In Reversal, Older Employees Keep Working in Downturns

Economic Policy Institute discusses a troubling pattern. Historically, when the economy went south, a larger proportion of workers retired early. It isn't clear whether they were offered packages, were sacked, or left for other reasons (say their job was redefined and they no longer enjoyed it), but the point is they left the workforce.

Now we see a change: the laborforce participation of older workers increases in bad times. And since underemployment still counts as employment, some of this cohort no doubt includes individuals who lost their jobs and still need a paycheck, but are bringing in less income than before.

From Monique Morrissey at Economic Policy Institute:

Younger workers struggling to find a job now have something else to worry about: older workers with little choice but to keep working, even in a weak labor market.

The decades-long postwar trend toward earlier retirement reversed itself in the 1990s, as fewer workers found themselves covered by traditional defined-benefit pensions or had access to retiree health care benefits.

In the past, cyclical downturns in the economy prompted an increase in early retirements. As the chart shows, increases in the unemployment rate during the recessions of the early 1980s and 1990-91 were associated with upticks in the share of 60-64 year olds not in the labor force. Thus, retirees made way for younger workers entering the labor force when jobs were scarce.



But with 401(k)s replacing traditional pensions, early retirement may no longer be tied to labor market weakness. Instead, retirement decisions appear to be increasingly affected by gyrations in the housing and stock markets. Take, for example, this clear break from precedent—the uptick in early retirement during the late 1990s, a period when labor markets were actually very tight, but the stock market was booming. Early retirements subsequently declined after the stock market bubble burst and ushered in the 2001 recession.

This new trend toward later retirement is unlikely to reverse any time soon, as a recent survey showed a sharp drop in the share of workers confident they would be able to afford retirement, due to concerns about health care costs, the weakening economy, and declining home values.

Job Market for New College Grads Worse Than 2001

A disheartening post from the Economic Policy Institute on the employment outlook for the class of 2008.

This weak market, which appears unlikely to improve much for the 2009 cohort, raises troubling issues. Much of the sense of disillusionment in America is coming from the fact that elements of our collective social beliefs are being revealed, like our financial institutions, to be bankrupt. Most people have faith that if they apply themselves, as in get a good education and work hard, they will have at least a middle class lifestyle (and similarly, if you go to top schools, you can if you choose join the upper middle class). Now we have rampant job insecurity (you can be good at what you do and still lose your perch due to no fault of your own), stagnant wages for everyone save those at the top in what was a supposedly growing economy, and now even the new grads are facing tough times.

From the Economic Policy Institute:

This month’s crop of new college graduates will confront a more inhospitable job market than their predecessors faced in 2001, the beginning of the last recession.

In particular, wage and benefit trends show that the labor market for recent college graduates (ages 23-29) was weaker in 2007 than before the last recession in 2001. Inflation-adjusted average hourly wages for young college graduates were $21.09 for men and $18.17 for women in 2007 (Figure A). While the hourly wages for both men and women have ended their steady decline, they have barely risen and are still lower by about $0.60 for women and $1.60 for men than they were six years ago.



What’s more, a college degree has become less of a guarantee of receiving health and retirement benefits on the job. Over the last recession and recovery, college graduates in entry-level jobs became less likely to receive employer-provided health insurance and pension coverage.1 The incidence of health insurance coverage is over 5 percentage points lower than in 2001, and less than half of young college grads now receive any form of pension coverage on the job (see Figure B).



The fact that new college grads are doing poorly is a troubling sign, since those with higher education and more skills required in the new economy (e.g., computer literacy) are expected to be faring well. With persistent job losses and rising unemployment expected, there is little evidence to suggest that the job market will improve for recent college graduates in the near future.

Why So Little Interest in Danish "Flexicurity"? (Income Inequality/Labor Inefficiency Edition)

Why is it that some ideas capture the popular imagination and others die on the vine? A lot has to do with timing, getting noticed by opinion leaders, having a pithy turn of phrase. Yet I've seen articles and books that (at least to me) make fundamentally important observations and go nowhere, and others which seemed by comparison lightweight, get a great deal of attention.

Now the object lesson isn't in the earthshaking category, yet it's sufficiently interesting and instructive to warrant more attention than it appears to have gotten.

Robert Kuttner wrote an article for Foreign Affairs (subscription required) on the Danish economic model. The summary:

Denmark has forged a social and economic model that couples the best of the free market with the best of the welfare state, transcending tradeoffs between dynamism and security, efficiency and equality. Other countries may not be able to simply copy the Danish model of social democracy, but it nonetheless offers important lessons for governments confronting the dilemmas of globalization.

