Too Big to Fail Banks are "Crony" Capitalism.

One phrase that became a household word as a result of the last financial meltdown is "too big to fail". Many have insisted that we need to break up all such banks while others have argued that the real issue is not one of size but one of interdependence i.e. a bank becomes more crucial to the economy when its failure will bring about a systemic failure and not only because it is large. The following article is a summary of the views of the president of the Dallas Federal reserve Bank who is a strong supporter of the view that the US does not have to put up with banks that are too big to fail. Read and comment.

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The largest U.S. banks are "practitioners of crony capitalism," need to be broken up to ensure they are no longer considered too big to fail, and continue to threaten financial stability, a top Federal Reserve official said on Saturday.

Richard Fisher, president of the Dallas Fed, has been a critic of Wall Street's disproportionate influence since the financial crisis. But he was now taking his message to an unusual audience for a central banker: a high-profile Republican political action committee.

 

Fisher said the existence of banks that are seen as likely to receive government bailouts if they fail gives them an unfair advantage, hurting economic competitiveness.

"These institutions operate under a privileged status that exacts an unfair tax upon the American people," he said on the last day of the annual Conservative Political Action Conference (CPAC).

"They represent not only a threat to financial stability but to fair and open competition … (and) are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great," said Fisher, who has also been a vocal opponent of the Fed's unconventional monetary stimulus policies.
Fisher's vision pits him directly against Fed Chairman Ben Bernanke, who recently argued during congressional testimony that regulators had made significant progress in addressing the problem of too big to fail. Bernanke asserted that market expectations that large financial institutions would be rescued is wrong.
But Fisher said mega banks still have a significant funding advantage over its competitors, as well as other advantages. To address this problem, he called for a rolling back of deposit insurance so that it would extend only to deposits of commercial banks, not the investment arms of bank holding companies.

"At the Dallas Fed, we believe that whatever the precise subsidy number is, it exists, it is significant, and it allows the biggest banking organizations, along with their many nonbank subsidiaries - investment firms, securities lenders, finance companies - to grow larger and riskier," he said.

Fisher argued Dodd-Frank financial reforms were overly complex and therefore counterproductive.
"Regulators cannot enforce rules that are not easily understood," he said.

(Reporting by Pedro Nicolaci da Costa; editing by Gunna Dickson)

Microeconomics of Scarcity

Hose tripe

Banning hosepipe use is a poor solution to a water shortage

How should we respond to scarcity? Should we increase the price or should we issue rationing coupon? An interesting real world article from the Economist.

 

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SPRAY the begonias or flout the law? That is the dilemma facing gardeners in England after a hosepipe ban came into force on April 5th. Another dry winter means that water is in short supply: anyone caught using a hose to refresh a parched lawn or clean a dirty car faces a £1,000 ($1,600) fine. And if you happen to own an ornamental fountain, forget it.
The ban's aim is off. It targets how water is transported, not its consumption—which metering would do. The obsessive car cleaner can use hundreds of buckets of water without fear. Nor is the ban likely to be strictly enforced. The last time hoses were widely forbidden, in 2006, two in seven people ignored the rule. Water firms have abandoned plans to set up hose hotlines enabling customers to shop their neighbours. There is no sign yet of hose vigilantes.

The economics of the ban are all wrong, too. With low supply and high demand, prices in an unregulated market would rise. But the hose ban aims to reduce the quantity of water consumed while maintaining a cap on the price. In a forthcoming article, Jeremy Bulow of Stanford Business School and Paul Klemperer of Oxford University use theory to show that such price caps mean those who value a good most do not necessarily get it. And because they can't pay for it, consumers commit effort to finding other ways of obtaining what they want.

Indeed, the kind of behaviour predicted by theory is already visible. Dedicated websites provide lots of ideas for sidestepping the ban by exploiting loopholes in the law. Power-washing the patio is acceptable if motivated by health-and-safety concerns—to blast away potentially slippery moss, for example. Fountains may be allowed to flow, as long as they lead into ponds containing goldfish.

