Archive for category Economics
SATURDAY, MARCH 16, 2013
Ed Harrison here. I haven’t been on NC in a while now but Yves asked me to cross-post this one because the issue is important. Let me note here that Tyler Cowen asks some troubling questions on this. And Ed Conway raises some good issues as well. I recommend reading those posts too. Below is my cross-post. If I have any updates, go to the CW version for those.
This morning we learned that after hours of tense negotiation, Europe has hammered out a 10bn euro “bailout” of Cyprus. I put the term bailout in quotes because the key feature of this deal is the bail-in of Cypriot depositors to the tune of 5.8bn euros, about a third of Cyprus’ GDP. This means that depositors went to sleep on Friday night and woke up Saturday to find that their money, deposited safely in Cypriot banks, had been seized and used to “bail out” the country. While the bail-in became official EU bank rescue policy during the Spanish crisis last summer, bank depositors were never mentioned at that time. I see this as an extreme measure which, if the European banking crisis continues elsewhere, will have very negative implications for bank depositor confidence in other European periphery countries.
The mitigating factor in terms of preventing a loss of confidence in the European banking system is that the bail-in will happen principally via a one-time 9.9% levy on deposits over 100,000 euros. This is a bank holiday measure that means that Cypriot bank account holders with funds over 100,000 euros will have 9.9% of their account holdings deducted from their accounts when banks open on Tuesday. However, importantly, an additional 6.75% levy is going to hit deposits below that 100,000 euro level. As a bank depositor, given a one-day national holiday to decide what to do with your now shrunken savings, what would you do?
Cyprus’ finance minister Michalis Sarris said large deposit withdrawals would be banned. Jörg Asmussen, a German member of the ECB board and a key ally of Angela Merkel, added that the part of the deposit base equivalent to the actual bail-in levies would be frozen immediately so the funds could be used to pay for the “bailout”. The Financial Times has the best immediate write-up on this. The finance minister is quoted this way in that article:
“I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” Mr Sarris said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”
Some of the bailout lenders like the IMF had actually been calling for Cyprus to seize all deposits larger than 100,000 euros. So this falls well short of those demands. Nonetheless, a rubicon has been crossed. Not only are senior bank debt lenders now on the hook before a single penny of European Union loans or guarantees flow to busted eurozone countries, but so are subordinated debt holders and so are even depositors. As an EU citizen, you must now believe that any lending exposure you have to a bank whether as a bond lender or deposit lender can be seized and confiscated by government, no matter how small the exposure. The FT notes that “[e]ven Ireland, whose banking sector was about as large relative to its economy as Cyprus’ when it was forced into a bailout in 2010, never considered such a measure.”
Bailout fatigue is the driving force behind the Cyprus bank deposit bail-in. The logic here is the same logic that was at work in the confiscation of subordinated debt holders’ money in the Dutch bank SNS Reaal’s bankruptcy. The principle is that the direct lenders of banks will now become the main parties to lose money in any future EU bailout deal. Significantly, sovereign balance sheets will not take a hit unless nationalized banks’ direct lenders do first. No loans and no guarantees will flow before appropriate haircuts are given to the direct bank lenders. And we can see now that this includes depositors. This approach was first adopted as principle during the Spanish crisis last year. European policy makers see bail-ins as critical in breaking the sovereign-bank nexus which has been so destructive during the European crisis.
My suggestion is that preferreds be converted first, wiped out if the capital is insufficient before moving to the debt holders. The debt holders should have an option of writedowns or equity conversion especially because some debt holders from funds are specifically limited in the types of investments they can hold. And senior debt is the stickiest wicket because haircuts here could create contagion. Nevertheless, the outline here is clear: set specific guidelines on how much bailing in one can anticipate will need to occur and this will go a long way toward relieving market funding worries for euro banks.
To the degree that Europe devises a bank resolution scheme along these lines, they will need to use it because bank recapitalisation will be an issue outside of Spain as well.
I hadn’t even considered bank depositor bail-ins. But apparently that’s what was meant as there are few senior and sub bank debt funds to get in Cyprus. To keep the bail-in principle, the EU was forced to bail in depositors then. This is problematic because no clear standardized EU-wide framework was worked out regarding how and when debt holders would be bailed-in as I suggested last July. Moreover, bailing in depositors brings up the spectre of bank runs again. In Spain, angry depositors were aghast when the money they were coaxed into switching out of deposits into preferreds was bailed in when Spanish banks were nationalized. Can you imagine the reaction if depositors actually lost money?
