Posts Tagged ‘Economy’
Wednesday, August 24th, 2011
Speaking at a town hall meeting last week in Illinois, President Obama said that one of the challenges of creating jobs in our economy is that businesses have used technology to become incredibly efficient, thus reducing their need for employees.
“When was the last time somebody went to a bank teller instead of using the ATM, or used a travel agent instead of just going online?” the president asked. “A lot of jobs that used to be out there requiring people now have become automated.”
The impact on the unemployment rate of information technology and its concomitant automation is not at all clear. The effect is highly variable across different countries, for example. Looking domestically, travel agents were never a major job category: Even if such jobs were automated away as the number of agencies dropped by about two-thirds in the decade-plus after 1998, such numbers pale alongside construction, manufacturing, and, I would wager, computer programmers whose positions were offshored.
The unfortunate thing in the entire discussion, apart from people without jobs obviously, is the lack of political and popular understanding of both the sources of the unemployment and the necessary solutions. Merely saying “education” or “job retraining” defers rather than settles the debate about what actually is to be done in the face of the structural transformation we are living through. On that aspect, the president is assuredly correct: He has the terminology correct, but structural changes need to be addressed with fundamental rethinking of rules and behaviors rather than with sound bites and band-aids.
Jordan offers more detailed commentary and analysis in the August edition of Early Indications.
Thursday, July 28th, 2011
Smeal’s Ed Ketz and co-blogger Anthony Catanach weigh in on their blog on the threats and rhetoric swirling in the debt ceiling debate. In particular, they question the August 2 deadline and President Obama’s assertion that Social Security payments may be delayed:
First, Geithner’s August 2 date is artificial. We see this in part because he set one date and then he switched to a later date, seemingly to give his side more heft in the debate. The problem with either date is that the U.S. government has almost $2 trillion in discretionary spending. As discretionary means “optional, not obligatory, non-compulsory,” if no agreement is achieved by August 2, the Obama administration will not have to default on its bills. Instead, it can reduce the discretionary spending, just as ordinary families with strained budgets may have to forego eating out or going to the theater. Indeed, if the Treasury Department defaults, it will be due to a political calculation and a stubborn unwillingness to reduce discretionary spending.
President Obama recently stated that Social Security checks might not be sent out in August if the debt ceiling is not raised. This Social Security scare is artificial and part of the political rhetoric. Again, there is almost $2 trillion in discretionary spending and the White House merely needs to decide which things get paid and which things are delayed. We assume he thinks Social Security is a priority.
There’s more on their blog, Grumpy Old Accountants.
Thursday, July 21st, 2011
Smeal’s John Liechty testified before the U.S. House Committee on Financial Services, Subcommittee on Oversight and Investigations, last week regarding the newly formed federal Office of Financial Research (OFR). The OFR, which was formed last year with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is charged with collecting data on the financial system to allow another government entity, the Financial Services Oversight Council, to effectively monitor its stability and ward off potential threats. The agency is the brainchild of Liechty, who spent 18 months gathering industry support and meeting with members of Congress to push its establishment.
According to The Hill‘s On the Money blog, the banking subcommittee wanted to learn “how the new Office of Financial Research plans to keep mounds of financial data safe from hackers. … With hackers always looming over the horizon, Republicans want to know what the office—which they charge lacks proper congressional oversight—is doing to keep that information in the right hands.”
In his prepared testimony, Liechty explained the origins of the OFR and why he believes its a necessary component to the country’s financial security. He opened with an outline of his three main points:
Financial stability requires transparency – The ability for regulators to both see through the counterparty network and the ability to see through asset backed, financial products to the underlying assets is an important fundamental component that is needed in order to be able to monitor the stability of the financial system. Transparency will require universally accepted identifiers and reporting standards—in essence it will require banks to get their back-offices in order. The investments required to improve transparency will not only result in improved macro-prudential regulation; they will result in improved risk management and substantial operational savings for the industry.
We face a significant scientific task – Not only do we not have the data in place, we have not done the science needed to understand system-wide risks to the financial system. In many ways, financial regulators are like the weather services, before the National Oceanic and Atmospheric Administration (NOAA) was established. NOAA was given the mandate to i) collect new data, ii) develop new models for identifying extreme events and improving weather forecasts, and iii) conduct the science necessary to understand the weather systems and build these next generation models. The Financial Services Oversight Council (FSOC) and the Office of Financial Research face similar challenges and have been given a similar mandate.