Another paper, by Tim Leunig of CentreForum, a think-tank, argues that heavy water users should be offered flexible contracts which would reward them for reducing usage in times of drought (farmers could plant less water-intensive crops, for example). They would be paid for each litre they forgo. That would leave the water company out of pocket but with more water. It could then sell this surplus to those that want it, at a higher price. An alternative would be to meter all water users, and to vary the price according to availability. That would, of course, mean installing meters in every house—which would be expensive, but probably a good idea anyway.

Does Daylight Saving cost More Energy?

It is interesting to read the following and learn that there are some seious studies that have concluded that Day Light Savings does in fact cost more energy. Read and comment.



For decades, conventional wisdom has held that daylight-saving time reduces energy use. But a unique situation in Indiana provides evidence challenging that view: Springing forward may actually waste energy.

Ben Franklin may not having been saving much candlewax by springing forward.

Up until two years ago, only 15 of Indiana’s 92 counties set their clocks an hour ahead in the spring and an hour back in the fall. The rest stayed on standard time all year, in part because farmers resisted the prospect of having to work an extra hour in the morning dark. But many residents came to hate falling in and out of sync with businesses and residents in neighboring states and prevailed upon the Indiana Legislature to put the entire state on daylight-saving time beginning in the spring of 2006.

Indiana’s change of heart gave University of California-Santa Barbara economics professor Matthew Kotchen and Ph.D. student Laura Grant a unique way to see how the time shift affects energy use. Using more than seven million monthly meter readings from Duke Energy Corp., covering nearly all the households in southern Indiana for three years, they were able to compare energy consumption before and after counties began observing daylight-saving time. Readings from counties that had already adopted daylight-saving time provided a control group that helped them to adjust for changes in weather from one year to the next.

Their finding: Having the entire state switch to daylight-saving time each year, rather than stay on standard time, costs Indiana households an additional $8.6 million in electricity bills. They conclude that the reduced cost of lighting in afternoons during daylight-saving time is more than offset by the higher air-conditioning costs on hot afternoons and increased heating costs on cool mornings.
“I’ve never had a paper with such a clear and unambiguous finding as this,” says Mr. Kotchen, who presented the paper at a National Bureau of Economic Research conference.

A 2007 study by economists Hendrik Wolff and Ryan Kellogg of the temporary extension of daylight-saving in two Australian territories for the 2000 Summer Olympics also suggested the clock change increases energy use.

That isn’t what Benjamin Franklin would have expected. In 1784, he observed what an “immense sum! that the city of Paris might save every year, by the economy of using sunshine instead of candles.” (Mr. Franklin didn’t propose setting clocks forward, instead he satirically suggested levying a tax on window shutters, ringing church bells at sunrise and, if that didn’t work, firing cannons down the street in order to rouse Parisians out of their beds earlier.)

Minimum Wage

An excellent must read article about minimum wages. I usually would not post back to back on the same issue but this is an exception. Enjoy the treat.

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Economic View

The Business of the Minimum Wage

By CHRISTINA D. ROMER

Published: March 2, 2013

RAISING the minimum wage, as President Obama proposed in his State of the Union address, tends to be more popular with the general public than with economists.

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Mark Allen Miller

I don’t believe that’s because economists care less about the plight of the poor — many economists are perfectly nice people who care deeply about poverty and income inequality. Rather, economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.

First, what’s the argument for having a minimum wage at all? Many of my students assume that government protection is the only thing ensuring decent wages for most American workers. But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone — perhaps not when unemployment is high, but certainly in normal times. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.

One argument for a minimum wage is that there sometimes isn’t enough competition among employers. In our nation’s history, there have been company towns where one employer truly dominated the local economy. As a result, that employer could affect the going wage for the entire area. In such a situation, a minimum wage can not only make workers better off but can also lead to more efficient levels of production and employment.

