother of all interventions.

    “Precisely who or what are the regulators? I mean, I’ve heard of the SEC, the CFTC, of course the FDIC, and an alphabet soup of others…Can you be more specific about which regulators you hold responsible?”

    First and foremost the Basel Committee on Banking Supervision which through their capital requirements for banks weighted based on risk of default are acting with unbelievable hubris as risk-managers of the world and distorting the whole financial system.

    “Also, if I may ask, why were there so few economists who foresaw this crisis and sounded an alarm?”

    Because very few were unaware of what was going on in the field of banking supervision and there is a general and natural tendency to believe that the regulators, many of them their PhD peers, knew what they were doing… which unfortunately they didn’t and don’t know.

    This unawareness extends to really not understanding the extent of the influence of the Basel Committee; something also supported by the fact that the 2000 and more pages of Dodd-Frank Act on financial regulatory reform does not mention even once the Basel Committee … even though now from the discussions we hear that the biggest headache for all your many local regulatory entities and especially for the Financial Stability Oversight Council, is to reconcile Dodd-Frank Act with the reforms coming out from the Basel Committee and known as Basel III.

  42. thanks Carla I’ll check it out :)

  43. “This isn’t business friendly. This is out-and-out corruption friendly.”

    I think he’s got it. I think he’s got it!
    (with apologies to the late, great Prof. Henry Higgins)

  44. Thank you.

  45. Why not just start by getting rid of any bank regulations that discriminates in favor of those who are perceived as not being risky, and which in fact translates into a regressive discrimination of small businesses and entrepreneurs, and the regions that do not host the triple-A rated?

    Creating a state bank to compensate for what bad the regulations do to you sounds strange.

    In all this never forget that the crisis was created by public bank regulators who thought they knew better than the bankers how to manage risks in the world.

  46. 1980s Goldie Hawn classic movie – “Protocol” :-)

    The 20-something generation wasn’t born yet when the movie was made, so “education” comes in all forms…

    Very creepy that Davos was one big navel-gazing exercise among the attendees even as Egypt blew up…

    No one has the moral obligation to allow navel-gazers to go metaphysical in their management of REALITY and insist we all CARE about them when they totally don’t CARE about the human species, or Spaceship Earth…

    7 billion people, “technology” investment not in energy and infrastructure but in gadgets that make sure the flow of $$$ completely bypasses bee-hive labor, so to speak,

    and they feel “safe” in Davos….that’s so delusional that MDs should sign off on the orders to put them all in an “institution”….

  47. Of course Old Lady (Bank of England) is right in that the capital requirements for banks should be doubled and more… but only for those loan and investments where they have been proven insufficient… like all those operations which included triple-A ratings and where the risk-weight applied was a minuscule 20%.

    For all those operations where the risk-weights were 100%, like when lending to “risky” small businesses and entrepreneurs, the capital requirements have proven more than sufficient… and should not go up one iota…that is unless one holds that those perceived as “risky” should subsidize the capital requirements needed for those perceived as not risky. Does Old Lady think that? I don’t think so… but neither am I sure they are aware of what they have been doing.

  48. Hardly anyone mentions the fact that when large numbers of people have no money to buy anything, there’s very little reason to invest in manufacturing businesses and create jobs. My wife runs a small jewelry business with a largely middle class clientele. They just don’t have the money to spend on jewelry any more.

  49. Herbert Wetherby

    The old lady thinks that 3 left turns make one right turn. And she is correct. I prefer to simply make the one right turn.

  50. Hey Marie Antoinette, when did that re-attach your head?… And you might want to put the Ayn Rand b.s. down and read a bit of history.

  51. Money is a public utility, or it should be. Why shouldn’t states charter their own banks to lend money into circulation for the development of physical and social infrastructure? The Bank of North Dakota has been doing this for almost a century.

    I understand that the big banks love their monopoly position. That doesn’t mean we need to support it.

  52. Jobs = Mobility/Relocation?

    Unfortunately this country has been pigeonholed? There are approximately sixty to seventy million homeowners under water on their mortgages (principle?) by > 30pc, and sadly on the conservative side of this morbid financial ledger.

    Stealthy? The “D66P 6″/FRB’s got US` under their tutelage, how quaint?

    How to do find a new job when your anchored for a decade or more? Doesn’t resonate as the american way…does it?

    Think aloud about this new paradigm of immobility, and now the internet our only communication outlet slowly, and methodically is being squeezed,…for securities sake?

    Thankyou Simon and James, and never ever, stop the “Good Digging for America’s Sake” :-)

    God Bless You, “Julian Assange”!

  53. Sunny cross-currents abound on the south China Seas’ as America awaits its Tsunami?

    Ref: US-China Trade Imbalance “-US-China Media Brief (2008)”

    Does China have import tariffs and quotas.
    China’s low wage advantage.
    China’s undervalued (yuan) currency.
    Factors Driving US-China Trade Imbalance.
    *Relocation of Exports to China*.
    **Over-counting China’s Exports**.
    ***Under-counting US Sales***.
    Who has benefited from China’s surplus with the US?
    Why are critics still blaming China?
    The Chinese Government response.
    Looking Ahead.
    ****Growing Interdependence****!

    http://www.aasc.ucla.edu/uschina/trade_tradeimbalance.shtml

    http://www.uschina.org/statistics/tradeable.html

    http://www.uschina.org/public/exports/states_exports_2007.html

    Please Note: Data from 2007 for states…whereas approx. 25pc +/+ have already moved offshore to China to do their business as of Jan/2011…nice!!!

  54. “it is so easy and so cheap to hire workers in those very emerging markets that are now booming, or perhaps because the skill mix available at prevailing wages in some parts of the US is not exactly what employers want” According to me above mentioned sentences are right as most of the Indian IT companies are getting huge business from US. US companies offer their jobs to Indian due to low salary of employees in India as well as they get top services from their Indian counterparts. Mr. Obama’s recent India visit pointed out about it.