“Crises Are an Inevitable Concomitant of Risk”

(p. 11) Some economic risks are worth taking, and crises are an inevitable concomitant of risk. Crises, like firm failures, can be seen as a manifestation of the Schumpeterian process of creative destruction. The role for economic analysis is to ensure that the creation dominates and that the destruction is not too costly.

Source:
Eichengreen, Barry. Capital Flows and Crises. Cambridge, MA: The MIT Press, 2003.

“Amazed by the Short-Term Psychology in the Market”

(p. A1) Even after European leaders appeared to have averted a chaotic default by Greece with an eleventh-hour deal for aid, worries persist that a debt disaster on the Continent has merely been delayed.

The tortured process that culminated in that latest bailout has exposed the severe limitations of Europe’s approach to the crisis. Many fear that policy makers simply don’t have the right tools to deal with other troubled countries like Italy, Spain, Ireland and Portugal, a situation that could weigh on the markets and the broader economy.
“I don’t want to be a Cassandra, but the idea that it’s over is an illusion,” said Kenneth S. Rogoff, a professor of economics at Harvard and co-author of “This Time Is Different: Eight Centuries of Financial Folly.” “I am amazed by the short-term psychology in the market.”
. . .
(p. B3) “I don’t think we’re anywhere near the endgame,” Professor Rogoff of Harvard said.

For the full commentary, see:
PETER EAVIS. ” NEWS ANALYSIS; For Greece, a Bailout; for Europe, Perhaps Just an Illusion.” The New York Times (Weds., February 22, 2012): A1 & B3 (sic).
(Note: ellipsis added.)
(Note: the online version of the commentary is dated February 21, 2012.)

Rogoff and Reinhart’s thought-provoking and much-praised book is:
Reinhart, Carmen M., and Kenneth Rogoff. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press, 2009.

Few Jobs from Billions Feds Spent on Green Stimulus

WindFarmTexas2012-02-29.jpg “County Commissioner Rosaura Tijerina supported tax breaks for the Cedro Hill wind farm, but it brought few new jobs.” Source of caption and photo: online version of the WSJ review quoted and cited below.

(p. A1) Alfredo Garcia was among the residents of Webb County, Texas, banking on a windfall from federal stimulus money.

Mr. Garcia expanded his Mexican restaurant from 80 to 120 seats, anticipating a rush of new patrons springing from the nearby Cedro Hill wind farm, a project built with the help of $108 million from U.S. taxpayers.
When construction ended, Cedro Hill had just three employees and Mr. Garcia’s restaurant, Aimee’s, filed for bankruptcy protection. “Nobody came,” said Mr. Garcia, a county judge who closed Aimee’s last year, putting 18 people out of work.
Companies have received more than $10 billion to create jobs and renewable energy by building wind farms, solar projects and other alternatives to oil and natural gas under section 1603 of the American Recovery and Reinvestment Act of 2009. The program expired in December, and President Barack Obama proposed last week that Congress revive it in the 2013 budget.
On federal applications, companies said they created more than 100,000 direct jobs at 1603-funded projects. But a Wall Street Journal investigation found evidence of far fewer. Some plants laid off workers. Others closed.
The discrepancies highlight broader challenges calculating the economic benefits of stimulus spending. Jobs have been an important measure influencing distribution of more than $800 billion in stimulus money, which also has included tax breaks and spending on roads, sewers, schools, health and public assis-(p. A10)tance. Yet the number of jobs created or saved is largely based on formulas, mathematical models and reports by recipients, rather than actual tallies.

For the full story, see:
IANTHE JEANNE DUGAN and JUSTIN SCHECK. “Cost of $10 Billion Stimulus Easier to Tally Than New Jobs.” The Wall Street Journal (Fri., FEBRUARY 24, 2012): A1 & A10.

WindStimulusRecipientsGraph2012-02-29.jpg

Source of graphic: online version of the WSJ story quoted and cited above.