Given that we have Larry Summers, Martin Wolf, and plenty of others regularly hand-wringing about the growing backlash against free trade, a country, particularly a little country that of necessity has to trade, has managed to reach not merely workable, but successful and robust mix of safety nets and market mechanisms is noteworthy, precisely because it flies in the face of the popular prejudice that you have to have one or the other. Conventional wisdom holds that you have either lots of social welfare and sclerotic, rigid economies, or you have laissez faire capitalism which (allegedly) produces higher growth rates, although it increasingly appears that the main beneficiaries are those at the top, and the average guy gets left behind, sometimes in a dustheap.

But look at what we get in Denmark. According to Kuttner, trade unions call on industry to do more outsourcing! Mirable dictu! That alone should stir interest.

Yes, the piece was deemed interesting enough to have run in Foreign Affairs, so presumably some serious policy wonks took note. But if the level of comment in blogland is any indicator, it appears to have been largely ignored by the Serious Economist cohort. Dani Rodrick gave it a very nice writeup last week, but a quick search shows that it went nowhere.
And this is an article that appeared in the March/April issue, mind you.

[Update: Mark Thoma provided this and this link, along with two others, to some older discussions of fliexicurity].

So what's afoot? I can make a few quick guesses:

1. Kuttner works as a journalist. Those outside the academy are not held in high esteem.

2. That name "flexicurity" stinks.

3. Recall the Swedish miracle? I wonder if the fact that Sweden eventually fizzled makes the experts loath to get on any Scandinavian bandwagons.

4. As discussed below, even if you accept that the Danish model can't be readily exported, it nevertheless has some uncomfortable implications for the US.

Let's get to the basics according to Kuttner:

.....the Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum's Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark's financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development).

On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world's second-highest tax rate, after Sweden; strong trade unions; and one of the world's most equal income distributions. For the half of GDP that they pay in taxes, the Danes get not just universal health insurance but also generous child-care and family-leave arrangements, unemployment compensation that typically covers around 95 percent of lost wages, free higher education, secure pensions in old age, and the world's most creative system of worker retraining.

Aside: would you mind paying that much in taxes if you got all those bennies, plus clean streets and nice public transportation? (Note I am unaware of what individuals pay in taxes versus corporations, but one has to assume the effective rate is pretty high). And remember, since the income distribution is so even, it's not like some people are paying disproportionately for public services.

Kuttner gives us his caveats:

Yet Denmark's social compact is the result of a century of political conflict and accommodation that produced a consensual style of problem solving that is uniquely Danish. It cannot be understood merely as a technical policy fix to be swallowed whole in a different cultural or political context. Those who would learn from Denmark must first appreciate that social models have to grow in their own political soil.

Danish "flexicurity" means no labor rigidity. Like the US, you have employment at will; the only restriction on firing workers is that you give them advance notice. The key elements:

[F]ull employment; strong unions recognized as social partners; fairly equal wages among different sectors, so that a shift from manufacturing to service-sector work does not typically entail a pay cut; a comprehensive income floor; and a set of labor-market programs that spend an astonishing 4.5 percent of Danish GDP on initiatives such as transitional unemployment assistance, wage subsidies, and highly customized retraining.

As Rodrik notes:

In the U.S. by contrast, "spending on all forms of government labor-market subsidies -- of which meager and strictly time-limited unemployment compensation makes up the most part -- is about 0.3 percent of GDP.

What Kuttner stresses, and this is hard for Americans to swallow, are two elements:

1. The large degree of government intervention, even if it is to promote better functioning labor markets and more economic efficiency

2. The commitment to economic equality

And there are not obvious reinforcements between 1. and 2.

As for 1, the US has (unfortunately) come to associate large scale government programs with wealth transfer (as in the New Deal and Great Society programs) or (occasionally) showcases that are assumed to produce useful side benefits (NASA, the national labs such as Sandia, the national park system). Somehow most people don't include our massive defense apparatus on this list.

Yet we tend to forget our own government support of business (the official kind, not the pork or regulatory capture variety), such as the federal funding, particularly by the National Institutes of Health, of drug research (estimates range from 40% to 55% of total outlays). Japan in its heyday benefited from the guidance of the Ministry of Trade and Industry. Australia has its Commonwealth Scientific and Industrial Research Organization, a highly government funded applied science think tank focused on industries deemed economically important.