But I suspect that few people, including economists, find this argument compelling today. Company towns are largely a thing of the past in this country; even Wal-Mart Stores, the nation’s largest employer, faces substantial competition for workers in most places. And many employers paying the minimum wage are small businesses that clearly face strong competition for workers.

Instead, most arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. Though a desire to help the poor is largely a moral issue, economics can help us think about how successful a higher minimum wage would be at reducing poverty.

An important issue is who benefits. When the minimum wage rises, is income redistributed primarily to poor families, or do many families higher up the income ladder benefit as well?

It is true, as conservative commentators often point out, that some minimum-wage workers are middle-class teenagers or secondary earners in fairly well-off households. But the available data suggest that roughly half the workers likely to be affected by the $9-an-hour level proposed by the president are in families earning less than $40,000 a year. So while raising the minimum wage from the current $7.25 an hour may not be particularly well targeted as an anti-poverty proposal, it’s not badly targeted, either.

A related issue is whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage. There’s been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.

Some evidence suggests that employment doesn’t fall much because the higher minimum wage lowers labor turnover, which raises productivity and labor demand. But it’s possible that productivity also rises because the higher minimum attracts more efficient workers to the labor pool. If these new workers are typically more affluent — perhaps middle-income spouses or retirees — and end up taking some jobs held by poorer workers, a higher minimum could harm the truly disadvantaged.

Another reason that employment may not fall is that businesses pass along some of the cost of a higher minimum wage to consumers through higher prices. Often, the customers paying those prices — including some of the diners at McDonald’s and the shoppers at Walmart — have very low family incomes. Thus this price effect may harm the very people whom a minimum wage is supposed to help.

It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the current tax system already subsidizes work by the poor via an earned-income tax credit. A low-income family with earned income gets a payment from the government that supplements its wages. This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous.

By raising the reward for working, this tax credit also tends to increase the supply of labor. And that puts downward pressure on wages. As a result, some of the benefits go to businesses, as would be the case with any wage subsidy. Though this mutes some of the direct redistributive value of the program — particularly if there’s no constraining minimum wage — it also tends to increase employment. And a job may ultimately be the most valuable thing for a family struggling to escape poverty.

What about the macroeconomic argument that is sometimes made for raising the minimum wage? Poorer people typically spend a larger fraction of their income than more affluent people. So if an increase in the minimum wage successfully redistributed some income to the poor, it could increase overall consumer spending — which could stimulate employment and output growth.

All of this is true, but the effects would probably be small. The president’s proposal would raise annual income by $3,500 for a full-time minimum-wage worker. A recent analysis found that 13 million workers earn less than $9 an hour. If they were all working full time at the current minimum — and a majority are not — the income increase from the higher minimum wage would be only about $50 billion. Even assuming that all of that higher income was redistributed from the wealthiest families, the difference in spending behavior between low-income and high-income consumers is likely to translate into only about an additional $10 billion to $20 billion in consumer purchases. That’s not much in a $15 trillion economy.

SO where does all of this leave us? The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish. If a higher minimum wage were the only anti-poverty initiative available, I would support it. It helps some low-income workers, and the costs in terms of employment and inefficiency are likely small.

But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go? 

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

Minimum Wage: Is $9 per Hour Sufficient?

President Obama suggested increasing the minimum wage to $9 an hour. There is no guarantee that the Congress will approve this request once it is officially made by the White House. The US minimum wage was $1.60 in 1968 while it is currently $7.25 , almost five times as much. So why is president Obama and so many others concerned about raising it some more? I am sure that all of you realize that what counts is not the nominal wage but the real one. This simply means that the $1.60 of 1968 is equivalent to $10.53 in 2012 dollars. So as you can see the minimum wage in the US has been declining over the years instead of either increasing or ,at a minimum, maintain its purchasing power. The following is a short article by Ralph Nader that speaks to the issue of minimum wage and where it should be.