Nasar Gives Compelling Portrait of Joseph Schumpeter and His Vienna

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Source of book image: http://luxuryreading.com/wp-content/uploads/2011/10/grand-pursuit.jpg

(p. C31) Ms. Nasar gives us Belle Époque Vienna — infatuated with modernity and challenging London in the race to electrify with new telephone service, state-of-the-art factories and power-driven trams — and then a devastating picture of Vienna at the end of World War I: war veterans loitering outside restaurants waiting for scraps, and desperate members of a middle class that saw inflation wipe out all its savings trading a piano for a sack of flour, a gold watch chain for a few sacks of potatoes.
. . .
Among the more compelling portraits in this volume is that of Joseph Alois Schumpeter, the brilliant European economist who argued that the distinctive feature of capitalism was “incessant innovation” — a “perennial gale of creative destruction” — and who identified the entrepreneur as the visionary who could “revolutionize the pattern of production by exploiting an invention” or “an untried technological possibility.”

For the full review, see:
MICHIKO KAKUTANI. “BOOKS OF THE TIMES; The Economist’s Progress: Better Living Through Fiscal Chemistry.” The New York Times (Fri., December 2, 2011): C31.
(Note: ellipsis added.)
(Note: the online version of the article is dated December 1, 2011.)

Even Krugman Worries that China Faces “Economic Crisis”

China’s economy is often touted as an exemplar of the success of government stimulus policies at promoting economic growth. So it is worth noting when a Nobel-Prize-winning international economist and advocate of government stimulus policies worries that in China:

(p. A25) . . . the bubble is bursting — and there are real reasons to fear financial and economic crisis.
. . .
I’ve been reluctant to weigh in on the Chinese situation, in part because it’s so hard to know what’s really happening. All economic statistics are best seen as a peculiarly boring form of science fiction, but China’s numbers are more fictional than most. I’d turn to real China experts for guidance, but no two experts seem to be telling the same story.

Still, even the official data are troubling — and recent news is sufficiently dramatic to ring alarm bells.
. . .
Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.
Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida.
. . .
For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing.
And anecdotal evidence suggests that while China’s government may not be constrained by rule of law, it is constrained by pervasive corruption, which means that what actually happens at the local level may bear little resemblance to what is ordered in Beijing.

For the full commentary, see:
PAUL KRUGMAN. “Will China Break?” The New York Times (Mon., December 19, 2011): A25.
(Note: ellipses added.)
(Note: the online version of the story is dated December 18, 2011.)

In Supporting Bailouts Buffett Was More Bootlegger than Baptist

ThrowThemAllOutBK.jpg

Source of book image: online version of the Omaha World-Herald review quoted and cited below.

(p. 9A) Peter Schweizer’s new book, “Throw Them All Out” (Houghton Mifflin Harcourt, 211 pages, $26) mostly goes after members of Congress for profiting from inside information and making investments that are legal for them but would be illegal for almost anyone else.

But Chapter 6 is titled, “Warren Buffett: Baptist and Bootlegger.”
Buffett is neither an actual Baptist nor a bootlegger, of course. Schweizer’s reference is to the alliance of churchgoers and illegal marketers of liquor who both favored laws to limit the legal sale of alcohol, although for different reasons.
Schweizer wrote that during the 2008-09 financial crisis, Buffett pushed for government action and called attention to the problems, looking like a noble Baptist, but profited from the bailouts, like a bootlegger, through investments in Goldman Sachs, General Electric, Wells Fargo and other financial companies.
“Buffett needed the bailout,” Schweizer wrote. “He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington.” Several senators, including Ben Nelson, D-Neb., are Berkshire shareholders, Schweizer wrote, “and they had to know that passing the bailout bill would bring big returns for their Berkshire stock.”
“There were many legitimate reasons to support the bill, and it can hardly be said that Buffett’s support was the deciding factor,” Schweizer wrote. “But his Baptist-bootlegger position was noteworthy for its strength in both directions: a lot of people followed his advice, and he and they made (p. 10A) a lot of money by pushing for the bailout. . . .
“Warren Buffett is a financial genius. But even more important for his portfolio, he’s a political genius.”

