Monday, September 6, 2010

Hard Work

When a man tells you that he got rich through hard work, ask him: "Whose?"

-- Don Marquis

In this week's Sift:

  • Jobs. It's easier to understand which policies won't create jobs than which ones will.
  • Corporatism and Net Neutrality. The debate sounds technical, but it's really about creating choke-points and collecting tolls.
  • Short Notes. Can liberals draw a crowd in D.C.? Why does the media provide a free platform for corporate shills? Strippers protest an Ohio church. Two-year-olds on anti-psychotics. God is funding Joe Miller's Senate campaign. David Brooks says something uncommonly insightful about Glenn Beck's followers. Bad Christmas presents. And more.


What better topic for Labor Day than jobs? Everyone seems to agree that there aren't enough jobs. But they disagree about whether and how the government can do anything about it.

Where are we? I love a good graphic, and this one explains where we are in the current recession compared to all the previous ones since World War II.


We're in an unusually long and deep drop. (The graphs show the percentage of jobs lost, which eliminates the effect of increased population.) In length it's looking about the same as the previous recession (2001), when it took about four years to get all the jobs back. In depth, it's the worst since the Depression.

We seem to be 6-8 months past the bottom, though the upward slope isn't very steep yet. Temporary hiring for the census created an illusion (that things were getting better faster a few months ago and that they're getting worse now) which is smoothed out in the dotted line.

Why? Popped bubbles lead to recessions that are fundamentally different from ordinary recessions, and recovery takes longer. Bubble-popping recessions include this one, the 2001 recession (the internet bubble), the Japanese "lost decade" of the 1990s (stock and real estate), and the Great Depression.

An ordinary recession is a normal part of the business cycle, caused by a temporary excess of production and inventory in an economy that is basically healthy. Businesses get over-optimistic during an expansion, so they build too many factories, open too many stores, and hire too many people. Eventually, some minor or accidental glitch causes consumers to slow down their spending. Then retailers cancel orders, factories lay off workers, and everything snowballs for a while, as each cutback causes more people to realize they're over-extended. Eventually, though, the overstocked inventory gets sold, factories get orders again, and everything straightens out.

That's what happens in the real economy. In the money economy, the ordinary recession produces a liquidity crisis -- people have assets of long-term value, but they need (or think they need) cash. So they try to sell things, driving prices down, and causing other people to want to sell things in a panic. Eventually wiser heads realize assets are cheap and start buying. Then the markets snap back like a rubber band.

An asset bubble, on the other hand, is based on fantasy and fraud rather than excess optimism. (The Dutch Tulip Mania of 1637 is the classic example.) In an asset bubble, large numbers of people imagine that they're rich -- and borrow and spend accordingly -- because speculators have bid asset prices up higher than any rationally foreseeable economic growth can justify. When the bubble pops, formerly "rich" people can't pay their bills, then the people they owe can't pay their bills, and so on.

In the financial economy, the asset bubble produces a solvency crisis. In a liquidity crisis, your creditors will get their money if they just wait until you can bring your long-term assets to bear. In a solvency crisis, you are actually broke; your debts exceed any rational valuation of your assets. The question in a liquidity crisis is "Who's willing to wait to get their money?" In a solvency crisis it's "Who's going to take the loss?"

The government can solve a liquidity crisis just by extending credit. (That's why the Federal Reserve was invented.) But extending credit during a solvency crisis just delays the day of reckoning. The books don't balance, and somebody has to take the loss.

Kinds of unemployment. One of the big debates now is about whether our unemployment is cyclical or structural. That sounds technical, but it's actually a pretty simple idea: Cyclical unemployment is the carpenter who will get back to work when the economy picks up and people start building houses again. Structural unemployment is the mechanic who sees gobs of want ads for nurses -- there are jobs, but not for him.

Cyclical unemployment is fairly easy to solve: The government runs a big deficit, lowers interest rates, and just generally pumps money into the economy. Imagine what would happen if somebody started shoveling five-dollar bills out of a helicopter: Pretty quickly the ice cream shop would have to hire back the scoopers it laid off.

Structural unemployment is trickier, because workers need to retrain. Government can help a little, but only after people get desperate enough to start over.

Paul Krugman has been arguing that our current unemployment is mainly cyclical, and that the problem with the stimulus is that it wasn't big enough. (He argued at the time it was proposed that it wasn't big enough.) Slate's James Ledbetter summarizes arguments that unemployment is increasingly structural. (The Economist is big on this idea and has been for months.)

The cyclical/structural distinction is related to the optimism/fantasy distinction: Bubbles distort the economy, and the jobs that go away when they pop don't necessarily come back. We had an irrational number of real estate agents, mortgage brokers, and home rehabbers in 2007, and a lot of them will have to find something else to do.

Still, it's obvious that unemployment isn't entirely structural, because there aren't any booming sectors screaming for qualified workers. My friends' kids are entering college now, and I don't know what they should study to be sure of getting a job.