Details are still sketchy. However, if there is a debt for equity conversion instead of just a clear-cut confiscation of funds, that would certainly mitigate the downside. I will have more to say at a later date but this doesn’t look good to me. It’s another ad-hoc solution that will lead to panic and talk of contagion, bank runs and a eurozone breakup. The EU can get away with this in Cyprus because the country is tiny. Would the same approach work in Spain?
What is clear now, however, is that this draconian solution – with even depositors bailed in – was driven by core European countries’ need to tell their own taxpayers that they would not be paying for the mistakes of others, that no German money would flow to bail out the so-called profligate periphery in a German election year. And that’s what matters most as far as EU policy goes.
If you are an investor, clearly relative value-wise, sovereign debt versus bank debt or sovereign CDS versus bank CDS is going to be a good play.
Editor’s note: Reuters mentions that half of Cypriot savers are thought to be non-resident Russians. So this policy will definitely get a response from Russia (though it is alleged that many of these deposits are tax dodges and that the Russia state would be pleased with the policy response as it would shift deposits back to Russia.
Update: Apparently, a condition of the bailout is that Cyprus raise its tax rate from 10% to 12.5%, the same (low) level as in Ireland. This pre-condition changes the tenor of the bailout somewhat as it makes clear that Cyprus is being forced into a corner and forced to alter macro policies in order to prevent its banking system from collapsing. Every European peripheral nation needs to understand that is what loss of currency sovereignty and inclusion in the euro zone means.
Update 2: The IMF now supports capital controls. This shift in policy occurred in December. I believe the shift will matter if the Cyprus bank bail-in scheme destabilizes deposit bases in periphery countries. See here for the wording of the Cyprus bank deposit guarantee. It is not clear what protection this provides and what the implications are for other deposit guarantees in the EU.
P.S. – I forgot to add this: follow me on twitter! I have been tweeting about this a lot and will be for some time to come. My handle is @edwardnh.
- Cyprus’ Bank Deposit Bail-in (nakedcapitalism.com)
- Bailout Cuts Cyprus Bank Accounts, Withdrawals Barred (greece.greekreporter.com)
- Cyprus shellshocked cash machines EMPTIED 60,000 British savers face losing MILLIONS EU bank Raid (countdowntozerotime.org)
- A look at Cyprus’ decision to tax depositors (miamiherald.com)
- Insane EU: Bank depositors in panic as they pay for Cyprus €10bn bailout (keeptalkinggreece.com)
- This Crazy Cyprus Deal Could Screw Up A Lot More Than Cyprus… (businessinsider.com)
- Europe Announces Stunning Bailout For Cyprus – Bank Depositors To Get Instant 10% Tax Before Banks Reopen This Week (businessinsider.com)
- Britons hit by Cyprus bank bailout (standard.co.uk)
- Cyprus parliament meets on EU bailout (bigpondnews.com)
- The Cyprus Bank Bailout Could Be A Disastrous Precedent: They’re Reneging On Government Deposit Insurance (forbes.com)
Meet the Genius Behind the Trillion-Dollar Coin and the Plot to Breach the Debt Ceiling | Wired Business | Wired.com
Meet the Genius Behind the Trillion-Dollar Coin and the Plot to Breach the Debt Ceiling
BY RYAN TATE
Photo: Kurtis Garbutt/Flickr
It was a December 2009 Wall Street Journal article that ultimately inspired the Georgia lawyer known online as “Beowulf” to invent the trillion-dollar coin.
The article, “Miles for Nothing,” detailed how clever travelers were buying commemorative coins from the U.S. Mint via credit cards that award frequent flier miles. The Mint would ship the coins for free and the travelers would deposit them at the bank, pay off their cards, and accumulate free miles.
More than six months later, during a wonky online discussion about the debt ceiling, Beowulf thought of the article and, egged on by fellow monetary-system obsessives, came up with his own clever plan to exploit the powers of the U.S. Mint. His idea to issue a single trillion-dollar coin to the U.S. Treasury, thus letting it avoid borrowing and bypass the debt ceiling, is now much discussed among Washington elites, including at the White House, where a spokesman Wednesday wouldn’t rule out the scheme.