For the full story, see:
Steve Jordon. “Warren Watch: Author Says Buffett Is a ‘Political Genius’.” Omaha World-Herald (Sunday, November 20, 2011): 9A -10A.
(Note: ellipsis in original.)
(Note: the online version of the article has the title “Warren Watch: A ‘Political Genius’.”)

Steve Jordan is discussing the book:
Schweizer, Peter. Throw Them All Out. New York: Houghton Mifflin Harcourt Trade, 2011.

Bruce Yandle is the former President of APEE and the author of the classic article on how bootleggers and Baptists often become allies in calling for government action:
Yandle, Buce. “Bootleggers and Baptists: The Education of a Regulatory Economist.” Regulation 7, no. 3 (1983): 12-16.

AFA Scholars Predict Sovereign Defaults

At the Chicago American Finance Association (AFA) meetings (held in conjunction with the AEA meetings), I attended a panel discussion on Fri., Jan. 6, 2012 on “Sovereign Default.” The session was chaired by Simon Johnson, and included Kenneth Singleton and Carmen Reinhart (who has co-authored a much-discussed book on the history of economic crises). (Martin Feldstein was supposed to participate but did not, and I did not catch the name of the scholar who replaced him on the panel).
When asked if they expected multiple countries in Europe to default in the near to medium term, all panel members agreed that such default would happen. (The consensus was that Greece, and at least a couple of other countries, would eventually default—the Euros needed to bail them out were too large, even if the Germans and the ECB changed course and wanted to try.) Before seeing the panel, I was not aware that expert academic opinion was so agreed on this prediction.
There was less certainty about whether this would necessarily lead to the end of the Euro. Reinhart pointed out that even in Greece, where austerity is severe and unpopular, there is currently little popular support for abandoning the Euro.
The panelists seemed to believe that sovereign defaults might lead to slow growth, high taxes and inflation, but might not lead to catastrophe.
Reinhart suggested that Europe, and maybe also the United States and the rest of the world, might just muddle along for an extended period.

The Kauffman Foundation’s Startup Act Would Encourage Entrepreneurs

The WSJ tells us the credentials of the authors of the following advice: “Mr. Muller is CEO of GenOn Energy. Mr. Zimpleman is president and CEO of the Principal Financial Group.”

(p. A15) In our view, there is no hope of giving consumers renewed confidence in America unless governments at all levels mount a vigorous effort to get rid of rules that discourage entrepreneurs from launching and growing new businesses.

The Kauffman Foundation recently proposed a way to do that with a set of ideas aptly called the Startup Act. Those ideas, which would cost the government virtually nothing, include:
• Letting in immigrant entrepreneurs who hire American workers.
• Reducing the cost of capital through capital gains tax relief for early stage investments.
• Reducing barriers to IPOs by allowing shareholders to opt out of Sarbanes-Oxley.
• Charging higher fees for patent applicants who want quick decisions to remove the backlog of applications at the Patent Office.
• Giving licensing freedom to academic entrepreneurs at universities to accelerate the commercialization of their ideas.
• Having the government provide data to permit rankings of startup friendliness of states and localities.
• Regular sunsets for regulations and a consistent policy of putting new ones in place only if their benefits exceed their costs.

For the full commentary, see:
EDWARD R. MULLER and LARRY ZIMPLEMAN. “OPINION; An Entrepreneurial Fix for the U.S. Economy; Several reforms can make it faster and easier for new business startups..” The Wall Street Journal (Mon., AUGUST 29, 2011): A15.