We cannot afford to fail – We live in a leveraged economy where the resilience and growth potential of the economy depends on having both an innovative and stable financial system. Innovation often leads to instability, unless the appropriate infrastructure is in place to provide stability. The FSOC and OFR offer a way forward to build this infrastructure. The risk that we live with, if we fail to have the proper oversight to provide a stable system, is not just the devastating economic impact that would come from another financial crisis of the magnitude of the 2008 crisis, but more importantly the political reality that will follow. If we can’t get this right and there is another crisis, then there is a very real risk that the political response may result in a response that adversly affects the finanical market’s ability to innovate.
You can view the entire hearing on the House banking committee’s website. For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.
Tuesday, June 7th, 2011
On the blog of the Pennsylvania Association of Realtors, Smeal’s Austin Jaffe highlights a report from the Lincoln Institute of Land Policy that summarizes recent trends in the housing market. Jaffe pulls out five lessons from the report on the state of the housing market:
1. We are unlikely to see a repeat of the housing price boom and bust again anytime soon.
2. Changes in the mortgage finance industry helped brew the unanticipated collapse.
3. Housing starts, building permits, and the home building industry will take years to recover to reach their pre-bust levels.
4. Mortgage foreclosures may be slowing but there will be a surplus of foreclosed properties in many markets for some time to come.
5. Regulatory reform may help future housing markets (or it might not!) but the forces in the economy and demographics will provide important signals for future trends.
View Jaffe’s complete blog entry on PAR’s Just Listed blog for his complete analysis.
Thursday, April 28th, 2011
What a week for couch potatoes—thrilling NBA and NHL playoff games; the fairy-tale royal wedding; and yes, the grand-daddy of them all, Federal Reserve Chairman Ben Bernanke’s Wednesday press conference. The first ever in the history of the Federal Reserve, I might add.
While I have no illusions that Bernanke will win the Nielson ratings wars this week, there is no doubt that the press conference was a seminal event in the Federal Reserve’s evolution toward greater transparency and accountability in its policymaking. Did the Chairman make any breaking news? Absolutely not, but there was important market reaction to what Bernanke said and the way that he said it.
Here is what I heard, and my perception of how the markets continue to view Fed policy:
1) The Federal Reserve Mandate – It was very clear that the chairman attempted to draw boundaries around what the Fed can do and what the Fed can’t do with respect to economic recovery. For the past three years various pundits have criticized the Fed for doing either too much or too little during the recent crisis, perhaps even overstepping its powers. Bernanke must have stated at least 15 times that the Federal Reserve’s mandate is to maintain/promote a growth level consistent with full employment and low inflation. His latest projections for the end of 2011 are range-bound estimates of GDP growth of 2.1 percent, inflation of 2 percent and unemployment at 8.3 percent.
These numbers are not going to make anyone jump for joy. But what is important here is that Bernanke emphasized (given his mandate of balancing growth, employment and inflation) that, in weighing the costs and benefits of various policy tools, he is more concerned with anemic growth and employment than he is with the specter of runaway inflation—at least for the next year. Notice there is nothing in the mandate statement concerning the appropriate level of the dollar.
2) Inflation – Bernanke was very clear to emphasize that if the Fed begins to see stronger signs of prices heating up, then the Fed will take swift action on the inflation front. This is definitely not what inflation hawks wanted to hear. Bernanke clearly feels that the main concern of Fed policy is unemployment and sluggish growth (yet, there are signs in the public speeches that other Fed Board members are beginning to challenge the Chairman’s position). Critics point to skyrocketing oil and commodity prices, the rise in food prices and some evidence of rising input costs leaking into other consumer good prices (Procter & Gamble and Coca-Cola announced price increases on products yesterday). Critics point out that latest CPI data shows all-level prices rising at a 2.7 percent rate, while Bernanke’s emphasis on the “core” CPI of 1.2 percent is unrealistic (the core rate strips out price increases from food and energy, which tend to be more volatile).
So how did the markets react? Silver moved up nearly 7 percent, approaching an all-time high of $50 an ounce, gold was more muted, rising about half a percent (Gold Bugs are now Silver Bugs), and oil was basically flat.