But the Anglo-Saxon countries don't have much in the way of models for buffering labor market dislocation. We tend to see it as welfare, but that line of thinking is fatally flawed.

Consider: as societies become more advanced, economic roles become more specialized. Everyone is a hunter-gatherer in a primitive society. In a pre-industrial society, you will see specialization (farmers versus tailors versus smiths), but these economies features little or no growth, and everyone's fate tended to rise and fall together, depending on the vagaries of weather, wars, and pestilence. There wasn't a scenario under which the smith would make a killing and the rest of the village would go begging.

Industrialization brought growth but also greatly increased uncertainty. As Adam Smith pointed out, even greater labor specialization becomes the norm. And that has increased over time not just in factories but in all walks of life. 100 years ago, a doctor was a doctor was a doctor. No more. You see it even in economics: trade economists versus macroeconomists versus financial markets specialists. Yes, they are often familiar with the work in other areas (teaching will force that on them), but they tend to publish more narrowly.

But if society demands increasingly specialized skills, and these skills in turn require the investment of time (education, considerable on the job training, or both) that creates labor market inefficiencies due to skill imbalances as demand and technologies change. This is a drag I don't see well recognized in conventional theories. It seems to be assumed that when trade or technological advances lead to certain industries, like buggy whips, to die off, labor and capital will automatically adjust. It isn't so simple and no where near so frictionless.

We thus have the highly visible problem of individuals suffering job losses, which can lead to long term un and under-employment, and/or not finding work only at considerably lower pay. That tends to be treated as a Darwinian outcome in the US, and we miss the fact that many of the people really could be redeployed in other fields if they had real training, not the half-hearted variety on offer here. Too often, the proposals to retrain workers to soften the blow of globalization sound more like a ruse to placate voters than serious policy.

Now of course, that view, as far as America is concerned, has some big shortcomings. First is the uneven and often substandard public education. It's hard to retrain people if they lack an adequate foundation. Second is labor mobility. As far as I can tell, you can drive from one end of Denmark to another in just over five hours. Thus if one had to move to find work, it would not be as wrenching as in the US (although changing communities is never easy).

But Denmark's biggest secret weapon is its even income distribution. That makes no only makes labor highly fungible, but is also facilitates people taking the jobs that suit them best (to the extent they have choices) rather than basing their decisions primarily or significantly on the size of their paychecks.

One thing that has quietly distressed me is how much US talent has been sucked up by Wall Street. I doubt that having a good bit of our top mathematical talent work on making better derivative models is the best use of their skills as far as society as a whole is concerned (and they don't even appear to have been hugely successful at that). A high proportion of the best and the brightest of Ivy League schools have also gone into finance; in earlier generations, they would have gone into a much broader range of occupations. Would Dean Richardson, the top veterinary surgeon who attempted to save the racehorse Barbaro, ever have gone that route had he graduated from Dartmouth in the 1980s? (Richardson was class of '74). Highly doubtful. Multiply Richardson by 10,000, maybe even 100,000. And that's just counting the elite schools. The same pattern holds at middlling to good but less celebrated schools (and of course, the other sad fact is America is due to the vagaries of primary and secondary education, plenty of smart, hardworking people don't have a shot at the best schools. Even in my very limited personal sample, I've seen way too many examples).

Consider further: in societies with more even income distribution, you can have higher caliber public servants (is the problem with government the institutions per se, or the difficulty in getting good people in the rank and file?) and teachers. And within organizations, people may be less resistant to change if the worst possible outcome, job loss, really isn't so terrible.

Yet economic competitiveness seems to have become inextricably enmeshed with our notions of the American Dream. It once meant that poor immigrants could come here, better themselves, and have a shot at middle class life. And even if they did not attain it, if their children applied themselves, almost certainly would.

But the American Dream seems to have morphed into something different. It no longer seems to stand for "if you work hard and play by the rules, you can have a comfortable and productive life." It feels as if it has become bound up with ever-increasing consumption, no matter what your economic cohort. Yet that new version of the dream now appears to be accessible only to those in the top echelons. So the fact of stagnant incomes for the bulk of the population has been exacerbated by the gap between the lifestyle aspirations pushed in media and the life most people lead.

And per the Danish example, the hidden costs of income inequality may be far higher than anyone wants to admit. To me, that it the inconvenient truth of Kuttner's piece which is leading it to be less popular than it deserves to be.