It’s been a remarkable journey. The path of the trillion-dollar coin, as Beowulf described it to Wired, began with a “silly question” in a “pointless … online bull session” in the comments section of financier Warren Mosler’s blog. Anonymous supporters helped spread the concept to the comments of other economics blogs and ultimately into posts on such sites. The idea soon attracted attention from more prominent liberal economists like James Galbraith and Paul Krugman, and then from writers like Matthew Yglesias and Ezra Klein. From there it was a short hop into the center mainstream. NBC’s Chuck Todd hammered a White House spokesman about the coin possibility on Wednesday.
It’s one thing for bloggers to help bring down a senator; it’s quite another to re-engineer all federal spending.
If the president uses such a coin to bypass intransigent Republicans who refuse to raise the debt ceiling, or even if he merely uses the possibility of such as leverage in negotiations, it will underline how ad-hoc online communities, like the anonymous international band of commenters to which Beowulf belonged, are increasingly able to move their ideas from the fringes into the middle of political debate. It’s one thing for bloggers to help bring down a Mississippi senator or to embarrass a presidential frontrunner, as they have in years past; it’s quite another for commenters to re-engineer the funding of the entire federal budget.
Their initial ambitions weren’t nearly so grand, to hear Beowulf tell it. (Though Beowulf’s real name is relatively easy to discover online, he spoke to Wired on the condition that we leave it out of this story.)
“It was really a pointless conversation,” Beowulf says, referring to the discussion that unfolded underneath a post on Mosler’s blog about government debt and the differences between the U.S. and Greek monetary systems. “I think it’s funny something we were chatting about a few years ago is now in the news.”
“It was almost a contingency plan, a silly question… What would happen if the government couldn’t get the debt ceiling raised?”
Ever the lawyer, Beowulf dived into Title 31 of the U.S. Code: “Money and Finance.” That Journalarticle was still rattling around in his head. He was also inspired by ideas from attorney-turned-finance-author Ellen Brown, who in her 2008 book Web of Debt quoted a 1980s-era director of Treasury’s Bureau of Engraving and Printing as saying the government could solve its debt problems by printing large coins. He wasn’t talking about circumventing the debt ceiling, which hadn’t yet become a political football, but he may have been on to something.
A comment thread begun nine days after the original post focused on the relationship between the Federal Reserve and the U.S. Treasury and on whether the Fed can legally help the Treasury circumvent the debt ceiling by, for example, overdrafting its account with the Fed.
But Beowulf added a new wrinkle: Why not seize upon the peculiar power of the U.S. Mint to issue platinum coins at the discretion of the Treasury Secretary, an unanticipated side effect of legislation intended to provide for a miniscule trade in commemorative coins?
Beowulf, a leading contributor to the blog Monetary Realism, explained his thinking to us this way: “If you go through the Federal Reserve, you’re borrowing money. If you go through the Mint, you’re making money.” (He hastens to add that the latter is actually more expensive for the government at the moment, but it does have the virtue of getting around a debt ceiling.)
Some of Beowulf’s buddies on Mosler’s blog, whose prodding had helped him come up with the trillion dollar coin idea in the first place, then fanned out to promote the idea. For example, a commenter who goes by Ramanam – Beowulf believes he’s from India – posted the idea within a week to Bill Mitceh’s “bill blog” on Modern Monetary Theory. Another supporter, management consultant Joe Firestone, alsowrote widely about the coin idea, crediting Beowulf.
“[Joe] and Cullen Roche were out there banging the drum for it,” Beowulf says. “You say it was my idea, [but] it was a group of people – it was really a group thing… It’s fascinating that I can have a bull session with people all over the country.”
After one of Firestone’s blog posts about the coin, Beowulf says, left-leaning economist James K. Galraith messaged Firestone about the idea, and shortly thereafter other prominent liberal economists began discussing the coin.
Interestingly, although the coin has been embraced by liberals as a useful political hack and rejected by Republicans as absurd and dangerous, the man who came up with it voted for Mitt Romney. Beowulf says he would have advised the 2012 Republican presidential candidate to use the same trick had he been elected president.
“We’re not real political,” he says of his circle of online pals, who he likens to players in a fantasy football league, but for the monetary system. “It’s like 4chan says – we’re just in it for the – what is it? LOLs? – lulz, lulz.”