Clearly, Bernanke attempted to speak to “Main Street” in emphasizing that he understands the pain caused by food and energy price increases making up a significant portion of American budgets. However, inflation is defined as the general rise in the level of ALL prices, which is the reason for his focus on Core CPI. My feeling about the Fed’s position is that prices in two large sectors of the U.S. economy continue to be stagnant—housing and even more importantly wages. Until Bernanke sees inflationary pressure in the form of a wage and price spiral, I think he will continue to emphasize accommodative monetary policy. Bernanke was very clear on this point stating that the Fed could target a 0 percent CPI through monetary tightening, but in weighing the costs and benefits, the effect on economic growth and employment would be recessionary.
Wednesday, February 16th, 2011
The protests in the Middle East that started in Tunisia and spread to Egypt are now sweeping into other countries, including Iran, where “Iranians confront economic hardships, including rising prices and unemployment, resembling those that helped spark uprisings in Egypt and Tunisia,” Bloomberg reports.
Fariborz Ghadar, director of Smeal’s Center for Global Business Studies, and Rob Sobhani, president of Caspian Energy Consulting, detail Iran’s economic challenges in a post on The Hill’s Congressional Blog:
The challenges facing Iran’s economy remain the same as three decades ago: corruption, mismanagement of Iran’s natural resources, lack of foreign investment, unemployment, brain drain, squeezing out the private sector, and, last but not least, putting ideology before national economic interests.
The late Ayatollah Khomeini’s claim that “economics is for donkeys” has been the fundamental challenge facing Iranians since the establishment of an Islamic Republic thirty years ago. By all economic measures, the people of Iran have fallen behind their neighbors and the world. Iran’s oil-rich neighbor Saudi Arabia has used the past three decades to cement itself as the world’s most important exporter of crude oil. Despite having the world’s second highest reserves of natural gas, Iran has fallen behind its small but agile neighbor Qatar in the quest to supply clean burning natural gas to regional, Asian and European markets. Non-oil exports have also suffered since Khomeini’s declaration. While rent-a-crowds encouraged by the regime have chanted “Death to America,” Turkey has taken in millions of tourists and last year generated over $20 billion in revenues, a figure exceeding all of Iran’s non-oil exports. Most tragic is Iran’s brain drain, which, according to the International Monetary Fund, is ranked No. 1 in the world. As thousands of Chinese, Israeli, Indian, and Arab students take the knowledge they have gained in the U.S. to their home countries and contribute to economic growth, Iranian students have been forced to flee their country into permanent exile. Even newly independent countries neighboring Iran, like Azerbaijan, have done better. Since its independence in 1992, Azerbaijan has attracted over $60 billion in foreign investments.
The sum total of these opportunity costs has created a crisis amidst Iran’s plentiful resources. The historic parallels with the former Soviet Union are telling. The collapse of the Soviet Union occurred, not because of, but despite plentiful resources. Indeed, in spite of taking over the U.S., the system devised by Moscow imploded and collapsed within a short few months.
Continue reading their Hill blog post to learn about Ghadar and Sobhani’s recommendations for U.S. policy toward Iran.
Monday, February 7th, 2011
“Governors around the U.S. are proposing to balance their states’ budgets with a long list of cuts and almost no new taxes, reflecting a goal by politicians from both parties to erase deficits chiefly by shrinking government,” The Wall Street Journal reports. “Some state officials and lawmakers say they have a chance to reshape government in ways that might not have been politically palatable in years past.”
In his newsletter Early Indications, Smeal’s John Jordan writes: “The process of resizing government … needs to begin with a look at what governments can and need to do, as well as how they do it. Furthermore, there are tasks that at one time were essential, but technological obsolescence is slow to alter governments.”
Jordan proposes that there are at least five questions that need to be answered when talking about resizing government:
1. What must government do, and how can other entities help deliver necessary services?
2. What can government stop doing entirely?
3. What is the right level of organization?
4. How can interested parties self-organize?
5. How can government do what it needs to do, more efficiently?
Elaborating on the fifth question, Jordan writes that, when it comes to IT, government could take a few cues from the private sector:
IT in government remains a sore subject. President Obama’s chief information officer, Vivek Kundra, recently put forth a 25-step plan to reform federal IT management. Many of the items are broad and seemingly self-evident to anyone familiar with industry (“consolidate data centers” and “develop a strategy for shared services” for instance). The fact is, however, that industry does not follow federal acquisition or implementation practices; getting federal IT to perform at a reasonable fraction of an Amazon or FedEx would be a massive achievement. Many of the most notable IT project failures of the past decade are government implementations: systems development disasters at the U.S. Census and the FBI are prime examples of the performance gap.
