Becker on infrastructure spending
Gary Becker raises several sharp questions on using infrastructure to stimulate the economy. Chief among them are: 1) the biggest job loss happened in financial, housing, and manufacturing sectors, however the proposed infrastructure plan concentrates on roads, energy and healthcare, etc. There seems to be a mismatching of skills. Is Obama’s plan expecting all financial engineers to become real engineers overnight? 2) the severity of the recession requires a speedy stimulus plan. However, any hasty plans by government will make the stimulus plan less effective — do we just throw money to fill the holes and can government cherry-pick the right projects?
Infrastructure in a Stimulus Package
Last week we blogged on how much stimulus to GDP and employment might be expected from a version of the Obama fiscal stimulus plan. I concluded that the amount of stimulus from the spending package would be far less than estimated in a study by the incoming Chairperson of the Council of Economic Advisers (“The Job Impact of the American Recovery and Reinvestment Plan”, by Christina Romer and Jared Bernstein, January 9, 2009). The activities stimulated by the package to a large extent would draw labor and capital away from other productive activities. In addition, the government programs were unlikely to be as well planned as the displaced private uses of these resources.
The stimulus package’s plans for spending on “infrastructure” clearly illustrate both concerns. I put this word in quotation marks because of the many definitions of what is included in the concept of infrastructure. Promoters of various stimulus packages- such as the just released House Committee on Appropriations $825 billion stimulus plan- include in infrastructure not only the traditional categories of roads, highways, harbors, and airports. They also include spending on broadband, school buildings, computers for school children, modern technologies, research and development, converter boxes for the transition to digital TV, phone service to rural areas, sewage treatment plants, computerized medical records and other health expenditures, and many other activities as well.
Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy. Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector. This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training. This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching.
An analysis by Forbes publications of where most jobs will be created singles out engineering, accounting, nursing, and information technology, along with construction managers, computer-aided drafting specialists, and project managers. Unemployment rates among most of these specialists are not high. The rebuilding of “crumbling roads, bridges, and schools” highlighted by in various speeches by President Obama is likely to make greater use of unemployed workers in the construction sector. However, such spending will be a small fraction of the total stimulus package, and it is not easy for workers who helped build residential housing to shift to building highways.
A second crucial issue relates not to the amount of new output and employment created by the stimulus, but to the efficiency of the government spending. Efficiency is not likely to be high partly because of the fundamental conflict between the goal of stimulating employment and output in order to reduce the severity of the recession, and the goal of concentrating infrastructure spending on projects that add a lot of value to the economy. Stimulating the economy when employment is falling requires rapid spending of this huge stimulus package, but it is impossible for either the private or public sectors to spend effectively a large amount in a short time period since good spending takes a lot of planning time.
Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect since infrastructure building projects in these areas can utilize some of the considerable unemployed resources there. However, many of these areas are also declining because they have been producing goods and services that are not in great demand, and will not be in demand in the future. Therefore, the overall value added by improving their roads and other infrastructure is likely to be a lot less than if the new infrastructure were located in growing areas that might have relatively little unemployment, but do have great demand for more roads, schools, and other types of long-term infrastructure.
Of course, at some point new taxes in some form have to be collected to pay for infrastructure and other stimulus spending. The sizable adverse effects on incentives of these taxes also have to be weighted against any value produced by the infrastructure (and other) stimulus spending.
The likelihood that such a rapid and large public spending program will be of low efficiency is compounded by political realities. Groups that have lots of political clout with Congress will get a disproportionate amount of the spending with only limited regard for the merits of the spending they advocate compared to alternative ways to spend the stimulus. The politically influential will also redefine various projects so that they can fall under the “infrastructure” rubric. A report called Ready to Go by the U.S. Conference of Mayors lists $73 billion worth of projects that they claim could be begun quickly. These projects include senior citizen centers, recreation facilities, and much other expenditure that are really private consumption items, many of dubious value, that the mayors call infrastructure spending.
Recessions would be a good time to increase infrastructure spending only if these projects can mainly utilize unemployed resources. This does not seem to be the case in most of the so-called infrastructure spending proposed under various stimulus plans.
Ferguson: The Ascent of Money
A highly recommended video program from PBS: Professor Niall Ferguson at Harvard talks about “the ascent of money”. And he asks some fundamental questions about the modern banking system we are living in.