What won't work: extending Bush's tax cuts. Few job-creating ideas are as delusional as extending the Bush tax cuts. Obama wants to let them expire for those making $250,000 or more (as he promised in the campaign). Republicans argue that restoring these Clinton-era rates will primarily raise taxes on small businesspeople, who are the primary creators of jobs. Keep their taxes low and they'll create the jobs the economy needs.

Not exactly. According to the WaPo's "5 Myths" column:

If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses.

Plus, the small-business-creates-jobs myth is only sort of true. A small business that is breaking out -- starting to franchise nationwide, say -- hires a lot of people. On the other hand, your basic family-owned restaurant or proprietor-operated shop might give the part-time help more hours if business picks up, but they rarely launch major expansions. And when they do expand, the trigger is increased consumer demand, not lower taxes.

A local friend verified this by talking to a number of proprietors on our Main Street. (Here in Nashua, Main Street is not a metaphor.) How many new people would they hire if they got a tax cut? Invariably, the answer was none.

What won't work: lower interest rates. Robert Reich takes apart the idea that lower interest rates will create jobs. In an ordinary recovery they will, but not in an asset-bubble recovery.

Usually, low interest rates create jobs in both a supply-side and a demand-side way. On the supply side, a business that wants to expand is more likely to do so if it can get a cheap loan. But, once again, if there's a shortage of demand, businesses aren't going to want to expand. Why build on to your restaurant if you can't fill the tables you have?

On the demand side, lower interest rates encourage people to borrow money to buy stuff. But:

Individuals aren't borrowing because they're still under a huge debt load. And as their homes drop in value and their jobs and wages continue to disappear, they're not in a position to borrow.

Reich sees two main results of lowering interest rates: First, a new wave of corporate acquisitions, which will have the effect of eliminating redundant jobs in the merged companies. And second, investment in new equipment that will replace workers rather than increase production. Net result: fewer jobs, not more.

What about Germany? Germany is often cited as an example of an economy that is recovering without a major government stimulus. Interesting story there: So far, Germany's recovery is better than ours in terms of employment, but worse in terms of GDP.

Two things are different about Germany: First, they didn't have a housing bubble, though their banks did get in trouble from investing in our worthless mortgage-backed securities.

Second, in the US, we let companies fire people and then paid them unemployment. Germany subsidized employment directly. NPR's Marketplace explains:

Workers are building fewer trucks because demand has dropped in half this year. But MAN says it hasn't had to lay off any of its permanent staff. That's because it's signed up for a government program called kurzarbeit, or short work. Workers take a cut in their hours and their pay. But the German government reimburses them for a chunk of their lost wages.
MAN spokesman Dominique Nadelhofer says employees may work as little as half time. But they still make 90 percent of their salary.

It's hard to say what lesson we should draw from that, other than maybe what we should do next time.

Conclusion: More stimulus would help some, but it's not clear how much, and besides, the political mood is very hostile. Democrats will do well to resist deflationary spending cuts. If the graph is right, employment should be back to 2007 levels in another year and a half.

In August, private employment went up by 67,000 jobs, but government employment dropped by 121,000 as temporary census jobs ended and the effects of the stimulus diminished. And this isn't encouraging: "while corporate profits were generally robust in the second quarter, many companies improved their revenues by cost-cutting."

Evidence of conservative framing success: The stimulus is often described (even in places like the NYT) as $800 billion of "federal spending". Actually it was about $500 billion of spending and $300 billion of tax cuts.

Slate explains where Labor Day comes from: After suppressing the Pullman strike, President Cleveland wanted to curry favor with workers. But the obvious May 1 holiday would have commemorated the Haymarket Riot.

Corporatism and Net Neutrality

DailyKos' Thutmose V posted a nice net-neutrality-for-dummies piece Monday.

Net neutrality is a good example of how corporatism works. Internet-providing corporations like Verizon and Comcast know why they care about the issue, and so they're relentless in lobbying for their interests. Most of the public doesn't know why they should care, and the eyes of the non-geek majority quickly glaze over when someone tries to explain.

As Thutmose makes clear, there is a legit reason why some internet traffic (like live video) would benefit if there were a high-priority lane on the internet, while other traffic (like email) wouldn't suffer if it were shunted to a low-priority lane and arrived a second or two later.

Regulations could be written to do this without fundamentally altering the nature of the internet. The Post Office, for example, has multiple classes of mail, but they don't deliver pro-Post-Office magazines faster than anti-Post-Office magazines.

But if the regulations are too loose, the internet corporations will gain vast new powers to prioritize however they like:

Imagine if Ford bought the Interstate Highway system, and announced that any car that was not a Ford would have to pay a high toll to use the highways. The Comcast NBC merger invites a similar situation with the Internet.  Does anyone think that Comcast might be tempted to give NBC priority on their network, and maybe charge anyone else providing [competing] content a high price to get on the net?

Comcast has disturbing history here.

Google was supposed to be a corporation whose interests coincided with consumers, but the Electronic Frontier Foundation isn't happy with the proposal Google worked out with Verizon. Google's interests are protected, but (according to MSNBC):

Skype would not have a chance to compete with any video telephony service Verizon might develop in the near future. And Netflix would be at a disadvantage trying to move high-quality video over Verizon’s fiber-optic pipes if Verizon decides to offer its own service.