Another Face of Housing Stress: Storage Auctions

A New York Times story discusses a new manifestation of housing stress, namely, that people who have euphemistically had to downsize their housing are inceasingly unable to keep up with the storage charges and are having their possessions auctioned off.

It would be nice if we could all emulate Buddhists and take such reversals with enlightened equanimity. But even if the people who got themselves were reckless or foolish, rather than merely unlucky, the idea of losing one's personal possessions on top of losing one's house is sad.

But even more telling are some of the vignettes and factoids buried in the story:

As they lose their homes, people are turning to these humble cinderblock and sheet-metal boxes to store their stuff. But some people cannot keep up with their storage bills any better than they could handle their mortgage payments, and storage companies are auctioning off their property for a pittance.....

The auctioneer, Blair Auction & Appraisal, has been conducting sales at self-storage facilities in the Midwest for more than a decade. “If a site used to have 10 auctions, these days it has 15 or 20,” said Wayne Blair, the owner.....

Subprime mortgage loans had low “teaser” rates to lure borrowers. Many storage facilities offer the first month for free....

Bill Martin, a 50-year-old former manager in the technology industry, lost his house in the Southern California community of Lake Forest last August....

“Storage has my hopes in it,” said Mr. Martin, who sleeps on a foldout bed in his mother’s guest room. “I don’t tell anyone this, but at least once a week I go over and look at my couch, my refrigerator, my TV stand, my mattress and realize I did have a life, and maybe there’s a way to go back to it.”....

Fred Reger, an auctioneer in Washington and its suburbs, is seeing two trends, which he calls “matching luggage” and “residential units.”

The first means that he often sees a bunch of over-stuffed plastic bags when he opens a unit. “People used to put their belongings in boxes,” Mr. Reger said. “But Hefties are a lot cheaper. These people came in under stress, which explains why they defaulted a few months later.”

A “residential unit” is one where the renter tries to illegally live in the unit. “We used to see one or two residential units a month,” Mr. Reger said. “Now I’m seeing 6 or 8 or 10. At one facility in D.C. the other day, we had three residentials.”....

For [the auctions of] some units, $6 is too much. “A dollar bill, first dollar bill takes it,” Mr. Snyder implored in front of one unit. “Come on, this is everything they own!” To no avail.

This is the eternal mystery of self-storage. If the material was worth money, it was foolish to let it go to default. If it was not worth much, why spend at least $50 a month to store it?

We are far from being in a Depression and having people live in cars or Hoovervilles. But behind those storage auctions is a good deal of quiet desperation which will no doubt become more widespread as the housing downturn continues.

The Fallen Standing of the US Middle Class

It's no surprise to anyone in America that being middle class isn't what it used to be. Even though we have more gadgets, middle class workers in the 1950s and 1960s could afford to have stay-at-home wives. For mort households, it takes more hours of paid labor, and more borrowing, to support a bourgeois lifestyle.

This article by Christopher Caldwell in the Financial Times, "The lazy, crazy middle class," does a good job of providing an overview of middle class decline, but steers clear of articulating the causes. For that, we can consult Thomas Palley:

America’s economic contradictions are part of a new business cycle that has emerged since 1980...The new cycle rests on financial booms and cheap imports. Financial booms provide collateral that supports debt-financed spending. Borrowing is also supported by an easing of credit standards and new financial products that increase leverage and widen the range of assets that can be borrowed against. Cheap imports ameliorate the effects of wage stagnation.

This structure contrasts with the pre-1980 business cycle, which rested on wage growth tied to productivity growth and full employment. Wage growth, rather than borrowing and financial booms, fuelled demand growth. That encouraged investment spending, which in turn drove productivity gains and output growth.

The differences between the new and old cycle are starkly revealed in attitudes toward the trade deficit. Previously, trade deficits were viewed as a serious problem, being a leakage of demand that undermined employment and output. Since 1980, trade deficits have been dismissed as the outcome of free-market choices....

The new business cycle also embeds a monetary policy that replaces concern with real wages with a focus on asset prices. Whereas pre-1980 monetary policy tacitly aimed at putting a floor under labor markets to preserve employment and wages, it now tacitly puts a floor under asset prices. This is not a matter of the Fed bailing out investors. Rather, the economy has become so vulnerable to declines in asset prices that the Fed is obliged to intervene to prevent them from inflicting broad damage.

