Obama's Plans for Changing Financial Regulation

The Obama administration outlined its plans for regulatory reform of the financial and banking systems. The White Paper on the proposals is here. Today's Wall Street Journal has a lot of information about the proposals. For example, see here and here. I am currently on a short vacation, but will comment on the regulations next week.

The Great Depression Redux

There is an update of a column that appeared in April in Vox by two economic historians--Barry Eichengreen and Kevin O'Rourke. You can get it here. The date the start of the current recession later than the NBER did, and compare a number of variables with the same time period during the Great Depression. It is sobering.

Books on Panics and Depressions

I finished recently an interesting book--The Panic of 1907: Lessons Learned from the Market's Perfect Storm by Robert F. Bruner and Sean D. Carr. The panic was a catylist for the passage of the Federal Reserve Act in 1913. With no "lender of last resort," it took private individuals such as J.P. Morgan to arrange loans and guarantees to the banks and trusts that were facing bank runs due to the panic. People Morgan relied on included Benjamin Strong and George F. Baker. Strong plays a prominent role in another interesting book--Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed. The latter book concerns the four central bankers of the U.S., Great Britain, France and Germany, and mistakes made that led to the Great Depression. Strong was the President of the New York Federal Reserve Bank, which was the dominant bank at the time. Strong died in 1928--before the onset of the depression. Friedman and Schwartz, in their history of monetary policy, state that they think Strong may have helped prevent some of the worst decisions made during the depression.

Of interest to me also was the inclusion of George F. Baker. Hope College has a Baker Scholar's Program and I am one of the advisors to the group. Originally, it was formed through money from a trust left by George F. Baker for educational purposes. Later, the family pulled out of educational endeavors, but Hope was permitted to maintain the George F. Baker name. Baker was a banker and close associate of J.P. Morgan. He also gave money for the start of the Harvard Business School. In an appendix in The Panic of 1907, the authors state that Baker cofounded the First National Bank of New York in 1863 at the age of 23. He was a director in 22 corporations and also a philanthropist, providing gifts that founded the Harvard Business School and Baker Library at Dartmouth.

At Hope, the Bakers are juniors and seniors who were selected after interviews with local businesspeople. The emphasis is on student leadership. The group meets with businesspeople, both locally and on trips that usually include New York, Chicago and San Francisco. Over the last two years, visits have included Cisco, Google, JPMorgan Chase, ADP, and the Chinese Consulate in San Francisco. The current Bakers are a great group, and it is a pleasure to work with them. Their website can be found here.

Unemployment Rates by Metropolitan Area

The Wall Street Journal had an article in Wednesday's edition of unemployment rates by metropolitan area. (See here.) Cities in California dominate the high unemployment rates--El Centro tops the list at 26.9%. Iowa City has the lowest on the list at 3.2%. Other low cities include Ames, Iowa, Lincoln, Nebraska, Manhattan, Kansas, and Sioux Falls, SD.
I note that my area of Holland, Michigan is at 11.5% while Baton Rouge, Louisiana is at 5.2%. In 1992, when I moved from Baton Rouge to Holland, the unemployment rate in Holland was well below the national average while Baton Rouge was above the national average. Things have certainly changed.

Harm to Competitors or Harm to Competition

The Wall Street Journal has an interesting piece in its opinion section by George Priest, a Yale University Law School professor of antitrust law. He notes that the Justice Department issued a report in 2008 addressing appropriate antitrust approaches, and that Christine Varney, the new Assistant Attorney General for Antitrust has rejected it outright. According to Priest, the report was not a rehash of the Chicago-school antitrust approach (which is an approach I like), but an approach more moderate. Ms. Varney has denounced the report outright.

The issue seems to be an old one in antitrust. Should antitrust focus on harm to competitors or on harm to competition? That is, should the focus be on the fact that some firms lose in the competitive process, and if the winner is large or grows large, antitrust should step in and "correct" the situation? Or, should the focus be on harm to the competitive process? Collusion is an example of something that harms the competitive process. Predatory behavior can also harm the competitive process, but the existence of firms harmed by a competitor is not evidence of predation.

Priest notes that it appears Ms. Varney thinks US policy should emulate European policy. This is strange in a sense, since European policy came to emulate US policy in the post-war period. Even in the 1950s, cartels were legal in a number of European countries. But in recent years, the EU's antitrust focus has been on large firms in the IT area who have been successful. Microsoft and Intel are the two prime examples. (I wonder whether EU regulators would have decided differently if Microsoft and Intel were European firms.)

There was a time when American antitrust focused more on harm to competitors than harm to competition. In the last thirty years, it has been wiser and focused more on harm to competition. The return to harm to competitors does not bode well for the competitiveness of the American economy in coming years. It might pay to recall that in the 1960s there were many who thought General Motors should have been sued by the antitrust authorities because it had monopoly power and could harm its competitors. Does anyone think so today?

How Are 3.5 Million Jobs Calculated?

The American Recovery and Reinvestment Act of 2009 is supposed to create or save roughly 3.5 million jobs. How was this estimate determined? Two documents provide the information. The first was written by Christina Romer and Jared Bernstein in January, before Barack Obama was inaugurated. It is entitled, "The Job Impact of the American Recovery and Reinvestment Plan." The second is a report prepared by the Council of Economic Advisors, of which Christian Romer is the Chair, entitled, "Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009." I will rely primarily on the second report, but it relies a lot on the first report.

Probably the average citizen hears that ARRA is supposed to save or create 3.5 million jobs thinks that this means that 3.5 million people will have jobs that would not have had jobs in the absence of the program. This is not correct though. The jobs are actually job-years. Suppose a project lasts two years and results in an extra 100 people being employed. The Council of Economic Advisors is calling these 200 job-years—the 100 people are employed for two years so each person is counted twice. In my previous post, I mentioned a project in Washington that involves $1,635,000,000 to be spent over several years. The estimate for that project listed on the website is 21,255 job-years. This does not translate into 21,255 people with jobs who would not have had jobs otherwise.

There is still the question of how the 21,255 figure was determined. For this, the report provided by the Council of Economic Advisors states that they estimated that a $100 billion of government spending creates 1,085,355 job-years (p. 5). That works out to $92,136 of government spending needed to create one job-year. To use an example in the report, an $11 billion program, “…will create about 120,000 job-years during the President’s first term.” (p. 5). That is, $11,000,000,000/92000 = 11,956 or approximately 12,000 job-years. In the example above, the $1,635,000,000 project will create 17,772 job-years, which is less than the 21,255 job-years listed on the website. I do not know the reason for the difference.

Keeping Track of the Stimulus Spending

The government has set up a website (www.recovery.gov) where the public can go and see how much has been spent and how it has been spent. A firm also has a site (www.recovery.org). The firm has a number of search engines that are used to find government Request for Proposals and other notices of bid taking for new projects. As of the date of this writing, the private web site has more information than the government web site. According to the private web site, the most expensive project authorized so far is in the state of Washington and involves demolishing nuclear facilities and remediating the waste sites. The price tag is $1,635,000,000. It is unclear when the money will start being spent since the usual government process involves a request for proposals, the collection of proposals and bids, and the awarding of bids. Once the bid is let, it takes time for the firm to begin work. However, this particular project is interesting in that part of the task is to, “Accelerate cleanup of facilities, waste sites, and groundwater along the Columbia River to support shrinking the active area of cleanup at the 586-square-mile Hanford Site to 75 square miles or less by 2015". That is, money for this project will still be paid out as late as 2015. Some critics of the American Recovery and Reinvestment Act point out that a lot of spending may be done after the recession is over and is no longer needed.