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Published on Saturday, February 16, 2013 by 

Nine Bucks an Hour? A Call for a Living Wage at $10.50 or More

by Ralph Nader

How could Barack Obama say, in his State of the Union speech, “let’s declare that in the wealthiest nation on earth no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour”?
Back in 2008, Obama campaigned to have a $9.50 per hour minimum wage by 2011. Now he’s settling for $9.00 by 2015! Going backward into the future is the price that poverty groups and labor unions are paying by giving Mr. Obama a free ride last year on this moral imperative. How can leaders of poverty groups and unions accept this back-of-the-hand response to the plight of thirty million workers who make less today than what workers made 45 years ago in 1968, inflation adjusted?
But, of course, the poverty groups and labor unions chose not to mobilize some of the thirty million workers who grow our food, serve, clean up and fix things for us to push for a meaningful increase in the minimum wage before Election Day.
It gets worse. The Obama White House demanded “message discipline” by all Democratic candidates. That meant if Obama wasn’t talking about raising the minimum wage to catch up with 1968, none of the other federal candidates for Congress should embarrass the President by speaking out, including Elizabeth Warren, of all people, who was running for the U.S. Senate from Massachusetts.
Catching up with a 1968 federal minimum wage of $10.50, inflation adjusted, should be a winnable goal this year. Once the media starts regularly reporting on the human consequences of unlivable wages, and once the entry of more and more of the thirty million workers to marches, rallies and town meetings grows, neither the Republicans nor the Blue Dog Democrats will be able to stop this drive.
It didn’t matter that the U.S. had the lowest minimum wage of any major western country (Australia is over $15, France over $11, and the province of Ontario in Canada is $10.25 – all of these countries also have health insurance for all).
It didn’t matter that several cities and 19 states plus the District of Columbia have higher minimums, though the highest – Washington state – reaches only to $9.19.
It didn’t matter that two-thirds of low-wage workers in our country work for large corporations such as Walmart and McDonald’s, whose top CEOs make an average of $10 million a year plus benefits. Nor did it matter that these corporations that operate in Western Europe, like Walmart, are required to pay workers there much more than they are paying Americans in the United States where these companies got their start.
Haven’t you noticed how few workers there are in the “big box” chain stores compared to years ago? Well, one Walmart worker today does the work of two Walmart workers in 1968. That is called a doubling of worker productivity. Yet, many of today’s Walmart workers, earning less than $10.50 an hour, and are making significantly less than their counterparts made in 1968.
Nobel-Prize-winning economist Joseph Stiglitz, told me that minimum wage policy relates intimately to child poverty. Single moms with children on a shrinking real minimum wage “translates to child poverty” and is “creating another generation” of impoverished people.
The arguments for a higher minimum wage, at least to reach the level of 1968, are moral, political and economic. James Downie writing in The Washington Post provided five reasons to raise the minimum wage: “1) it will help the economy; 2) it reduces poverty and inequality; 3) it reduces the ‘wage gap’ for women and minorities; 4) indexing the minimum wage is, well, common sense; and 5) it’s consistent with American values.”
Downie gives historical perspective on just how far our economic expectations have slid when he quotes Theodore Roosevelt at the 1912 Progressive Party convention:
“We stand for a living wage…enough to secure the elements of a normal standard of living – a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit a reasonable saving for our old age.”
In the ensuing 100 years, worker productivity has increased about twentyfold. Why then are not most workers sharing in the economic benefits of this productivity? With other worker advocates, we chose to demonstrate on Feb. 12, 2013 before the headquarters of the U.S. Chamber of Commerce whose business coalition opposes increases in the minimum wage while its members report record profits and boss pay. And before the headquarters of the large labor federation – the AFL-CIO – we urged well-paid union leaders to devote more of their power and resources on Congress and the White House to lift up the minimum wage for those they like to call their “brothers and sisters,” from the ranks of the working poor.
The last time – 2007 – a higher minimum wage law was passed under the prodding of the late Senator Edward Kennedy, nearly 1,000 business owners and executives, including Costco CEO Jim Sinegal, the U.S. Women’s Chamber of Commerce CEO Margot Dorfman (two thirds of low-income workers are women), and small business owners from all 50 states signed a “Business for a Fair Minimum Wage” statement.
It read: “[H]igher wages benefit business by increasing consumer purchasing power, reducing costly employee turnover, raising productivity, and improving product quality, customer satisfaction and company reputation.”
Listen to those words, Walmart! You badly need to improve your reputation, given your recent major missteps.
Catching up with a 1968 federal minimum wage of $10.50, inflation adjusted, should be a winnable goal this year. Once the media starts regularly reporting on the human consequences of unlivable wages, and once the entry of more and more of the thirty million workers to marches, rallies and town meetings grows, neither the Republicans nor the Blue Dog Democrats will be able to stop this drive. Congressional districts all have many such workers in their districts and polls show 70 percent popular support for raising the minimum wage. That includes millions of workers who call themselves conservatives.
The April Congressional recess – the first two weeks of the month – will be the first opportunity to show up where it counts – at the town meetings held by senators and representatives back home. Filling those seats usually requires two to three hundred local voters. If workers rally, by the time the lawmakers go back to Congress, they’ll have a strong wind to their back to face down the lobbies for greed and power, who have money, but don’t have votes.
Check out our website timeforaraise.org and join this long overdue initiative.