Though, when Beowulf stops laughing, he finds the whole notion absurd. “It’s more a disappointment than anything,” he says. “There’s really no reason for a trillion dollar coin, it’s kind of sad that it’s gone this far.”
It may have started as a game, but Beowulf and his pals are poised to inject an important new tactic into oversight of the government’s monetary institutions.
The coin hack even surprised and impressed former U.S. Mint director Philip Diehl, who co-authored the law that enabled the platinum loophole in the first place.
“When I first heard about the idea to mint a trillion-dollar coin, I was very surprised,” says Diehl. “But because I know that law backwards and forwards, I knew immediately that the guy who came up with the idea was right.
“It’s an ingenious use of the law to avoid a ridiculous and irresponsible situation, in which the country would be driven to default.”
(For more from Diehl, see Why Stealing a $1 Trillion Coin Isn’t Worth the Price of a Getaway Van.)
Clever though it may be, the trillion-dollar coin may not be Beowulf’s last monetary parlor trick. He described to us a borrowing scheme involving the Treasury and the Federal Deposit Insurance Corporation, which could potentially allow ready access to funds totaling “90 percent of infinity.” Congress, you may have met your match.
- Can a $1 trillion coin end debt ceiling crisis? (mbcalyn.com)
- Can We Avert The Coming Debt Ceiling Crisis With A Magic Coin? (mbcalyn.com)
- Judge Napolitano Weighs in on the Trillion Dollar Coin Proposal: ‘It Would Be Economically Catastrophic’ (foxnewsinsider.com)
- Why #MintTheCoin Is A Good Strategy (crooksandliars.com)
- Trillion-dollar coin politically alluring (upi.com)
- The #1 Mistake People Are Making About The Trillion Dollar Platinum Coin (businessinsider.com)
- The story of the $1 trillion coin (mnn.com)
- Refuses to rule out minting $1 trillion coin… (politico.com)
- Trillion dollar coin: The new nuclear option (washingtonpost.com)
- Mint That Coin (managed-futures-blog.attaincapital.com)
Stabilization Won’t Save Us
By NASSIM NICHOLAS TALEB
Published: December 23, 2012
THE fiscal cliff is not really a “cliff”; the entire country won’t fall into the ocean if we hit it. Some automatic tax cuts will expire; the government will be forced to cut some expenditures. The cliff is really just a red herring.
Likewise, any last-minute deal to avoid the spending cuts and tax increases scheduled to go into effect on Jan. 1 isn’t likely to save us from economic turmoil. It would merely let us continue the policy mistakes we’ve been making for years, allowing us only to temporarily stabilize the economy rather than address its deep, systemic failures.
Stabilization, of course, has long been the economic playbook of the United States government; it has kept interest rates low, shored up banks, purchased bad debts and printed money. But the effect is akin to treating metastatic cancer with painkillers. It has not only let deeper problems fester, but also aggravated inequality. Bankers have continued to get rich using taxpayer dollars as both fuel and backstop. And printing money tends to disproportionately benefit a certain class. The rise in asset prices made the superrich even richer, while the median family income has dropped.
Overstabilization also corrects problems that ought not to be corrected and renders the economy more fragile; and in a fragile economy, even small errors can lead to crises and plunge the entire system into chaos. That’s what happened in 2008. More than four years after that financial crisis began, nothing has been done to address its root causes.
Our goal instead should be an antifragile system — one in which mistakes don’t ricochet throughout the economy, but can instead be used to fuel growth. The key elements to such a system are decentralization of decision making and ensuring that all economic and political actors have some “skin in the game.”
Two of the biggest policy mistakes of the past decade resulted from centralized decision making. First, the Iraq war, in addition to its tragic outcomes, cost between 40 and 100 times the original estimates. The second was the 2008 crisis, which I believe resulted from an all-too-powerful Federal Reserve providing cheap money to stifle economic volatility; this, in turn, led to the accumulation of hidden risks in the economic system, which cascaded into a major blowup.
Just as we didn’t forecast these two mistakes and their impact, we’ll miss the next ones unless we confront our error-prone system. Fortunately, the solution can be bipartisan, pleasing both those who decry a large federal government and those who distrust the market.
First, in a decentralized system, errors are by nature smaller. Switzerland is one of the world’s wealthiest and most stable countries. It is also highly decentralized — with 26 cantons that are self-governing and make most of their own budgetary decisions. The absence of a central monopoly on taxation makes them compete for tax and bureaucratic efficiency. And if the Jura canton goes bankrupt, it will not destabilize the entire Swiss economy.