Federal Subsidies Create Few Green Jobs

(p. F2) . . . solar power, which makes extensive use of robots in fabricating the cells, and has no moving parts to service once it is up and running, may be an odd choice for job creation.
“It’s just not that labor-intensive,” said Howard Axelrod, an engineer and economist. And as for the jobs it creates, there may be a price elsewhere, Dr. Axelrod said.
. . .
Build enough solar plants and some coal plants will shut down; that would amount to firing Peter to hire Paul.
. . .
And, economists point out, some of the work that renewable energy creates goes to people who already have jobs — roofers who install the panels or truck drivers who move them around, or steel workers who make towers for new wind machines.
Some of the jobs could eventually go elsewhere. Two years ago, Evergreen Solar, which got $58 million in aid from Massachusetts for a factory in Devens, said it would shift production to China instead.
. . .
The debate is part of a larger discussion of what constitutes a “green” job. In October 2009, Congress gave the Bureau of Labor Statistics a special appropriation to count them.
. . .
“Driving a bus is driving a bus, right?” said Connie Mack, Republican of Florida. Hilda Solis, the secretary of labor, said they were “green buses.” But aides later clarified that the bureau counted any bus driving job as green because it preserved natural resources.
None of this suggests that green is bad, just that it is not particularly job-heavy. In December 2010, Susan Combs, the comptroller of Texas, reported that school districts in her state were giving tax abatements to lure new jobs, but had to give $1.6 million for every wind energy job. Manufacturing jobs could be created for $166,000 each.

For the full story, see:
MATTHEW L. WALD. “Solar Power Industry Falls Short of Hopes in Job Creation.” The New York Times (Weds., October 26, 2011): F2.
(Note: ellipses added.)
(Note: the online version of the article has the date October 25, 2011.)

Collins Says Successful CEOs Are Empirical and Disciplined

GreatByChoiceBK.jpg

Source of book image: online version of the WSJ review quoted and cited below.

(p. A15) ‘Great by Choice” is a sequel to Jim Collins’s best-selling “Good to Great” (2001), which identified seven characteristics that enabled companies to become truly great over an extended period of time. Never mind that one of the 11 featured companies is now bankrupt (Circuit City) and another is in government receivership (Fannie Mae). Mr. Collins has a knack for analysis that business readers find compelling.

Mr. Collins’s new book tackles the question of how to steer a company to lasting success in an environment characterized by change, uncertainty and even chaos. Like his previous work, this book builds its conclusions on a framework of painstaking research, conducted over nine years and overseen by Mr. Collins and his co-author, Morten T. Hansen, a management professor at the University of California, Berkeley.
. . .
Messrs. Collins and Hansen draw some interesting and counterintuitive conclusions from their research. First, the successful leaders were not the most “visionary” or the biggest risk-takers; instead, they tended to be more empirical and disciplined, relying on evidence over gut instinct and preferring consistent gains to blow-out winners. The successful companies were not more innovative than the control companies; indeed, they were in some cases less innovative. Rather, they managed to “scale innovation”–introducing changes gradually, then moving quickly to capitalize on those that showed promise. The successful companies weren’t necessarily the most likely to adopt internal changes as a response to a changing environment. “The 10X companies changed less in reaction to their changing world than the comparison cases,” the authors conclude.
. . .
If “Great by Choice” shares the qualities that made “Good to Great” so popular, it also shares some that drew criticism. The authors’ conclusions sometimes feel like the claims of a well-written horoscope–so broadly stated that they are hard to disprove. Their 10X leaders are both “disciplined” and “creative,” “prudent” and “bold”; they go fast when they must but slow when they can; they are consistent but open to change. This encompassing approach allows the authors to fit pretty much any leader who achieves 10X performance into their analysis. Would it ever be possible, one wonders, to find a leader whose success contradicted their thesis?

For the full review, see:
ALAN MURRAY. “BOOKSHELF; Turbulent Times, Steady Success; How certain companies achieved shareholder returns at least 10 times greater than their industry.” The Wall Street Journal (Tues., OCTOBER 11, 2011): A15.
(Note: ellipses added.)