We're movin' on up

Feels like forever since I've done this. So what's shakin' on this day of days? First, good news, if you're into that sort of thing: the IMF thinks the global economy is set for stronger growth in the coming year, and predicts only -1.1% growth this year, instead of -1.4%. Whoopie.

On the other hand, the IMF expects write-downs by banks to total $1.5 trillion next year. Yves Smith on Naked Capitalism points out that tier 1 capital--stock options, reported reserves and retained earnings--is about $4 trillion, right now, and that most of that came from public bail-outs. Compare that to $3.4 trillion in total write-downs since the crisis began, and we fast begin to leave 'whoopie', heading straight for the hills of 'whoono.' But what else is new?

Oh, that the public option got shot in the stomach.

The first proposal, by Senator John D. Rockefeller IV of West Virginia, was rejected 15 to 8, as five Democrats joined all Republicans on the panel in voting no. The second proposal, by Senator Charles E. Schumer of New York, was defeated 13 to 10, with three Democrats voting no.

The votes vindicated the middle-of-the-road approach taken by the committee chairman, Senator Max Baucus, Democrat of Montana. Mr. Baucus voted against both proposals, which were offered as amendments to his bill to expand coverage and rein in health costs.

“There’s a lot to like about a public option,” Mr. Baucus said, but he asserted that the idea could not get the 60 votes needed to overcome a Republican filibuster on the Senate floor.

You're right, Mr. Baucus, there is a lot to like about the public option. Unfortunately, there's almost nothing to like about you, and that's my cross-to-bear in this gnarly little scenario. I'll take socialism over your Montanan ass any day of the week.

And speaking of socialism,

The 'flexibility' explanation of unemployment is wrong.

...

In a recent article, Howell et al (2007) econometrically examined the impact of these
rigidity variables, or what they call Protective Labor Market Institutions (PLMIs), and concluded that: “while significant impacts for employment protection, benefit generosity, and union strength have been reported, the clear conclusion from our review of these studies is that the effects for the PLMIs is distinctly unrobust, with widely divergent coefficients and levels of significance.” Indeed, in his published comments on the Howell et al. article, Jim Heckman (2007) argues that the authors “…are convincing in showing the fragility of the evidence on the role of labour market institutions in explaining the pattern of European unemployment, using standard econometric methodology.” Freeman (2007) also finds the evidence for the impact of these institutional variables less than convincing “despite considerable effort, researchers have not pinned down the effects, if any, of institutions on other aggregate economic outcomes, such as unemployment and employment”.

Source: Bell and Blanchflower, "What Should Be Done about Rising Unemployment in the UK?" February 2009, p. 15

If only I had had these papers in eleventh-grade AP Economics, I could have saved myself a lot of capitalist fist-pumping. So what does this all mean? The standard explanation in (conservative) neo-classical economics for long-run employment is that it is most highly correlated with labor market interference. Since wage subsidies and employment protections distort the price of labor, there will be a deadweight loss in labor markets representing the gap between labor supplied and labor demanded. That's why socialism doesn't work, and why all European countries at all times always have higher unemployment rates than the United States (9.7%), except for Norway (3.0%), Denmark (3.7%), Switzerland (3.8%), the Netherlands (4.4%), Italy (7.4%), the UK (7.9%), Sweden (8%), Germany (8%), Belgium (8%), and France (8.2%).

That's not fair comparison, of course, because I'm looking at the employment picture during a recession. Rates of unemployment in Europe are on the rise (except in Norway, where an effective stimulus caused them to drop in June), just like in the United States. What matters is the time series--but that's exactly the point of the paper above:

There is no evidence in the UK that over the last year or so that union density, benefits, the tax wedge or employment protection has risen. Interestingly, both Spain and Ireland, which have seen big changes in unemployment over the past twenty years (Appendix 1), always had low levels of all of these rigidity variables and these have not increased over time. What is true is that unemployment in Europe is higher than it is in the United States and Western Europe has more job protection, higher unemployment benefits, more union power, and a more generous welfare state. But that is a cross-section correlation and it tells us little or nothing about time series changes.

As Denmark, Norway and the Netherlands prove, even the contention that unemployment is across-the-board more robust in Europe is faulty. And, as we know, all of these states have an exceptionally activist public presence in labor markets.

But wait! I forgot a few Europeans, didn't I? What about Spain (17.9%) and Ireland (12.6%)? They're looking awful. Maybe if they hadn't aggressively pursued labor and financial market deregulation, and then encouraged a false boom in construction and real estate-backed asset prices (familiar, huh?), things would be better.

I read, what now seems like years ago, an article in the FT by Paul de Grauwe, an economist at the University of Leiden, which asserted that labor market regulation acted simply to slow down market forces regardless of economic climate. In a boom, this is seen as a downside, since everyone wants to hire everyone else--at the lowest price, of course--so that they can make more money. In a bust, however, wage and employment controls prevent the kind of downwards spiral in demand and unemployment that is currently wreaking havoc in a United States made impotent by its own commitment to free markets. Every person who is fired is one less person who will spend money, which in turn squeezes businesses, who then ramp up firings, etc etc al the way to the bread lines. Intervention in labor markets through wage-subsidies and other schemes plug a hole in this leak; witness the success, recently, of one such program in Germany, a scheme known as kurzarbeit, for which the German government paid private employees 60% of their wages to work less. The reasoning behind it is that slashing a day or two off of one person's workweek and giving it to another person distribute employment, even if only part-time, more evenly. It's also more efficient than simply increasing unemployment benefits, because employees remain productive, and can wait for a global recovery in demand to restore them to full hours.

Would that we would do these things in America, but we won't, not with bold and spirited defenders of liberty like Orin Hatch and Jim De Mint on our side. I'm so happy to be an American, I could scream.