Ralph Nader is a consumer advocate, lawyer, and author. His latest book is The Seventeen Solutions: Bold Ideas for Our American Future. Other recent books include, The Seventeen Traditions: Lessons from an American Childhood, Getting Steamed to Overcome Corporatism: Build It Together to Win, and "Only The Super-Rich Can Save Us" (a novel).

CBO on the deficit

The last report by the Congressional Budget Office is a positive welcome development. It might even act as a force for the two parties to arrive at a "grand bargain". The following is from the US News.

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CBO Paints Rosier Economic Picture for 2013

Budget estimators predict better growth, lower debt

By Danielle Kurtzleben

February 5, 2013

Congressional Budget Office Director Douglas Elmendorf gestures as he speaks during a news conference about the office's annual Budget and Economic Outlook at the Ford House Office Building on Feb. 5, 2013.

For the first time in five years, the government is projected to have a deficit below $1 trillion, the Congressional Budget Office reported on Tuesday.
But as with the last CBO estimate of the nation's budgetary and economic outlook, estimates could shift depending on what Congress does with spending and the economy.
The report estimates that under current law the fiscal year 2013 deficit will come in at $845 billion, or around 5.3 percent of GDP. That's about half of where the deficit was in 2009. But CBO adds that debt as a share of economic output would remain at "historically high" levels—around $12.2 trillion, or 76 percent of GDP at the end of fiscal year 2013. That's the highest share of GDP that the national debt will have been since 1950, according to the CBO.

As for the broader economy, the office has sharply improved its outlook. In August 2012, the CBO predicted that the U.S. economy would shrink by 0.5 percent in 2013, with unemployment hitting 9.1 percent at the end of the year. Now, the office projects growth of 1.4 percent this year, with unemployment at 8.0 percent at the end of the year.
Though better than previous estimates, CBO's predictions still represent a bleak outlook. If the economy only grows by 1.4 percent in 2013, that's a slowdown from around 1.9 percent in 2012. And if unemployment remains above 7 percent through 2014, as the office projects, it will be 6th consecutive year with the jobless rate above 7 percent. That will make it the longest period of sustained high unemployment 70 years, the CBO says.
CBO's director Doug Elmendorf told reporters at a Tuesday press briefing that full economic recovery could be a long time in coming.
"We expect output to remain below its potential level until 2017, almost a decade after the recession started in 2007," he said.