Compared to customer service in travel, banking, shopping, or information businesses (iTunes, anyone?), finding even basic information on most government websites can be painful. Transparency can be difficult to track down. Control of bills passing through legislation is a key perquisite of power, and holding up the process with committee hearings that happen very slowly and/or erratically is common, so clear, open calendars are not always the rule. Like legislatures, regulatory bodies can be opaque, in that budget and headcount information is typically difficult to obtain, unlike the information readily available in a private company’s annual report.
If information can be hard to find, the state of on-line transactions is even more dismal: compare getting a fishing license or renewing other permits to checking in for an airplane flight. While efficient government looks much better to citizens on the outside than to gainfully employed government workers on the inside of slow-moving bureaucracies with no incentive to improve customer service, perhaps the current crisis can provide the impetus for real change to commence. In a sector that lags private industry by many performance metrics, a combination of new tools and more focused motivation has the promise to improve service, cut costs, increase accountability, and enhance security.
Tuesday, November 23rd, 2010
President Obama returned from his Asia trip earlier this month without accomplishing one of his principle goals: negotiating a new free trade agreement with South Korea.
Smeal’s Terrence Guay explains what tripped up the deal and what it indicates about the U.S. and global economies:
President Obama’s November trip to Asia sought, among other initiatives, to finalize a free trade agreement with South Korea. With negotiations concluded and a treaty signed in 2007, the U.S. Congress balked at ratifying the treaty. In effect, President Obama tried to persuade the Koreans to amend the treaty to allow greater access to U.S. automobile and beef exports. His inability to do so reflects several changes in the domestic and international political economy.
First, South Korea successfully stood up to U.S. pressure to change the terms of the treaty. The Asian country refused to weaken its fuel economy regulations, which are higher than U.S. standards and impose additional costs for U.S. auto companies seeking to expand into the Korean market. Also, due to citizens’ concerns about the safety of U.S. beef (the “mad cow” phenomenon), the Korean government refused to relax its regulations on beef imports. That two products presented an obstacle to completing a trade agreement with our seventh largest trade partner suggests that American influence on global economic matters is in decline. For further evidence, see the inability of the United States to persuade other countries at the G20 summit this month to apply pressure on China to revalue its currency, or the nine-year (and counting) negotiations on the World Trade Organization’s Doha round of global trade talks.
Second, the failure to reach a trade deal with South Korea underscores the growing distrust of many Americans and politicians of the benefits of global trade and investment flows, especially during “the Great Recession.” The global economy played virtually no role in the recent Congressional elections, other than the simplistic campaign ads blaming China for our economic problems. And while a Democrat-controlled Congress was wary of approving trade agreements with South Korea, Panama and Colombia for a variety of reasons over the past three years—including concerns about labor and environmental issues in those countries—it is not at all obvious that a Republican-controlled House of Representatives will pursue trade agreements with any greater fervor. Most economists expect modest contributions to domestic job and economic growth should these trade deals ultimately be implemented. But with opinion polls consistently showing an American public wary of globalization, the benefits of free trade, and the increasing global influence of other countries, there is little to be gained by congressional Republicans or Democrats using political capital on an issue where the benefits are not widely acknowledged.
Monday, November 22nd, 2010
With the holiday shopping season kicking off on Friday, retailers are falling over each other with their black Friday sales designed to get shoppers into their stores. According to Smeal’s Lisa Bolton, however, the retail industry should be trying to wean consumers off of their focus on price.
From Smeal’s Research with Impact website:
There are other elements retailers need to think about and push for in order to take some of the emphasis off price.
“Besides having the right price promotions in place, it’s critical to consider the consumer’s overall shopping experience,” Bolton says. “Retailers have to figure out ways to get beyond price and offer something that consumers are looking for.”
She adds that thinking about elements like parking, cart availability and overall atmosphere are not trivial. These details help create a pleasurable experience that may entice shoppers to come into a store, stay longer, and purchase more.
