Economic Crisis – Page 13 – artdiamondblog.com

“There Is More Uncertainty, and Everybody Is Afraid”

Robert Shiller is often a shrewd diagnostician, but less often a wise therapist. For instance he is right in thinking that uncertainty is part of our problem, but wrong in his usual view that more government spending is the solution.
A better way to reduce uncertainty is for the government to act more predictably, following some reasonable rules. I heard such a view articulately defended in a lunch speech at the American Economic Association meetings in January by Stanford economist John Taylor. His speech has been polished and published in National Affairs (see citation way below).
Here are some interesting observations by Shiller (via Bewley):

(p, 7) Factors of production like wheat or trucks or pumps don’t have morale issues. Human beings do.

How these issues affect the labor market is a major focus of the research of Professor Bewley, who is a colleague of mine at Yale. He has developed an idiosyncratic approach, interviewing hundreds of corporate managers at length about the driving forces for their actions. The managers consistently told him that they are concerned about the emotional state of their core employees. They said that their companies’ continued success depends on the positive feelings and loyalty of these workers — and lamented the hard choices that would need to be made in a severe downturn.
. . .
Lower-level managers won’t ask for scarce resources . . . , because those items look like luxuries to fellow employees, who worry that there won’t be enough in the company budget for them to keep their jobs.
One top manager told Professor Bewley that he had to compensate for the reticence of lower-level managers, who won’t ask for anything. “I tell them to put in a few dreams for equipment they would like, because if they don’t try, they’ll never get what they want,” this manager said.
Of course, while that reticence may preserve jobs in one’s own company, it works against job growth elsewhere. A result is a loss of vigor in the aggregate economy, and the sapping of the very kind of creativity that might spur a recovery.
Professor Bewley shared with me a passage from an interview in July with a manager of a large manufacturing company. “There is more uncertainty, and everybody is afraid,” this manager told him. “Do your job. Keep employed. Don’t come up with a new idea.” In his own company, the manager said, “Everybody is doing the same thing.”

For the full commentary, see:
ROBERT J. SHILLER. “ECONOMIC VIEW; The Survival of the Safest.” The New York Times, SundayBusiness Section (Sun., October 3, 2010): 7.
(Note: ellipses added.)
(Note: the online version of the commentary is dated October 2, 2010.)

Here is the Taylor reference:
Taylor, John B. “The Cycle of Rules and Discretion in Economic Policy.” National Affairs, no. 7 (Spring 2011): 55-65.

Chinese College Graduates Are Underemployed “Ant Tribe” in Big Cities

(p. A1) BEIJING — Liu Yang, a coal miner’s daughter, arrived in the capital this past summer with a freshly printed diploma from Datong University, $140 in her wallet and an air of invincibility.

Her first taste of reality came later the same day, as she lugged her bags through a ramshackle neighborhood, not far from the Olympic Village, where tens of thousands of other young strivers cram four to a room.
Unable to find a bed and unimpressed by the rabbit warren of slapdash buildings, Ms. Liu scowled as the smell of trash wafted up around her. “Beijing isn’t like this in the movies,” she said.
Often the first from their families to finish even high school, ambitious graduates like Ms. Liu are part of an unprecedented wave of young people all around China who were supposed to move the country’s labor-dependent economy toward a white-collar future. In 1998, when Jiang Zemin, then the president, announced plans to bolster higher education, Chinese universities and colleges produced (p. A12) 830,000 graduates a year. Last May, that number was more than six million and rising.
It is a remarkable achievement, yet for a government fixated on stability such figures are also a cause for concern. The economy, despite its robust growth, does not generate enough good professional jobs to absorb the influx of highly educated young adults. And many of them bear the inflated expectations of their parents, who emptied their bank accounts to buy them the good life that a higher education is presumed to guarantee.
“College essentially provided them with nothing,” said Zhang Ming, a political scientist and vocal critic of China’s education system. “For many young graduates, it’s all about survival. If there was ever an economic crisis, they could be a source of instability.”
. . .
Chinese sociologists have come up with a new term for educated young people who move in search of work like Ms. Liu: the ant tribe. It is a reference to their immense numbers — at least 100,000 in Beijing alone — and to the fact that they often settle into crowded neighborhoods, toiling for wages that would give even low-paid factory workers pause.
“Like ants, they gather in colonies, sometimes underground in basements, and work long and hard,” said Zhou Xiaozheng, a sociology professor at Renmin University in Beijing.
. . .
A fellow Datong University graduate, Yuan Lei, threw the first wet blanket over the exuberance of Ms. Liu, Mr. Li and three friends not long after their July arrival in Beijing. Mr. Yuan had arrived several months earlier for an internship but was still jobless.
“If you’re not the son of an official or you don’t come from money, life is going to be bitter,” he told them over bowls of 90-cent noodles, their first meal in the capital.
. . .
In the end, Mr. Li and his friends settled for sales jobs with an instant noodle company. The starting salary, a low $180 a month, turned out to be partly contingent on meeting ambitious sales figures. Wearing purple golf shirts with the words “Lao Yun Pickled Vegetable Beef Noodles,” they worked 12-hour days, returning home after dark to a meal of instant noodles.
. . .
Mr. Li worried aloud whether he would be able to marry his high school sweetheart, who had accompanied him here, if he could not earn enough money to buy a home. Such concerns are rampant among young Chinese men, who have been squeezed by skyrocketing real estate prices and a culture that demands that a groom provide an apartment for his bride. “I’m giving myself two years,” he said, his voice trailing off.
By November, the pressure had taken its toll on two of the others, including the irrepressible Liu Yang. After quitting the noodle company and finding no other job, she gave up and returned home.