Even if the corporations decide to play fair with each other, a fast-lane-slow-lane structure motivates them to keep the slow lane slow. The point here is to create many new choke-points where toll booths can be set up. That -- and not innovation and competition -- is how big corporations make big money.

For a trivial example of how corporate toll booths work, consider unlisted phone numbers. The LA Times' David Lazarus reports that the monthly cost of an unlisted number varies from $1.25 (ATT) to $1.99 (Time Warner Cable) per month -- in exchange for changing a bit in their database and then not publishing your number:

Time Warner and other telecom companies are charging for a service that consists of them basically not doing anything. And because they continue not to do anything month after month, they keep charging you on the grounds that it's a recurring service.

He points out that Time Warner Cable doesn't even publish a phone book -- it just distributes information to whoever has the local phone book contract. So the "service" is purely a toll TWC can charge because it happens to be the gate-keeper.

Kevin Drum elaborates:

phone companies are regulated monopolies. If I want phone service, I have no choice but to contract with a tiny number of suppliers who then have privileged information about me. Should I also pay them protection money for withholding my Social Security number or my date of birth from their phone books?

The job every corporation really wants is Gate Keeper. You do nothing, employ nobody, and collect tolls. Wait, I'm wrong, you do employ some people: lobbyists who help you create new choke-points where new gates can be installed.

Short Notes

I can't make it to D.C. on October 2. Can you?

We used to mourn when the independent bookstores were driven out of business by Barnes and Noble. Now we mourn when the Barnes and Noble closes.

The NYT had a "Room for Debate" feature on the great egg recall and what's wrong with the egg industry. Rather than discuss the issue, though, I want to step back and look at the contributors: a food safety activist, some university professors in relevant fields, and then a guy from the Cato Institute, a libertarian think-tank funded by the Koch brothers.

The Cato guy, predictably, says that "The Panic Will Subside" and so there's no need for new regulations. That's because Cato's mandate is not public health, but fighting government regulation of business. Every Cato article concludes that regulations are unnecessary, and the only mystery is how it will arrive at that conclusion. (This guy says that regulations will necessarily favor big egg producers over small ones. But of course Cato cares no more about small egg producers than it cares about public health. Whoever makes no-government-regulations a sympathetic position is Cato's new best friend.)

Here's my question: Why do we routinely let these guys into the room, even though they have no interest in solving the problem, whatever it is? Every well-rounded debate panel has to include a shill for our corporate overlords, who will argue in bad faith until he arrives at his pre-ordained conclusion. And we accept this without a second thought.

Second City Network gives its explanation for Jan Brewer's mental glitch during her opening statement at the Arizona gubernatorial debate.

An Ohio church protests the local strip club on Saturday nights. Lately the dancers have been returning the favor on Sunday mornings.

The Onion captures the spirit of bigotry perfectly in Man Already Knows Everything He Needs To Know About Muslims.

Disturbing article in Thursday's NYT about the growing number of very young children being prescribed anti-psychotic drugs. Given that my wife is a two-time cancer survivor and my parents swear by their anti-depressants, I'm usually unimpressed by articles about the evils of modern medicine. But this caught my attention:

A Columbia University study recently found a doubling of the rate of prescribing antipsychotic drugs for privately insured 2- to 5-year-olds from 2000 to 2007. Only 40 percent of them had received a proper mental health assessment, violating practice standards from the American Academy of Child and Adolescent Psychiatry.

NYT columnists Gail Collins and David Brooks are mostly just fooling around during this conversation, but then Brooks lets loose the following bit of insight into the 8-28 Beck rally and the Tea Party mindset in general:

Every society has to engird capitalism in a restraining value system, or else it turns nihilistic and out of control. The Germans have a Christian Democratic set of institutions, enforced by law. The Swedes have their egalitarianism. Since the days of Jonathan Edwards, we have developed a quasi-religious spirituality that informally restrains the excesses of the market. God and Mammon are intertwined.
Many people feel that the values side of this arrangement is dissolving. Both the government and Wall Street are leaping into the void, to bad effect. … People like those at last weekend’s rally want the Judeo-Christian ethic back, which sweetened and softened life on the frontier (physical or technological). And so they march. They are only vaguely aware of this value system. It is so entwined into their very nature, they can not step back and define it. But they feel it weakening.
It might be possible for a responsible person to tap into this sense, but none has, so Glenn Beck has.

That's why I find Brooks to be the most frustrating columnist in America today. He'll write nothing but nonsense for months, and then off-handedly say something like that.

Check out Vanity Fair's look at Sarah Palin.

As best I can tell, this is not a joke: Alaskan Senate candidate Joe Miller wants you to help God fund his campaign.

It's never too early to start thinking about what not to get your little girl for Christmas.

The Weekly Sift appears every Monday afternoon. If you would like to receive it by email, write to WeeklySift at


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