In decentralized systems, problems can be solved early and when they are small; stakeholders are also generally more willing to pay to solve local challenges (like fixing a bridge), which often affect them in a direct way. And when there are terrible failures in economic management — a bankrupt county, a state ill-prepared for its pension obligations — these do not necessarily bring the national economy to its knees. In fact, states and municipalities will learn from the mistakes of others, ultimately making the economy stronger.
It’s a myth that centralization and size bring “efficiency.” Centralized states are deficit-prone precisely because they tend to be gamed by lobbyists and large corporations, which increase their size in order to get the protection of bailouts. No large company should ever be bailed out; it creates a moral hazard.
Consider the difference between Silicon Valley entrepreneurs, who are taught to “fail early and often,” and large corporations that leech off governments and demand bailouts when they’re in trouble on the pretext that they are too big to fail. Entrepreneurs don’t ask for bailouts, and their failures do not destabilize the economy as a whole.
Second, there must be skin in the game across the board, so that nobody can inflict harm on others without first harming himself. Bankers got rich — and are still rich — from transferring risk to taxpayers (and we still haven’t seen clawbacks of executive pay at companies that were bailed out). Likewise, Washington bureaucrats haven’t been exposed to punishment for their errors, whereas officials at the municipal level often have to face the wrath of voters (and neighbors) who are affected by their mistakes.
If we want our economy not to be merely resilient, but to flourish, we must strive for antifragility. It is the difference between something that breaks severely after a policy error, and something that thrives from such mistakes. Since we cannot stop making mistakes and prediction errors, let us make sure their impact is limited and localized, and can in the long term help ensure our prosperity and growth.
- Bill Black: Kill the “Fiscal Cliff” Instead of the Economy ” naked capitalism (mbcalyn.com)
- It’s Not A “Fiscal Cliff” … It’s The Descent Into Lawlessness (shiftfrequency.com)
- Wonkbook: Fiscal cliff deal moves to the Senate (washingtonpost.com)
- Poll: Americans view economy as poor, split on future (mbcalyn.com)
- Fiscal Cliff: Democrats Fiddle While Nation Burns (frontpagemag.com)
- Obama Playing Chicken With Economic Disaster (townhall.com)
- Diving into the fiscal economic mess (sgtreport.com)
- It’s Not a “Fiscal Cliff” … It’s the Descent Into Lawlessness (12160.info)
- Chaos Is Good for You (slate.com)
- Weighing the Week Ahead: Decision Time? (oldprof.typepad.com)
Business groups grow frustrated over impasse in ‘fiscal cliff’ talks
By Vicki Needham - 12/23/12
Business leaders are growing increasingly frustrated with the lack of progress in talks to head off billions in looming tax hikes and spending cuts they say will harm the nation’s economy.
Concern increased among business groups following the failure of House Republicans to round up enough votes to pass their “Plan B” bill that would have stopped tax increases on anyone making $1 million a year or less.
“We’re not in a state of panic over last night because it was part of the process,” David French, the chief lobbyist for the National Retail Federation, told The Hill.
But “we’re nervous,” he said.
French argues though that while a deal at this point is logistically difficult, reaching an agreement would set a positive tone for the next couple of years when lawmakers will be forced to work together on comprehensive tax and entitlement reform.
Lack of a bipartisan compromise would be the “worst thing that can happen,” he said, as it would spell “two more years of political trench warfare.”
The stark reality of that possibility sunk in after lawmakers left Washington on Friday for the Christmas holidays with neither a broad bipartisan agreement nor a back up plan that could, at the very least, prevent more than $600 billion in tax increases and spending cuts scheduled to begin in January.
French said all of the sides must come together on a deal.
“House Republicans negotiating with themselves aren’t going to resolve this,” French said.
Through most of the month, business leaders sounded an optimistic chorus. And talks between Speaker John Boehner (R-Ohio) and President Obama did appear to make progress before Boehner moved to his backup plan.
But the latest news has shifted the mood among business leaders.
“There is incredible frustration,” said one source representing the business community who asked not to be identified.
Business owners across the country now feel like the last month has been “virtually wasted” with unnecessary political posturing when they “could have been at the table hammering away” toward an agreement, the source said.