All these features have been present in the current economic expansion. Wages have stagnated despite strong productivity growth, while the trade deficit has set new records. Manufacturing has lost 1.8 million jobs. Prior to 1980, manufacturing employment increased during every expansion and always exceeded the previous peak level. Between 1980 and 2000, manufacturing employment continued to grow in expansions, but each time it failed to recover the previous peak. This time, manufacturing employment has actually fallen during the expansion, something unprecedented in American history.

Now to Caldwell on how this is playing out. From the Financial Times:

Two years ago, several prominent economists gathered in Italy to debate the wide gap in annual working hours that separates the workaholic US from leisure-obsessed Europe. The conference was called: “Are Europeans Lazy? Or Americans Crazy?”.... But sometime in the intervening years, ordinary Americans – without stinting on craziness, of course – appear to have made their peace with laziness. On Wednesday, the Pew Research Center, based in Washington, DC, published an eye-opening study on the economic attitudes and prospects of middle-class Americans. Inside the Middle Class: Bad Times Hit the Good Life found that Americans’ number-one priority – named by 68 per cent of respondents and topping children, marriage, career, wealth and religion – was “having enough free time to do the things you want”.

The American middle class is not playing to type these days. The go-getting engine of the global economy is less work-obsessed than it looks and less confident. The percentage of middle-class people who say their life is better than it was five years ago is the lowest in almost half a century, according to Pew. Average Americans feel as though they are barely clinging to their position on the social ladder; 78 per cent say it is harder to maintain a middle-class lifestyle than it was five years ago. A middle-class squeeze (rising healthcare costs, rickety pensions, the collapse of housing prices and so on) has been at the heart of debates in both parties this presidential campaign season.

Low economic morale is a problem even when it is illusory. In this case it is not, US census data show. A majority of Americans of all races and regions tend to identify themselves as middle class (the figure is 53 per cent today). There are not enough perches in the middle class to accommodate all of them. A standard measure defines “middle-income” households as those earning between 75 and 150 per cent of median family income, now about $60,000. Where 40 per cent of American households met that definition in 1970, only 35 per cent do today. (Using “income” as a synonym for “class” is crude, but that is how US social scientists do it.)

This “hollowing out” of the middle class is an old story. It has been going on for three decades. But there are a couple of new twists. Rising inequality was always accompanied by rising prosperity. Certainly gains were unevenly apportioned: the rich, black people and single women gained disproportionately while high-school drop-outs and single men suffered disproportionately. But the system was thriving and so was the ordinary US worker, even if the meaning of “ordinary” was changing. The system was not managed to egalitarians’ liking – but it retained the resources to set more egalitarian priorities if politicians chose. Now, even the resources are in doubt. For the first time since statistics have been gathered, the adjusted median family income actually declined from one economic boom to the next, from $61,227 in 1999 to $59,493 in 2006.

A transitional economy is sometimes hard to measure. Americans have trusted that the hard-to-measure bits concealed strengths, not flaws. True, they reasoned, the incomes of the poorest have fallen since 1970, but that included many of the 35m immigrants the country has added since then and the US offered them a way up. True, houses were growing more expensive, but the average new house is bigger, fancier and more efficient than the places the poor lived in decades ago.

Today, though, a large swath of Americans is being priced out of what the Pew authors call the “anchors of a middle-class lifestyle”, starting with housing, medical care and education. And one of the economy’s hard-to-measure phenomena (the housing boom) has become an easy-to-measure one (debt). The debt-to-income ratio for the middle class has risen from 0.45 in 1983 to 1.19 now. Some of this shift is due to the rise in house prices: the percentage of middle-class income spent on housing rose from 26.8 per cent in 1981 to 33.7 per cent in 2006. In 1970, people tended to pay twice their family income for a home; now they pay five times. That money did not seem to be lost because it could be spent – you just had to borrow against your home to get it. Americans borrowed too much. In a world of “ownership” without equity, the difference between ownership and rental is not obvious.

The US middle classes have always had an empathy with the rich that is anomalous in a world context. They oppose milking high earners, thinking that they themselves might be rich someday. But that empathy is eroding. Only 42 per cent of the middle class think that “rich people achieve their wealth through hard work and ambition”; 47 per cent chalk up wealthy people’s fortunes to “connections and family ties”.