On the other hand, Bolton knows that the recession has made consumers overly sensitive to price. The continual low prices have conditioned consumers to buy on promotion, so it will be a challenge for retailers to change consumers’ mentality.
“This is a difficult problem for retailers,” she says. “If you move away from price and your competitor stays with price, then you’re at a disadvantage, so it’s almost as if the whole industry needs to figure out how to move consumers away from price.”
In an ideal world, retailers want to move away from price altogether and get consumers focusing on quality. However, Bolton thinks that this ideal world may be far off. Given the past few years, she admits it’s going to be challenging for retailers to wean consumers off sales promotions.
Tuesday, November 16th, 2010
The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform last week released their preliminary recommendations for increasing tax revenues and reducing federal spending in an attempt to bring the deficit under control. Calling the debt a cancer that will destroy the country if not fixed, co-chairs Erskine Bowles and Alan Simpson proposed cuts to everything from defense contracting to the White House budget to the federal workforce.
Below, Smeal faculty members Ron Gebhardtsbauer, Austin Jaffe and Anthony Warren weigh in on three of the recommendations.
Ron Gebhardtsbauer, faculty-in-charge of the Actuarial Science Program, on the commission’s Social Security proposals:
In the process of putting our fiscal house in order, the Obama Fiscal Commission also gets Social Security back in financial balance, which is great. The most important fix is indexing the retirement age to our increases in longevity, which makes Social Security sustainable, and encourages people to work longer. Without indexing, Social Security’s finances go out of balance as we live longer. And it’s not draconian at all. They very slowly raise the normal retirement age for full benefits to age 68 in 2050 and around age 69 in 2074. This won’t affect older workers, and middle age workers won’t be affected much. Older workers in physically demanding jobs will be able to get disability benefits under an easier disability definition.
I also like that they are finally making Social Security truly universal by covering the remaining state and local government workers (although that will be tough to get through Congress, as the large states have lots of power).
There are many other fixes, which I’ll discuss in a later blog.
Austin Jaffe, chair of the Department of Insurance and Real Estate, on the possibility of eliminating the mortgage interest tax deduction:
Perhaps the “sacred cow” of U.S. housing subsidies has been the mortgage interest tax deduction. Even when consumer interest was disqualified, interest deductibility from a mortgage was preserved. Recent discussion has raised the possibility that subsidizing mortgage interest payments is no longer a worthwhile policy. The Deficit Commission has suggested limits on mortgage interest deductibility: The benefit would only be available for primary homes, no interest would be deductible from home equity lines of credit, and no deductions would be available on mortgages larger than $500,000.
Here are some areas of current debate:
1. The costs of lost revenue are being raised over and over again these days. The Joint Commission on Taxation estimated that it cost $80 billion in 2009 alone. About one-half of homeowners claimed tax benefits were a “major reason” to buy. Yet many households do not itemize their deductions (including about 50 percent of homeowners).
2. Poterba and Sinai’s 2010 study found that 2.8 million households with annual income over $250,000 saved about $15 billion, while 19 million households with incomes between $40,000 and $75,000, saved only about $10 billion. The savings to middle- income households amounted to $542, or $1.48 per day. This is hardly sufficient to become a homeowner.
3. Finally, commentators are now beginning to wonder if the deduction is a destabilizing force in housing markets. Inducing homeowners to borrow for consumption of housing services may add additional volatility to house prices since indebtedness adds financial risk to the system, especially when prices are dropping. This is another example of distortions created by providing incentives via the tax code.
There are other issues including the capitalization of tax benefits into current prices before the purchase takes place, comparisons of housing markets in countries without interest deductions, violation of horizontal equity of renters, and others.
After all of these years, it would truly be amazing if this well-liked tax subsidy would be rescinded even if the benefits are not as great as is typically thought relative to the costs.
Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, on the Bowles-Simpson recommendation to merge the Department of Commerce with the Small Business Administration and cut the new entity’s budget by 10 percent:
For many years the Small Business Administration has been the poor cousin among government agencies with the result that small companies have suffered from inadequate representation in Washington. Recently for example, the administration has supported larger corporations rather than the lifeblood of the economy, innovative job-creating small firms. Therefore there is a concern that smaller companies will now lose any voice that they may have had for the illusion of ever elusive cost cuts. It would be better to double the Small Business Administration and half the Department of Commerce.