“Our position hasn’t changed, we know what businesses want and we’re advocating for what they need, which is something that will offer growth.”
The White House and Capitol Hill have served as a virtual carousel for dozens of chief executives who have urged lawmakers and President Obama to craft a broad agreement that includes tax hikes, spending cuts and entitlement reforms.
Collectively, business groups generally have pushed for the sides to agree to a sizeable deficit-reduction package that also prevents tax hikes on most taxpayers. Big and small businesses have sometimes been at odds during the talks, with corporate CEOs offering more support for higher tax rates and small business groups arguing that would hurt their members.
Many hoped the talks could provide a framework for tax reform next year, something that has long been a priority for the corporate world.
- How Boehner’s Plan B Vote Imploded – NationalJournal.com (mbcalyn.com)
- Conservatives urge GOP leaders to be bold, prepare to go over cliff – The Hill’s On The Money (mbcalyn.com)
- Search for Way Through Fiscal Impasse Turns to the Senate – NYTimes.com (mbcalyn.com)
- Congress in Tizzy; One GOP Leader: Obama ‘Eager to Go Over the Cliff’ (bloomberg.com)
- How Party of Budget Restraint Shifted to ‘No New Taxes,’ Ever – NYTimes.com (mbcalyn.com)
- Boehner, White House vow to press ahead (kansascity.com)
- A Flaccid Boehner (skydancingblog.com)
- “Fiscal cliff” efforts in disarray as U.S. lawmakers flee (reuters.com)
- Conservatives urge GOP leaders to be bold, prepare to go over cliff (thehill.com)
- US ‘fiscal cliff’ vote abandoned (bbc.co.uk)
The Liberation of General MotorsBy STEVEN RATTNER
Like Willy the whale, General Motors has finally been freed – or nearly so.
Today’s announcement that the Treasury Department had agreed on a process to extricate the government from its ownership stake in G.M., the world’s largest automaker, is welcome news.
For General Motors, the separation will conclusively remove the appellation of “government motors,” a stigma that the company had argued affected the buying decisions of a meaningful segment of consumers.
The divorce will ultimately also liberate G.M. from a number of government-imposed restrictions, importantly including those relating to executive compensation. These restrictions adversely affected G.M.’s ability to recruit and retain talent. Now, compensation decisions will be made by the company’s board of directors, just as they are in every other public company in America.
From Washington’s point of view, divesting its remaining shares will end an uncomfortable and distinctly un-American period of government ownership in a major industrial company.
The only alternative to government stepping in would have been for the companies to close their doors, terminate all their workers and liquidate.
Neither the George W. Bush nor the Obama administrations volunteered to bail out G.M., Chrysler and other parts of the auto sector. Both subscribed firmly to the longstanding American principle that government should resolutely avoid these kinds of interventions, particularly in the industrial sector.
However, in this case, that was simply not possible, as Mr. Bush and Mr. Obama both concluded. I and the other members of the Obama administration’s auto task force determined that the industry’s crisis was caused not only by the financial and economic meltdown but, equally, by poor management that had run these American icons into the ground and exhausted their cash resources.
We were faced with a classic market failure: Not a penny of private capital was willing to provide the financing essential for these companies to keep running. Those (like Mitt Romney) who contend that G.M. and Chrysler could have been restructured without government involvement simply don’t understand the facts.
The only alternative to government stepping in would have been for the companies to close their doors, terminate all their workers and liquidate. That would have led to huge failures and layoffs among the suppliers. Even Ford would have had to shut down, at least for a time, because of the unavailability of parts.
Here’s another important lesson of the auto rescue: It would not have been possible without the existence of the much-hated $700 billion Troubled Asset Relief Program.
Without TARP, we could not have provided the $82 billion to these companies without Congressional approval. And given the dysfunction of Congress, I don’t believe there was any chance that the legislature would have acted within the few weeks that we had before the companies would have collapsed.
In a perfect world, I would not be a seller of G.M. stock at this moment. For one thing, the company is still completing the reworking of its sluggish management processes in order to achieve faster and better decisions and lower costs.
For another, G.M.’s financial problems slowed its development of new products during 2008 and 2009. Now, a passel of shiny new models offering great promise is about to hit showrooms.
And in my view, G.M. stock remains undervalued, trading at about 7 times its projected 2013 earnings, compared with nearly 13 for the stock market as whole.