Who is to blame for this debacle? The answers will tell you a lot about the politics of this presidential election. The Pew analysts find a certain ambiguity. The middle class is more conservative than the very rich and the very poor, but it is tending towards the Democrats. Its sympathies are split – to borrow the terminology of that Italian economic conference – between a Lazy party and a Crazy party. Republicans, the Crazy party, are twice as likely (by 17 per cent to 8) to blame “the people themselves”, who thought they could use their home-equity loans to live like the rich. Democrats, the Lazy party, are twice as likely (by 35 per cent to 16) to blame the government. At least they blame the Republicans who thought the government, too, could somehow borrow without incurring debt. For now, the smart money is on the Lazy, rather than the Crazy, party. But, of course, they could both be right.

With all due respect to Pew, survey research has to be taken with a handful of salt. The fact that 68% of the respondents said having enough free time to do the things you want” was their top priority is probably aspirational and a symptom of ever-worsening time stress. I doubt that many of the participants would accept a job with lower pay and better hours.

Surprise! It's Rough Out There in the Job Market

The New York Times has an odd story today, "Is a Lean Economy Turning Mean?" which discusses how conditions for workers have become dire. New jobs are scarce, and many of the ones out there don't pay as well as what employees got in previous roles. Hello, downward mobility.

What makes the piece peculiar is that the Times seems to have woken up just now to the idea that the labor market has been difficult for the last few years. It's been common for the media to follow the headline unemployment stats, when those are have considerable shortcomings. The self-employed (who may in practical terms may be severely underemployed) and part-timers are counted among the employed, but the most serious failing in the official unemployment release is the numerator, how unemployment is defined. As Walter Williams at Shadow Stats noted:

Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year. As of July 2004, the less-than-a-year discouraged workers total 504,000. Adding in the netherworld takes the unemployment rate up to about 12.5%.

I have not gone trolling for an updated estimate of how large the pool of discouraged workers is, but table in the Bureau of Labor Statistics Household Survey, "Alternative measures of labor underutilization" sheds some light (click for larger image),

It shows raw underutilization of 9.9% and seasonally adjusted underutliization of 9/0% as of January 2008. That seems more consistent with the lack of labor bargaining power in the economy:



The Times indirectly acknowledges the limitations of the unemployment stats by looking at labor utilization and finding a downtrend there.

But the bigger question is: why hasn't this gotten more notice sooner? It's widely acknowledged that inflation adjusted wages have been stagnant since the 1970s. And even in a nominally robust economy like New York City, the white collar cohort not working on Wall Street has been squeezed. Everyone I know in a firm or corporation is doing 50% more than they were expected to do a decade ago, and they certainly aren't earning 50% more in real terms or even nominal terms. (And the 50% is not an exaggeration: I know quite a few people who are single-handedly doing what was formerly two jobs at their company). Plus we have a culture where many white collar workers are expected to be on call virtually all the time, which both extends the number of hours worked and adds to stress. Yet few have wanted to see these developments as a sign of the falling standing of workers.

From Peter Goodman of the New York Times:

Nicole Flennaugh has a college degree, office experience and the modest expectation that, somewhere in this city on the eastern lip of San Francisco Bay, someone will want to hire her.

But Ms. Flennaugh, 36, a widow, cannot secure steady, decent-paying work to support herself and her two daughter...

“You’re used to making $17 an hour with benefits, and now you have to take any job for $8 an hour,” Ms. Flennaugh says....

“I’ve literally sat and cried, but my friends with double degrees are doing worse,” she says. “It’s the economy. It’s really bad.”

Now, it’s getting tougher — particularly for those at the lower rungs of the economic ladder, and especially for African-Americans like Ms. Flennaugh.....

Many companies, long reluctant to add workers, are hunkered down and waiting for improved prospects, engaged in what Ed McKelvey, a senior economist at Goldman Sachs, calls “a hiring strike.” Americans with jobs are taking cuts to their work hours; those without jobs are staying out of work longer, or accepting positions that pay far less than they earned previously.

Teenagers are struggling to land minimum-wage jobs at fast-food restaurants, because those positions are increasingly being filled by adults. And those with poor credit are finding that this can disqualify them from getting a job...

Indeed, the increasingly anemic job market comes on the heels of six years of economic expansion that delivered robust corporate profits but scant job growth. The last recession, in 2001, was followed by a so-called jobless recovery. As the economy resumed growing, payrolls continued to shrink.

Even as job growth accelerated in 2005 and 2006 before slowing last year, it was not enough to return the country to its previous level. Some 62.8 percent of all Americans age 16 and older were employed at the end of last year, down from the peak of 64.6 percent in early 2000, according to the Labor Department.

