Monday, April 14, 2008

Not a lot of laughs, professor...

Nobel Prize-winner Joseph Stiglitz isn't crazy about globalization and he's not optimistic about the apparent slowdown here in the US. Regardless of your political/economic point of view, his is a voice of some considerable credibility.

Now consider the demise of subprime lending is producing financial losses in the strangest places. I agree with Alex Tabarrok, spreading the pain has been a good thing since it would otherwise have been concentrated here in the US.
From the frozen lands of Norway's Arctic Circle to the hot sands of the Middle East and the booming metropolis of Shanghai the losses from America's subprime crisis are popping up around the world like angry whac-a-moles. The losses are large and appear larger by being found in the most unexpected of places. Today the focus is on these world-wide losses but I think future historians will focus on how the crisis demonstrated to everyone the power of integrated capital markets to diversify risk.
Still, of all the exports we that we can point to as rising briskly, debt default is an odd one for us to be the world leader. It is also a product that will have few second-time customers, I think.

The longer the uncertainty surrounds credit markets, the more likely the recession will lengthen and deepen. While I have always considered the periodic reporting of popular confidence in our collective economic future to be amusing anecdotal data, how people feel about the future is far more important to how they act that I had allowed. We will learn more about this when the tax rebates likely flow into debt repayment rather than purchases.

It's not that we will talk ourselves into a bad recession, it's that we now have many more sources of very good information pouring in and as we emphasize those that can harm us most, we begin to reduce economic activity. This pattern is not easily turned around.

The larger, and looming worry for me, is unemployment, and Stiglitz didn't ease my mind, that's for sure. As the first wage-stagnant expansion (I know, it doesn't include benefit cost growth) in history closes, it seems a different relationship - or perhaps more properly - lack thereof with employees now permeates modern business. While not necessarily adversarial, it is certainly indifferent, having distinctly focussed on shareholder value as the major, perhaps only goal. This may be good business for an entire industry, where firms coming and going as investors reward the best performers, but labor mobility has failed to demonstrate the capacity to keep up.

The efficiency of rational business management may be countered by humans who cannot live 100% rationally. This atmosphere will be further eroded by the fact that firms have now seemingly lost almost any corporate reluctance to lay off workers, so that when they begin, I think they may snowball in a way we have perhaps never seen before.

One big difference this time is the precipitate drop in state/local tax revenues from lower economic activity and lower property values (which have a long delay factor) are already being felt as politicians refuse to raise taxes and unlike the federal government, cannot operate in deficit. Government jobs, long a robust growth area for employment and wages are unthinkably facing shrinkage with teachers, agency staff, and other public employees seeing pink slips.

Not only are these some of the last jobs with old-time lavish benefits, they were usually a compromise employment deal: we'll pay you less and stick you in a labyrinthine bureaucracy with stultifying work, BUT you'll be impossible to fire and won't have a huge co-pay.

If Stiglitz is right, one more semi-palatable option for job security will be diminished.

We could rewrite the work culture rules for Americans with this recession. Or maybe we'll just do away with most of them.


Ol James said...

It sounds like that drop in the bucket is dodging all the holes that were shot into it.
Don't ya think by adding to unemployment benefits it give companies the incentive to go ahead and start layoffs?? As you said, those on the bottom of the ladder are going to find something extra in their pay envelopes. But Id bet my last bippy, those in government especially will say the layoffs are a cost cutting initiative. After all how can they justify a self imposed raise,what with the cost of living!?!
I over heard a commentator on a FOX program state that the government could help bring us out of this...(gulp), "recession" by eliminating Farmer Subsidies,(I about dropped my bowl of corn flakes, sure would hated to have wasted $0.75). I think he was mad on account of his being in the real estate market, go figure.
Somebody needs to give our legislators a wake up call. After all they are supposed to represent us and not bleed us dry. (submit preaching to the choir phrase here).

Anonymous said...

Sounds like the governments will have to get by on less or get a little more productive (something I try t do every year with my farming operation). From my little bit of experience working for the State of IL, productivity is not the first thing that comes to mind.