But as my former boss in the White House, Lawrence H. Summers, kept reminding us in 2009, this intervention needed to be the opposite of Vietnam: We wanted to have as small a footprint as possible while the government was a shareholder and to get out as quickly as practicable.
While the government still retains (temporarily) a majority stake in Ally, G.M.’s former finance arm (formerly known as GMAC), the scorecard for the auto rescue is nearly complete.
Of the $82 billion that the two administrations pumped into the auto sector, Treasury is likely to recover all but about $14 billion.
No doubt, bailout haters will focus on this loss of taxpayer money. But remember two key points:
First, the $17.4 billion initial round of bridge loans that was provided at the end of 2008 was necessary only because GM and Chrysler had been utterly derelict in not preparing for restructurings through bankruptcy that were clearly inevitable. G.M., in particular, wallowed in an irresponsible state of denial. Had the companies been properly prepared, the loss of that $17.4 billion could have been avoided.
Second, for $14 billion – 0.4 percent of the government’s annual expenditures – more than a million jobs were saved at a time when unemployment in the Midwest was well above 10 percent.
The auto industry has not only survived but it is flourishing. Car sales, which had sunk as low as 10.4 million in 2009, are now running at an annual rate of more than 15 million. As many as 250,000 new workers have been added. Disastrous past industry practices – from bloated inventories to excessive sales incentives – have been curbed. As a result, G.M. earn more in 2011 than in any year in its 104-year history.
Finally, let’s keep well in mind the most important lesson of the auto rescue: While government should stay away from the private sector as much as possible, markets do occasionally fail, and when they do government can play a constructive role, as it did in the case of the auto rescue.
- Liberty to Lie – NYTimes.com (mbcalyn.com)
- Rhetoric returns to auto bailout (dispatch.com)
- Now General Motors Is Ripping Mitt Romney For Lying About The Auto Industry (businessinsider.com)
- Fact check: Obama, Romney trade charges over federal auto bailout (latimes.com)
- GM: Romney in ‘parallel universe’ with bailout claims – The Hill’s Transportation Report (mbcalyn.com)
- Obama’s U.S. Auto Industry Better Off Than Four Years Ago: Cars – Bloomberg (bloomberg.com)
- General Motors to Change Name to Government Motors (lunaticoutpost.com)
- Now They Tell Us (pjmedia.com)
- The Oracle at Delphi: Mitt Romney’s direct tie to increased unemployment in North Alabama (warmsouthernbreeze.wordpress.com)
- Romney Profited from Auto Bailout (drudge.com)
McDonald’s Worker Makes $8.25 an Hour, McDonald’s CEO Made $8.75 Million Last Year
The CEO makes almost 600 times as much as one Chicago worker.
December 12, 2012
Bloomberg has an article today highlighting the pay gap at McDonald’s. The whole piece is worth a read but the beginning is particularly striking. It highlights Chicago man Tyree Johnson, who holds positions at two different McDonald’s. Between shifts he has to give himself a quick scrubbing in one of the restaurant’s bathrooms because he can’t even show up for work at a McDonald’s smelling like a McDonald’s.
“I hate when my boss tells me she won’t give me a raise because she can smell me,” he said.
Johnson, 44, needs the two paychecks to pay rent for his apartment at a single-room occupancy hotel on the city’s north side. While he’s worked at McDonald’s stores for two decades, he still doesn’t get 40 hours a week and makes $8.25 an hour, minimum wage in Illinois.
This is life in one of America’s premier growth industries. Fast-food restaurants have added positions more than twice as fast as the U.S. average during the recovery that began in June 2009.
Johnson’s circumstances look particularly grim when they’re compared, as Bloomberg does, to the compensation enjoyed by executives whose pay gives a whole new meaning to “McJob.”
Johnson would need about a million hours of work — or more than a century on the clock — to earn the $8.75 million that McDonald’s, based in the Chicago suburb of Oak Brook, paid then- CEO Jim Skinner last year.
… Twenty years ago, when Johnson first started at McDonald’s, the CEO’s compensation was about 230 times that of a full-time worker paid the federal minimum wage. The $8.75 million that Thompson’s predecessor as CEO, Skinner, made last year was 580 times, according to data compiled by Bloomberg.