For the full story, see:
ANDREW JACOBS. “China’s Army of Graduates Is Struggling.” The New York Times, First Section (Sun., December 12, 2010): A1 & A12.
(Note: ellipses added.)
(Note: the online version of the story is dated December 11, 2010 and has the title “China’s Army of Graduates Struggles for Jobs.”)

Chinese Government Created Real Estate Bubble in a Dozen Ghost Towns Like Kangbashi Area of Ordos

“As China’s roaring economy fuels a wild construction boom around the country, critics cite places like Kangbashi as proof of a speculative real estate bubble they warn will eventually burst.” Source of photo: online version of the NYT article quoted and cited below. Source of caption: online version of the NYT slideshow that accompanied the online article quoted and cited below.

The October 19, 2010 New York Times front page story (quoted below) on the Ordos ghost town in China, was finally picked up by the TV media on May 30 in a nice NBC Today Show report.
It should be clear that the Chinese real estate bubble will burst, just as real estate bubbles eventually burst in places like Japan and the United States. What is not clear is what the effects will be on the Chinese and world economies.

(p. A1) Ordos proper has 1.5 million residents. But the tomorrowland version of Ordos — built from scratch on a huge plot of empty land 15 miles south of the old city — is all but deserted.

Broad boulevards are unimpeded by traffic in the new district, called Kangbashi New Area. Office buildings stand vacant. Pedestrians are in short supply. And weeds are beginning to sprout up in luxury villa developments that are devoid of residents.
. . .
(p. A4) As China’s roaring economy fuels a wild construction boom around the country, critics cite places like Kangbashi as proof of a speculative real estate bubble they warn will eventually pop — sending shock waves through the banking system of a country that for the last two years has been the prime engine of global growth.
. . .
Analysts estimate there could be as many as a dozen other Chinese cities just like Ordos, with sprawling ghost town annexes. In the southern city of Kunming, for example, a nearly 40-square-mile area called Chenggong has raised alarms because of similarly deserted roads, high-rises and government offices. And in Tianjin, in the northeast, the city spent lavishly on a huge district festooned with golf courses, hot springs and thousands of villas that are still empty five years after completion.
. . .
In 2004, with Ordos tax coffers bulging with coal money, city officials drew up a bold expansion plan to create Kangbashi, a 30-minute drive south of the old city center on land adjacent to one of the region’s few reservoirs. . . .
In the ensuing building spree, home buyers could not get enough of Kangbashi and its residential developments with names like Exquisite Silk Village, Kanghe Elysees and Imperial Academic Gardens.
Some buyers were like Zhang Ting, a 26-year-old entrepreneur who is a rare actual resident of Kangbashi, having moved to Ordos this year on an entrepreneurial impulse.
“I bought two places in Kangbashi, one for my own use and one as an investment,” said Mr. Zhang, who paid about $125,000 for his 2,000-square-foot investment apartment. “I bought it because housing prices will definitely go up in such a new town. There is no reason to doubt it. The government has already moved in.”
Asked whether he worried about the lack of other residents, Mr. Zhang shrugged off the question.
“I know people say it’s an empty city, but I don’t find any inconveniences living by myself,” said Mr. Zhang, who borrowed to finance his purchases. . . .