“The economy never got its groove back after the tech bubble burst,” says Mark Zandi, chief economist at Moody’s Economy.com. “We’re still feeling fallout from the collapse of the tech economy and the accounting scandals. There are still psychological scars for the managers affected. Managers are less interested in taking risks.”....

Oakland, long known as the blue-collar sibling to the aristocratic San Francisco across the bay, is among the metropolitan areas that never fully recovered from the last recession, with fewer jobs today than in March 2001, according to Economy.com....

Home to about 400,000 people, Oakland is enormously diverse, with blacks making up 36 percent of the population, Hispanics 22 percent and Asian-Americans 15 percent, according to the 2000 census. The city is racked by stubborn poverty, with one-fifth of all households living on less than $15,000 in annual income, according to the census.

Given that picture, Oakland reflects a national trend: The weaker labor market is especially pronounced for African-Americans, and black women in particular, a slide that has halted a quarter-century of steady gains.

From 1975 to early 2000, the percentage of African-American women who were employed jumped to 59 percent from 42 percent. Two years later, following a recession, the percentage had dropped to 55 percent. Since then, employment among African-American women has shown little change, reaching 55.7 percent at the end of 2007.

In a recent paper, the Center for Economic and Policy Research asserted that a recession in 2008 would be likely to swell the ranks of the unemployed by 3.2 million to 5.8 million, while raising the unemployment rate among black Americans to 11.3 percent to 15.5 percent, compared with 8.3 percent in 2007.

Nationally, the unemployment rate remains at a historically low level of 4.9 percent, though this does not include people who have given up looking for work.

The slide in employment is occurring at a time when jobs are more important than ever for millions of households headed by African-American women, because welfare changes in the 1990s forced many into the job market to compensate for a loss of public assistance.

“The labor market for low-income women is so poor that it’s almost a hoax,” says Randy Albelda, an economist at the University of Massachusetts in Boston.

For more than a decade, Dorothy Thomas, 49, an African-American and a mother of two, worked as an administrative assistant at various health care centers in Northern California. In her last job, she earned $16 an hour, as well as benefits, she said.

It was never enough to pay all the bills, she said, so she made choices, paying this one, not paying that one, all the while focused on one mission: getting her two daughters through school. She lived in apartments in better neighborhoods, paying more rent than she could afford to ensure that her girls attended better schools.

“I truly bought into the idea that education is the way out of poverty,” Ms. Thomas says. One daughter received a master’s degree in education and is a teacher in Hawaii, she says, and the other is still in college.

But the bills for Ms. Thomas are still coming due. She lost her car in November 2005 after she fell behind on the payments. Unable to drive to work, she lost her job. Since then, she has been unable to find a job.

Several times, she has landed interviews that seemed likely to bring offers, but the jobs required a credit check — a test she cannot pass.

“My credit is just so in shambles,” she told a classroom full of people gathered for a credit counseling session at the Private Industry Council. “More and more jobs are checking your credit. They’re saying that credit is a reflection of your character.”

Ms. Thomas deftly toggles between different modes of speech, from street-smart to receptionist-smooth. But getting to work without transportation and buying clothes for interviews without cash are beyond her abilities....

Government data show that the labor market has weakened in recent years for nearly every demographic group...The source of this weakening and what it says about the overall, long-term health of the economy are the subject of fractious debate.

Some economists argue that the labor market has merely settled back to earth after years of ridiculously aggressive investment in technology, which created far more jobs in the 1990s than could be sustained.

“This is a return to normal,” says Robert E. Hall, an economist and senior fellow at the Hoover Institution, a conservative research group at Stanford.

But others conclude that the sluggish job market reflects long-term, systemic forces reshaping the American economy. It represents, they say, the underbelly of the so-called new moderation that has made recessions less frequent and less severe.

Traditionally, the American economy has often expanded in extreme cycles. In periods of growth, companies hire aggressively. When they sense a slowdown, they cut back, laying off workers and curtailing investments, amplifying the ripples of retrenchment. Now, however, companies aim to keep their work forces lean all the time....

In 1994, 30 million people were hired into new and existing private-sector jobs, according to the Labor Department. By 2000, the number of hires had expanded to 34 million. A year later, in the midst of the recession, hiring slackened to 31.6 million, while layoffs winnowed the work force.

In 2003, with the economy again growing, layoffs slowed, but the private sector hired only 29.8 million — a figure that has nudged up only a little in the years since.