- McDonald’s Worker Makes $8.25 an Hour, McDonald’s CEO Made $8.75 Million Last Year (alternet.org)
- McDonald’s Employee Excited to Be Earning Minimum Wage After 20 Years On the Job (wonkette.com)
- McDonalds CEO Earns $35,000 Per Day: Fox News Worries About Greedy Unions (addictinginfo.org)
- Tyree Johnson, McDonald’s Worker, Still Makes Minimum Wage After 20 Years Of Service (huffingtonpost.com)
- McDonald’s minimum-wage workers, high-paid CEOs highlight massive pay gap between rich and poor (business.financialpost.com)
- McDonald’s $8.25 Man and $8.75 Million CEO Shows Pay Gap (bloomberg.com)
- A McDonald’s Employee Must Work One Million Hours To Make As Much As The Company’s CEO (thinkprogress.org)
- McDonald’s CEO made almost 600x as much as the ones who do all the real work (dangerousminds.net)
- McDonald’s $8.25 Man and $8.75 Million CEO Shows Pay Gap – Bloomberg (jdeanicite.typepad.com)
- In rare strike, NYC fast-food workers walk out – Salon.com (mbcalyn.com)
Robots and Robber Barons
By PAUL KRUGMAN
Published: December 9, 2012
The American economy is still, by most measures, deeply depressed. But corporate profits are at a record high. How is that possible? It’s simple: profits have surged as a share of national income, whilewages and other labor compensation are down. The pie isn’t growing the way it should — but capital is doing fine by grabbing an ever-larger slice, at labor’s expense.
Fred R. Conrad/The New York Times
Wait — are we really back to talking about capital versus labor? Isn’t that an old-fashioned, almost Marxist sort of discussion, out of date in our modern information economy? Well, that’s what many people thought; for the past generation discussions of inequality have focused overwhelmingly not on capital versus labor but on distributional issues between workers, either on the gap between more- and less-educated workers or on the soaring incomes of a handful of superstars in finance and other fields. But that may be yesterday’s story.
More specifically, while it’s true that the finance guys are still making out like bandits — in part because, as we now know, some of them actually are bandits — the wage gapbetween workers with a college education and those without, which grew a lot in the 1980s and early 1990s,hasn’t changed much since then. Indeed, recent collegegraduates had stagnant incomes even before the financial crisis struck. Increasingly, profits have been rising at the expense of workers in general, including workers with the skills that were supposed to lead to success in today’s economy.
Why is this happening? As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.
About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.
In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.
Still, can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries. The early-19th-century economist David Ricardo is best known for the theory of comparative advantage, which makes the case for free trade; but the same 1817 book in which he presented that theory also included a chapter on how the new, capital-intensive technologies of the Industrial Revolution could actually make workers worse off, at least for a while — which modern scholarship suggests may indeed have happened for several decades.
What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.
I don’t know how much of the devaluation of labor either technology or monopoly explains, in part because there has been so little discussion of what’s going on. I think it’s fair to say that the shift of income from labor to capital has not yet made it into our national discourse.
Yet that shift is happening — and it has major implications. For example, there is a big, lavishly financed push to reduce corporate tax rates; is this really what we want to be doing at a time when profits are surging at workers’ expense? Or what about the push to reduce or eliminate inheritance taxes; if we’re moving back to a world in which financial capital, not skill or education, determines income, do we really want to make it even easier to inherit wealth?
As I said, this is a discussion that has barely begun — but it’s time to get started, before the robots and the robber barons turn our society into something unrecognizable.
- Paul Krugman: Robots and Robber Barons (mgptpt.wordpress.com)
- Paul Krugman: Robots and Robber Barons (economistsview.typepad.com)
- “Robots And Robber Barons”: Profits Continue To Rise At The Expense Of Workers (bell-book-candle.com)
- Op-Ed Columnist: Robots and Robber Barons (nytimes.com)
- Robots and Robber Barons (thesunnews.typepad.com)
- “Robots And Robber Barons”: Profits Continue To Rise At The Expense Of Workers (mykeystrokes.com)
- Robots and Robber Barons (realclearpolitics.com)
- Abbreviated Pundit Round-up: The fiscal thingie and what Republicans need to do about it (dailykos.com)
- Taking Seriously A Changed Labor Market (takingpitches.com)
- It’s a Wealth Distribution Question, Not a Jobs Crisis: (brothersjuddblog.com)