For the full story, see:
DAVID BARBOZA. “A City Born of China’s Boom, Still Unpeopled.” The New York Times (Weds., October 19, 2010): A1 & A4.
(Note: ellipses added.)
(Note: the online version of the commentary is dated October 19, 2010 and has the title “Chinese City Has Many Buildings, but Few People.”)

Source of graph: online version of the NYT article quoted and cited above.

China’s Speculative Real Estate Bubble

Visit msnbc.com for breaking news, world news, and news about the economy

In a front page article on October 20, 2010, the New York Times reported on how the Chinese government encouraged a real estate investment binge that has resulted in a growing number of empty, speculatively built ghost cities. Now the video media has picked up the story in the well-done story linked to above and cited below.

Williams, Ian, reporter. “The Roads Not Taken: Visiting China’s Ghost Cities.” Broadcast on the Today Show, Sunday morning, May 30, 2011.

Reduce Spending for Stronger Economy

Source of graph: online version of the WSJ article quoted and cited below.

(p. A17) To the extent that government spending crowds out job-creating private investment, it can actually worsen unemployment. Indeed, extensive government efforts to stimulate the economy and reduce joblessness by spending more have failed to reduce joblessness.

Above all, the federal government needs a credible and transparent budget strategy. It’s time for a game-changer–a budget action that will stop the recent discretionary spending binge before it gets entrenched in government agencies.
. . .
We can see such a sensible budget strategy starting to emerge. The first step of the strategy is largely being addressed by the House budget plan for 2011, or HR1. Though voted down in its entirety by the Senate, it is now being split up into “continuing” resolutions that add up to the same spending levels.

For the full commentary, see:

GARY S. BECKER, GEORGE P. SHULTZ AND JOHN B. TAYLOR. “OPINION; Time for a Budget Game-Changer; Assurance that current tax levels will remain in place would provide an immediate stimulus. House Republican budget planners are on the right track.” The Wall Street Journal (Mon., APRIL 4, 2011): A17.
(Note: ellipsis added.)

In Greece It Is Illegal for Brewers to Produce Tea

“Demetri Politopoulos at his microbrewery in northern Greece. He says Greek leaders need to do more to make the country an easier place to do business.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 1) DEMETRI POLITOPOULOS says he has suffered countless indignities in his 12-year battle to build a microbrewery and wrest a sliver of the Greek beer market from the Dutch colossus, Heineken.

His tires have been slashed and his products vandalized by unknown parties, he says, and his brewery has received threatening phone calls. And he says he has had to endure regular taunts — you left Manhattan to start up a beer factory in northern Greece? — not to mention the pain of losing 5.3 million euros.
Bad as all that has been, nothing prepared him for this reality: He would be breaking the law if he tried to fulfill his latest — and, he thinks, greatest — entrepreneurial dream. It is to have his brewery produce and export bottles of a Snapple-like beverage made from herbal tea, which he is cultivating in the mountains that surround this lush pocket of the country.
An obscure edict requires that brewers in Greece produce beer — and nothing else. Mr. Politopoulos has spent the better part of the last year trying fruitlessly to persuade the Greek government to strike it. “It’s probably a law that goes back to King Otto,” said Mr. Politopoulos with a grim chuckle, referring to the Bavarian-born king of Greece who introduced beer to the country around 1850.
Sitting in his office, Mr. Politopoulos took a long pull from a glass of his premium Vergina wheat beer and said it was absurd that he had to lobby Greek politicians to repeal a 19th-century law so that he could deliver the exports that Greece urgently needed. And, he said, his predicament was even worse than that: it was emblematic of the web of restrictions, monopolies and other distortions that have made many Greek companies uncompetitive, and pushed the country close to bankruptcy.

For the full story, see:
LANDON THOMAS Jr. “What’s Broken in Greece? Ask an Entrepreneur.” The New York Times, SundayBusiness Section (Sun., January 30, 2011): 1 & 5.
(Note: the online version of the article is dated January 29, 2011.)

Estonia Re-Elects “Government that Continued to Embrace Laissez-Faire Capitalism”

(p. A5) MOSCOW — Early results in Estonia’s parliamentary election on Sunday showed the ruling coalition headed for a victory, in a remarkable show of support for a government that has imposed harsh austerity measures to lift the country out of recession.
. . .
The vote reflects approval for a government that continued to embrace laissez-faire capitalism during the painful months after the global downturn. After Estonia’s economy shrank nearly 15 percent, the state reduced its budget by the equivalent of 9 percent of gross domestic product. Demand fell steeply, and unemployment crept up, early in 2010, to 19.8 percent.
But in contrast to their neighbors in Latvia, where economic troubles led to riots and the government’s collapse, Estonians stoically absorbed the suffering. These sacrifices allowed Estonia to join the euro zone in January, a move its leaders hailed as a sign that the country was on its way to achieving Western European standards of living. Meanwhile, the economy has been projected to grow by 4 percent this year, and unemployment has dropped to around 10 percent, according to the Estonian Unemployment Insurance Fund.