Obama’s inaugural address 01/20/2009
Obama’s historical Presidential inaugural address:
John Bogle on economic outlook
John Bogle, founder of Vanguard on economic outlook. Pay attention to his view on the equity investing for the next decade. He also proposes two taxes: 1) tax on securities transactions in order to discourage speculations, which I think it’s a bad idea; and 2) tax on fuel, which I think is a good idea, but the timing may not be great during recession.
(source: CNBC)
John Taylor interview
John Taylor is an economist at Stanford University and he is also the author of the famous “Taylor Rule” in monetary policy.
What Obama can do with the banks?
In a few days, U.S. banks will have a new boss in Barack Obama. What will he demand from his sick subjects? That is a huge talking point among bank-stock investors.
After an incoherent start, the Treasury of Henry Paulson launched multiple bank rescues that settled into something of a pattern. Recipients of government aid issued preference shares with an affordable dividend, and the really sick, like Citigroup and Bank of America, passed a portion of future losses to the taxpayer.
But this approach didn't solve the problem: BofA shares are down 81% in a year, despite two government interventions. Meanwhile, Standard & Poor's said Friday that without government support Citi's credit rating would be four notches lower.
Mr. Obama needs to try something new.
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Surprisingly, the incoming administration is discussing plans that resemble Mr. Paulson's ideas. The new team is mulling wider use of loss-sharing agreements and buying toxic assets from banks.
For investors, much depends on the terms attached to assistance granted by the new administration. If they are tough, the stocks could get hit. And they may have to be tough to avoid a public outcry. The Obama team is well aware that throwing taxpayer money at the banks is unpopular with the public.
Just as important is the scale of bad asset purchases and loss guarantees. If they are too small, the banking sector doesn't get cleaned up quickly. But if they are too big, the public purse gets strained and popular opposition intensifies.
Looking at the weakness of balance sheets, there is a good chance that credit losses will pile up and banks' capital needs would overwhelm what the new administration can, or wants, to spend.
An alternative strategy would be to nationalize the sickest and restructure their balance sheets by giving a haircut to the banks' creditors. The advantage: It quickly removes problem banks from the market, and takes restructuring out of the hands of unreliable executives. The downside: It prompts panic in the debt markets, hurting healthy banks.
A variation for the government would be seizing banks and restructuring their balance sheets without hurting creditors, before trying to recapitalize them with private money. Granted, that also would be expensive for the taxpayer, given embedded balance-sheet losses, but it might provide a lasting solution for certain banks.
Whatever path the new administration takes, it is likely to demand concessions from the industry on how it pays its staff and how it lends.
For instance, Friday, the Federal Deposit Insurance Corp. proposed extending the bank-debt guarantee to 10 years from three years, as long as the debt is used to fund consumer loans.
If the administration goes too far down this interventionist road, while keeping banks publicly traded, they could start resembling the old government-sponsored entities, like Fannie Mae and Freddie Mac. Investors may remember how that all ended.
World Trade is Collapsing
World into the recession: with rich countries dramatically cutting back their consumption and imports, the exports in Asian countries were brought down to its knees. And the credit crunch further exacerbated the problem by making the letter of credit, which is vital to international transactions, harder to get than ever. Now the shippers are offering ZERO shipping rate trying to get their idled ships put into use.
(source: telegraph)
Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October.
“They have already hit zero,” said Charles de Trenck, a broker at Transport Trackers in Hong Kong. “We have seen trade activity fall off a cliff. Asia-Europe is an unmitigated disaster.”
Shipping journal Lloyd’s List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal “bunker” costs. Container fees from North Asia have dropped $200, taking them below operating cost.
Industry sources said they have never seen rates fall so low. “This is a whole new ball game,” said one trader.
The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.
Trade data from Asia’s export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.
Korea’s exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.
A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America’s two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.
“This is no regular cycle slowdown, but a complete collapse in foreign demand,” said Lindsay Coburn, ING’s trade consultant.
Idle ships are now stretched in rows outside Singapore’s harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes.
It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.
The World Bank caused shockwaves with a warning last month that global trade may decline this year for the first time since the Second World War. This appears increasingly certain with each new batch of data.
Mr de Trenck predicts Asian trade to the US will fall 7pc this year. To Europe he estimates a drop of 9pc – possibly 12pc. Trade flows grow 8pc in an average year.
He said it was “illogical” for shippers to offer zero rates, but they do whatever they can to survive in a highly cyclical market.
Offering slots for free is akin to an airline giving away spare seats for nothing in the hope of making something from meals and fees.
Market failed to cheer up in 2009 so far
With financial sector continuing to slide:
(courtesy of Bespoke Investments)