Thursday, September 29, 2011

Manhattan Leads on Jobs and Wages in First Quarter

The latest county job and wage numbers suggest that one place economic recovery starts is in counties that were already quite well off, like Manhattan. They also suggest that Santa Clara county, Calif. – the heart of Silicon Valley – is Manhattan’s main competitor.

In the first quarter of this year, Manhattan, aka New York County, gained nearly twice as many jobs (43,400) as Cook County, Ill. (22,900), which includes the City of Chicago. The two counties have approximately the same employment base - Manhattan has 2.304 million workers and Cook County has 2.334 million. The first-quarter numbers, just published by the Bureau of Labor Statistics, compare the first quarter of 2011 with the first quarter of 2010 to minimize issues of seasonality.

Among the 322 large counties with more than 75,000 employees, only Harris, Tex., gained more jobs than Manhattan in the first quarter compared with the same quarter in the previous year.

Manhattan’s average weekly wage was the highest of the large counties at $2,634, with the next two highest-wage counties both in the NYC metro area (Fairfield, Conn. and Somerset, N.J.) The next two highest-wage counties are in California (Santa Clara and San Francisco). The average weekly wage in large counties in the first quarter of 2011 was $935.

The increase in wages from 2010 to 2011 (again, first quarter numbers) was highest in Manhattan among the large counties, $222. The average U.S. large-county increase was $46. Santa Clara county was second. Somerset, NJ and Fairfield, Conn. are also among the top ten large counties in terms of their wage increase.

On a percentage basis, Manhattan wages rose 9.2 percent, which placed 10th out of the 322 large counties. Manhattan accounts for approximately three-quarters of the New York City economy.

Friday, September 16, 2011

UBS MESS | 4 Reasons Glass-Steagall Rocks

Sept. 16, 2011—I'm reading about the arrest in London of Kweku Adoboli of the Swiss investment bank UBS at the Randolph Hotel in Oxford, overlooking Balliol College. Alice and I are here for the Oxford University Reunion Weekend—it's 49 years since I  matriculated.

Mr. Adoboli, the young UBS trader, made a $2 billion mistake, it seems. Using his Delta One trading system, he bought Swiss francs as a hedge when he meant to sell them. Before he realized his mistake, if we can believe this, the market ran away with his bet. Swiss francs fell in value. UBS took the hit for a couple billion. This exceeds Nick Leeson's $1.3 billion loss, which brought down Barings in 1995. It ranks third after Jerome Kerviel's $6 billion loss at Société Générale in 2008 and Yasuo Hamanaka's $2.6 billion loss at Sumitomo in 1996. All this from today's Independent, delivered to my door this morning.

For UBS, the timing is bad. It had just started to show a profit in 2010. So long as no one bails out UBS, the victims are (and should be, based on the published information so far) UBS employees and shareholders.

But for the just-issued Vickers Report, from Britain's Independent Commission on Banking chaired by Sir John Vickers, the timing couldn't have been better. It shows how risky the "casino" banks are, and how frail is their ability to control it.

The Vickers Report recommends reversing some of Britain's "Big Bang" deregulation of 1986 by "ringfencing" retail (commercial) banks with a separate board of directors and shareholder equity that is at least 10 percent of risk-weighted assets. The plan is for new controls to be in place by 2019.

A key element of the Vickers recommendations is that commercial banking and investment banking be separated. This was a central component of the Glass-Steagall Act of 1933, separating commercial banking from investment ("casino") banking.

An opponent of the Vickers recommendations, Martin Jacomb, protested against them in the September 14  Financial Times (p. 15), the day after the Vickers report was publicized:
Commentators speak loosely about going back to Glass-Steagall. But the Glass-Steagall Act was introduced to deal with a problem that no longer exists: the distribution of fraudulent securities to uninformed customers. It was abolished because customers wanted the services universal banks can provide.
Sorry, but that loose statement is just wrong. Let me count the ways:

1. Glass-Steagall was not abolished. The Steagall part, having to do with deposit insurance and insured-bank regulation, is still very much in force. What was eaten away over time was the fence around the banks and the FDIC's ability to contain the problem.

2. Distribution of fraudulent securities to uninformed customers is still a problem. Does anyone believe that the underfunded securities regulators will prevent any future Bernie Madoff from emerging, or any future misdescribed and toxic derivative?