For the full story, see:
ELLEN BARRY. “After Cuts, Voters Back Ruling Bloc in Estonia.” The New York Times (Mon., March 7, 2011): A5.
(Note: ellipsis added.)
(Note: the online version of the article is dated March 6, 2011.)

Warren Buffett Says “the American System” Unleashes “Human Potential”

(p. 16) Mr. Buffett said Berkshire last year spent more than $5 billion on property and equipment in the United States – more than 90 percent of the company’s total expenditure – and that the overwhelming part of the company’s future investment will be at home.

“The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective,” he wrote.
“Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

For the full story, see:
PETER LATTMAN. “Buffett Plans to Buy Local, Investing Mostly in the U.S.” The New York Times, First Section (Sun., February 27, 2011): 16.
(Note: the online version of the article was dated February 26, 2011 and has the title “As Berkshire Improves, Buffett Sings Praises of U.S.”)

Caballero Worries about the Relevance of Mainstream Macro Modeling

In the past, I have found some of MIT economist Ricardo Caballero’s research useful because he takes Schumpeter’s process of creative destruction seriously.
In a recent paper, he joins a growing number of mainstream economists who worry that the recent and continuing economic crisis has implications for the methodology of economics:

In this paper I argue that the current core of macroeconomics–by which I mainly mean the so-called dynamic stochastic general equilibrium approach–has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in “fine-tuning” mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in “broad-exploration” mode. We are too far from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.

Source:
Caballero, Ricardo J. “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome.” NBER Working Paper # w16429, October 2010.

The paper has been published as:
Caballero, Ricardo J. “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome.” Journal of Economic Perspectives 24, no. 4 (Fall 2010): 85-102.

Occupational Licensing Adds Billions a Year to Cost of Services

Source of graph: online version of the WSJ article quoted and cited below.

(p. A1) . . . economists–and workers shut out of fields by educational requirements or difficult exams–say licensing mostly serves as a form of protectionism, allowing veterans of the trade to box out competitors who might undercut them on price or offer new services.

“Occupations prefer to be li-(p. A16)censed because they can restrict competition and obtain higher wages,” said Morris Kleiner, a labor professor at the University of Minnesota. “If you go to any statehouse, you’ll see a line of occupations out the door wanting to be licensed.”
While some states have long required licensing for workers who handle food or touch others–caterers and hair stylists, for example–economists say such regulation is spreading to more states for more industries. The most recent study, from 2008, found 23% of U.S. workers were required to obtain state licenses, up from just 5% in 1950, according to data from Mr. Kleiner. In the mid-1980s, about 800 professions were licensed in at least one state. Today, at least 1,100 are, according to the Council on Licensure, Enforcement and Regulation, a trade group for regulatory bodies. Among the professions licensed by one or more states: florists, interior designers, private detectives, hearing-aid fitters, conveyor-belt operators and retailers of frozen desserts.
. . .
Mr. Kleiner, of the University of Minnesota, looked at census data covering several occupations that are regulated in some states but not others, including librarians, nutritionists and respiratory therapists. He found that employment growth in those professions was about 20% greater, on average, in the unregulated states between 1990 and 2000.
Licensing can also drive up costs to consumers. Licensed workers earn, on average, 15% more than their unlicensed counterparts in other states–a premium that may be reflected in their prices, according to a study published by the National Bureau of Economic Research and conducted by Mr. Kleiner and Alan Krueger, an economist at Princeton University.
Mr. Kleiner estimates that across the U.S. economy, occupational licensing adds at least $116 billion a year to the cost of services, which amounts to about 1% of total consumer spending. In a look at dentistry, Mr. Kleiner found that the average price of dental services rose 11% when a state made it more difficult to get a dental license.

For the full story, see:

STEPHANIE SIMON. “A License to Shampoo: Jobs Needing State Approval Rise.” The Wall Street Journal (Mon., February 7, 2011): A1 & A16.
(Note: ellipses added.)

“Some of the jobs that require licensing in one or more states.” Source of caption and table: online version of the WSJ article quoted and cited above.