Friday, November 20, 2009

"Jobless Prosperity"?

This week a story on Bloomberg.com on 11/16 about Bernanke lunching with Wall Street originally had a title which included "jobless prosperity" buoys market and they later changed it to "jobless rebound". What rebound?

Jobless claims continue high over 500,000 each week. Even extended benefits will run or for at 1 million people by January.

James Tobin, the Nobel economist, was famous, besides his Q ratio for valuing companies and the market, for his general equilibrium level paper relating monetary policy and unemployment. While acknowledging an equilibrium level, he maintained through his life that forced unemployment was incompatible with a free society as well as an unproductive loss of talent and resources. I do not see any economist today advocating for Tobin's principles. I see no one considering whether a Tobin Tax to control profitable volatility and risk taking on futures trading (such as happened with oil) and derivatives. Given his abhorrence for unnecessary selective governmental regulation, I believe his attempts to regulate systemically dangerous firms would be more focused on the risks as opposed to salaries and bonuses and size.

This all ties in to the weak dollar/strong dollar debate, credit rationing, unemployment, and what effect a weak dollar or a strong dollar would have on reducing a deficit after a sustained recovery with employment as well as controlling inflation. A weak dollar has allowed financial institutions to recapitalize, although they are generally insolvent if their balance sheets were properly reported, while credit rationing and unemployment has been used to hold inflation down.

These issues are very worthy of civil public debate. This week I asked both Mark Thoma of the University of Oregon and Paul Krugman elongated questions on these issues. While I do not expect to get a response from either one, I am hoping they will write something in the near future which addresses not just a need for s second stimulus that actually targets unemployment, because the first stimulus was an economically inefficient pork pie, but also embraces the caring economic principles of James Tobin, who had his childhood roots in Champaign-Urbana, Illinois, in a cohesive explanation.

I wrote Mark Thoma:

What do you think of Joseph Gagnon's post,

particularly his assertion that the falling dollar will not be a problem as long as there are no policies attempting to keep unemployment below its equilibrium level? What effect would targeting unemployment with U6 at 17.5% (22% if older 1990's calculation used) with an efficient stimulus have relative to his argument? Given the weak dollar carry trade, how can asset bubbles and debt purchases be maintained without the expectation of inflation and then inflation itself becoming a multiple for an increasing deficit more than a multiple for increased GDP which would allow a faster reduction of the deficit?
How is a jobless recovery in which a significant number of the unemployed over 55 (if not 50) may never ever get an interview for a job consistent with their experience and ability much less a job consistent with their experience worth the defense of the financial system status quo?

Denninger of MarketTimer has very convincingly shown the correlation of the weak dollar strong stock market and strong dollar weak stock market beginning in late 2008 to the point where the market is conservatively 20% over valued. In my mind the stock market has become a carry trade. During this stock market upturn, the banks had ability to issue stock and debt to add to their capitalization which still leaves their balance sheets a fiction. If Bank of America valued its assets using the same process forced on Fannie May and Freddie Mac, it would have to post a 50-80 billion dollar loss provision.

Is there no one advocating the principles of James Tobin?

To Paul Krugman I wrote:

Could you comment in a future post or article on how James Tobin  might approach the current unemployment, deficit, liquidity, weak/strong dollar, and credit issues of the current financial crisis?

When I read a reasonable article by James Gagnon on The Baseline Scenario entitled, "Who's Afraid of a Falling Dollar?"  and come away from it with a queasy disgusting feeling, I have to ask who is standing up for the principles of James Tobin with respect to unemployment?  How is unemployment not being used to hold inflation down while the systemically dangerous recapitalize?  Is credit rationing keeping unemployment high?

Would a Tobin Tax on futures trading like oil and on derivative transactions be productive in limiting "unproductive" financial transactions, particularly when the trading profits become so risky they create unemployment, while maintaining liquidity and still be consistent with his fear of selective, knee jerk governmental regulation?  (I found Allessandri and Haldane's "Banking on the State" November 2009 Bank of England interesting in this regard).

I find it hard to believe he would tolerate arguments that it is ok and a good thing to have a "Jobless Prosperity" as I saw headlines on Bloomberg.com this week.

Yet the legitimate arguments relating to weak dollar/strong dollar in relation to economic recovery, interest rates/credit availability, and how a deficit would be reduced after sustained recovery (I am particularly concerned if a weak dollar would actually extend a deficit longer than a strong dollar recovery; it would seem inflation with a strengthening dollar might be more controllable and lead to deficit reduction with GDP growth faster than inflation with a weak dollar particularly since the United States is a net importing country and we are already seeing higher import prices with a weak dollar).

I see these as very interrelated, but I have probably asked too many questions.

If they write something in the future, good, but my point is that part of the eternal defense of individual liberty is caring. How is it okay to finance the recapitalization of systemically dangerous financial firms on the families of unemployed workers while at the same time we refuse to fire the executives who ran these systemically dangerous firms and programs and we refuse to strip the improperly valued toxic assets from their hands and off their balance sheets? Sweden did it in the 1990's and kept the banks private and stronger. Why can't we do it?



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