3. Glass-Steagall was designed to prevent runs on banks. The three-part program of the Banking (Glass-Steagall) Act of 1933 was to keep the foxes of speculative banking (the "casino" bankers) out of the chicken-coop of commercial banking, to empower the Federal Depsoit Insurance Corporation to insure deposits, and to regulate insured banks on behalf of depositors and the federal insurance fund. It also keep insurance companies out and also created the Federal Open Market Committee, which still sets U.S. monetary policy. It has worked well, and for 75 years the FDIC took care of ailing commercial banks without massive external funding.

4. "Customers" did not demand the erosion of Glass-Steagall.  The legislative record of U.S. bank deregulation and subsequent actions of investment banks shows the ending of many Glass-Steagall protections  was driven by financial speculators seeking  access to the deep pockets of commercial banks and (via credit default swaps) insurance companies. There was no customer-driven yearning for "universal banking".

As the Economist said in 1999, the erosion of Glass-Steagall protections should have been accompanied by new regulations for investment banks. The United States Government unwittingly became a guarantor of  "casino" bankers - and insurance companies - without the limitations that came in 1933 with deposit insurance. The  failure of Lehman Brothers three years ago showed how perilously far into the commercial banking business investment banks had penetrated. The latest UBS fiasco shows the urgency of preventing a repeat of that situation, starting with implementation of Dodd-Frank.

Wednesday, September 14, 2011

Creating U.S. Jobs - Six Avenues

What are the real choices before Washington this fall?

The number one issue before the nation is economic recovery. Unemployment rates have been too high for too long. Here are a few ideas about what we can expect and hope for during the next few months:

1. Don't Depend on an Out-of-Ammo Fed. Federal Reserve Chairman Bernanke wants to appear to be doing everything he can. However, there is little more the Fed/FOMC can do to help the economy since December 16, 2008 when the Federal Funds rate was lowered to the Zero Bound. Quantitative Easing hasn't made much difference. How much can the Fed spend buying long-term Treasury bonds to lower long-term interest rates, even if it sells short-term Treasurys at the same time? How much difference does it make for the Fed to buy up long-term bonds if the Treasury is selling new ones at the next window?

2.  Implement Dodd-Frank to Help Address the Liquidity Trap. The economy would turn around if the Fed's easy-money policies led to more bank lending. But bankers are still worried about their balance sheets. Lax oversight by bank regulators has been replaced by close questioning. Bad loans are still not all recognized and new categories of potentially bad loans have opened up, e.g., the sovereign debt of the PIIGS countries, whose debts are freezing bank liquidity despite  of banks EU rescue programs. Speeding up implementation of Dodd-Frank financial reforms would improve confidence in and among U.S. banks.

3. Pass the President's Second Jobs Program. Another $450 billion for job creation may not be sufficient. However, it is necessary and a CNN poll and others show, by wide margin, that the U.S. public wants this program implemented.

4. Encourage Entrepreneurship. Creating jobs is not just about getting existing firms to hire more workers. It's about encouraging people to start up new businesses. Incubators help. Entrepreneurship can be taught - it's like a language. Governments at all levels can do big and small things to make it easier for people to create businesses.

5. Modify Fuel Prices to Encourage Green Jobs. Federal subsidies of alternative energy and energy efficiency didn't work as well as hoped because prices for fossil fuels don't reflect their full costs (and also because many states and localities did not have staff ready in 2009 to respond to stimulus programs offering money for green jobs). Subsidies for fossil fuels need to be ended and a tax on gasoline or carbon should be imposed. Tom Friedman had a good op-ed on this topic today ("Is It Weird Enough Yet?"). The last Congress rejected cap-and-trade and a carbon tax, but the pressure to find money to pay for Medicare and Social Security, as well as more evidence on global warming, might bring these proposals back to debate and action.

6. Most of All, Reform the Tax Code to Encourage Job Creation. If U.S. payroll tax rates are lowered significantly, as President Obama has suggested, this will have a dual benefit, encouraging employers to hire and putting money in the hands of middle-class consumers, who will spend it. This could be paid for by raising the top tax for those earning, say, $500,000 or more, and gradually raising the cap on the payroll tax (as Sen. Bernie Sanders, I-VT, has proposed). This would return the income tax to a semblance of progressivity and would tax those best able to bear the burden and least likely to spend new money.