Still, all of these estimates are contingent upon what Congress does in the coming months. The sharply positive revisions are due in large part to Congress veering away from the so-called "fiscal cliff"—stopping tax hikes for most Americans and putting off until March across-the-board budget cuts totalling $1.2 trillion over 10 years.
Often criticized by congressional Republicans who say the CBO too often skews its findings to support Obama administration policies, its latest report argues that all of the projections are conditional upon what Congress decides to do about sequestration.
If lawmakers allow across-the-board cuts to medicare, defense and other discretionary spending—or if they fail to enact a long-term debt ceiling agreement or maintain government funding—CBO would likely have to revise down its estimated economic outlook, officials say.

Job Discrimination?

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Although the Great Recession ended in 2009 the number of unemployed is still very high. As many of you know, there are many different metrics for measuring unemployment the most popular of which says that the US has currently a 7.9% unemployment rate.  That is estimated to be over 10 million people. To understand the significance of the above numbers one must keep in mind that the labour force in the US is currently estimated to grow at over 1 million every year i.e about 100,000 new jobs a year. At the present rate of creating 150,000 then it would take a long long time to make significant cuts into that reserve of unemployed. Sadly the African American population carries an unemployment burden that is far larger than its proportion in the population.

Scholars sketch bleak economic picture for black Americans

By Michael A. Fletcher, Published: February 1

Scholars gathered for the African American Economic Summit at Howard University on Friday sketched an alarming picture of the financial ills afflicting the black community even as the nation recovers from the recession.
The white-black wealth disparity is more than 20 to 1. Black homeownership has declined. Black joblessness is up. Black income is down.
As the conferees gathered, the government released new figures showing the black unemployment rate at 13.8 percent, nearly double the 7.0 percent for whites. The overall jobless rate is 7.9 percent.
As bleak as the economic picture is for black Americans, the immediate prospects for improving it are worse, many participants said. They agreed that chances are remote for the kind of aggressive, targeted action needed to combat those problems and close the economic disparities that have long separated blacks and whites.
“We are basically talking about an economic system that is shot through with discrimination,” said Bernard E. Anderson, a former assistant secretary of labor.
Despite that, Anderson and others said, President Obama seems reluctant to attack economic disparities between blacks and whites head-on.
Anderson said that Obama’s second inaugural address was notable for lifting up gay rights, sounding the call for immigration reform and signaling his determination for women to receive equal pay in the workplace. “But there was not a single, blessed word on race,” he said.
Anderson said that he has met with Obama’s economic advisers in years past, but did not get the sense that they were interested in any racially targeted economic remedies. “He does not want to be labeled a president who is consumed by racial inequality in this country,” Anderson said.
Others at the conference said that Obama took office during the worst downturn since the Great Depression and had his hands full forging policies to keep the economy from a full meltdown.
Meanwhile, administration officials have pointed out that the president’s policies have led to 35 consecutive months of private-sector job growth and more than 6 million new jobs. They also note that the president’s work to expand Pell Grants and extend the earned-income and child tax credits have helped millions of African Americans.
Nonetheless, conferees said that more needs to be done to close the racial disparities that have long been a feature of the nation’s economic life.
During the depths of the crisis, Obama often said he wanted to build a better, more durable economy in the recovery. Conference participants said they are challenging him to live up to his word.
“We would all like to see him pursue that course,” said Ralph B. Everette, president and chief executive of the Joint Center for Political and Economic Studies, which co-sponsored the event.
Several scholars offered far-reaching, if politically unlikely, policy prescriptions.
Duke University professor William A. Darity Jr. said policymakers should pursue a large-scale public jobs program to dramatically lower unemployment. Darrick Hamilton, an economist at the New School, said the government should divert some of the money used to fund the income-tax deduction for mortgage interest to fund “baby bonds” that would provide $15,000 for disadvantaged newborns of any race to invest later in higher education, a business or a home.
The remedies need to be bold because “racial disparities are persistent and they are ubiquitous,” said Enrique A. Lopezlira, a lecturer at Howard. “It is hard to explain in a context that does not include some sort of institutional racism going on.”