George Magnus in the Financial Times describes the world's predicament as a "once-in-a-generation crisis of capitalism", bequeathed by the excesses of the 1980s-2008 period. The stakes couldn't be higher.

The Jobs Impact of a High Top Tax Rate

President Obama wants to cut payroll taxes and pay for it in part by raising the top Federal income tax rate.

Cutting payroll taxes is long overdue. You get less of what you tax. If you tax jobs - and that's what a payroll tax is - you get fewer jobs. Also, a middle-class worker is more likely to spend the money from a tax cut than someone earning $500,000 a year.

What would the effect be of a higher top Federal income tax rate? Tony Phillips in his blog on compares top marginal tax rates and job growth during the period 1925-2010.

The top tax rate was below 40 percent in 31 of these years (1925-31 and 1987-2010). The average top tax rate was 33.3 percent. Job growth averaged 0.94 percent. (GDP growth averaged 3.6 percent.)

The top tax rate was 70-94 percent during the other 45 years! The 94 percent rate was in the two peak wartime years of 1944-45. The average top rate was 81.5 percent. The average rate of job growth was 2.6 percent, 2.8 times the average growth for the low-rate years. (GDP growth during the high-top-tax-rate years averaged 8.6 percent, 2.4 times the average GDP growth rate during the low-rate years.)

Meanwhile, in the low-top-tax-rate years, inequality of income has increased. This has hurt consumer demand, which is the bulk of GDP. The payroll tax has become a huge share of Treasury income, but it tops out. Without a higher top rate, our income tax structure is highly regressive, as Warren Buffett has famously complained.

The latest year when a higher top tax rate, 70 percent, was in effect was the last year of the Carter Administration. Phillips says:
[In 1980, when] America's top marginal income tax rate was 70%, that rate applied to earners with incomes of $215,400 or more. In 2011 dollars, that equals $590,000. Under a 1980 scheme, only a tiny fraction of Americans would pay the top marginal tax rate.
So Obama's proposed tax reforms look good from both sides. Cutting payroll taxes will boost demand and create jobs. Raising the top income tax rate to pay for the cut reduces the severely regressive tax sttucture and seems historically to be associated with more job creation than occurs under the present low-top-rate system introduced during the Reagan administration.

Wednesday, September 7, 2011

Mayor Koch Makes a Couple of Good Points

Former Mayor Ed Koch doesn't blog, but he does send out from an email list maintained by his law office an occasional letter with his opinion of movies he has seen recently and sometimes he provides some comments on local or national political issues. He has taken positions on individuals in the news, such as candidates for public office.

Today, on the eve of President Obama's much-awaited speech with new proposals for job creation, the Mayor proposes that the President include the proposal that "the bankruptcy laws be amended immediately to empower bankruptcy judges to reduce principal as well as interest."

This would help clear the sticky foreclosure process. Houses lose value when banks push forward their claims slowly. Some banks do not want to reveal too quickly how many mortgages they signed on to are substandard and are being foreclosed on.

The usual argument against allowing bankruptcy courts to write down the principal owed is “moral hazard”. (This is an insurance term referring to the hazard that insurance can remove the incentive for insured owners to look after their property. Over-insurance, for example, creates a moral hazard because the insured gets more from the property when it is destroyed than the property is worth. Someone who is not moral might torch their own property.)

The argument against allowing bankruptcy courts to write down principal is that it would, in the Mayor's words, "encourage future borrowers to borrow more than they could repay."

Then the Mayor delivers his zinger, addressed to the President:

If “moral hazard” were the standard, why were the banks, which made decisions that were financially devastating to this country, bailed out to the tune of billions of dollars by laws enacted by Congress and signed by you, as well as actions taken by the Federal Reserve?  Remember, Mr. President, that banks were given those billions to provide liquidity to businesses, but instead used the taxpayers’ monies to buy U.S. Treasury bonds to enhance their balance sheets with the interest received.
Something needs to be done to finish "marking to market" in the housing industry. Borrowers have received a lot less help from the government than the lenders. The Mayor's proposal would redress the balance for the remaining borrowers. This would be a good addition to the President's proposals.