Rather than hire and risk having to fire in another downturn, companies added hours for those already on the payroll and relied more on temporary workers, said Mr. McKelvey, the Goldman Sachs economist. Manufacturing companies continued to automate, to squeeze more production out of the same number of workers, while shifting jobs to lower-cost countries like China and Mexico. For lower-skilled workers, that intensifies the competition for the jobs that remain.

“Now, you’re not only competing against the guy next door,” Mr. McKelvey says. “You’re competing against the guy across the water.”

Some economists say the weakness of hiring in recent years may protect those with jobs against the usual impact of a recession: Many companies are so lean that the unemployment rate may not increase much.

“It’s not your grandfather’s recession anymore,” says Jared Bernstein, senior economist at the Economic Policy Institute, a labor-oriented research group in Washington. “You’re probably going to see fewer layoffs, because you just don’t have the traditional model.”

But the same trend suggests that the impacts of the slowdown are likely to be felt deeply for several years, even after the economy resumes a swift expansion, Mr. Bernstein added.

Before 1990, it took an average of 21 months for the economy to add back the jobs shed during a recession, according to an analysis by the Economic Policy Institute and the National Employment Law Project, a worker advocacy group. Yet in the last two recessions, in 1990 and 2001, it took 31 months and 46 months, respectively, for employment levels to recover fully.

In the recessions of the early 1980s and the early 1990s, the ranks of the so-called long-term unemployed — those out of work for 27 weeks or more — jumped to well above 20 percent of all unemployed people. But in both cases, that share eventually settled back to close to 10 percent of the unemployed.

After the 2001 recession, however, the long-term share stayed above 20 percent from the fall of 2002 until the spring of 2005. In the months since, it has never dipped below 16 percent. In January, 18 percent of those unemployed had been without work for at least 27 weeks, according to the Labor Department.

Thomas Palley: "The Debt Delusion"

Economist Thomas Palley has of late been discussing what he believes to be an insufficiently-acknowledged cause of our current financial woes, namely, a shift in government policy away from emphasizing wage growth as a key objective. Another shift was a lack of concern about trade deficits.

Now one can argue that combatting trade deficits means protectionism, but that's a naive view. Our trading partners do not have open economies; neither do we. China has an openly mercantilist approach, gives substantial subsidies to domestic industries, and maintains a dollar peg (which is admittedly being permitted to slip, but due to high domestic inflation, not to any desire to accommodate the US). We restrict entry of certain high wage professionals like doctors and provide heavy agricultural subsidies. So to act as if the default position is open borders is a gross misunderstanding of how things work. This is a game of who gives what in return for what access. And our negotiating priorities have been skewed in favor of large corporations rather than wage earners.

Palley describes the consequences:

A second big American interest-rate cut in a fortnight, alongside an economic stimulus plan that united Republicans and Democrats, demonstrates that US policymakers are keen to head off a recession that looks like the likely consequence of rising mortgage defaults and falling home prices. But there is a deeper problem that has been overlooked: the US economy relies upon asset price inflation and rising indebtedness to fuel growth.

Therein lies a profound contradiction. On one hand, policy must fuel asset bubbles to keep the economy growing. On the other hand, such bubbles inevitably create financial crises when they eventually implode.

This is a contradiction with global implications. Many countries have relied for growth on US consumer spending and investments in outsourcing to supply those consumers. If America’s bubble economy is now tapped out, global growth will slow sharply. It is not clear that other countries have the will or capacity to develop alternative engines of growth.

America’s economic contradictions are part of a new business cycle that has emerged since 1980. The business cycles of Presidents Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush share strong similarities and are different from pre-1980 cycles. The similarities are large trade deficits, manufacturing job loss, asset price inflation, rising debt-to-income ratios, and detachment of wages from productivity growth.

The new cycle rests on financial booms and cheap imports. Financial booms provide collateral that supports debt-financed spending. Borrowing is also supported by an easing of credit standards and new financial products that increase leverage and widen the range of assets that can be borrowed against. Cheap imports ameliorate the effects of wage stagnation.

This structure contrasts with the pre-1980 business cycle, which rested on wage growth tied to productivity growth and full employment. Wage growth, rather than borrowing and financial booms, fuelled demand growth. That encouraged investment spending, which in turn drove productivity gains and output growth.

The differences between the new and old cycle are starkly revealed in attitudes toward the trade deficit. Previously, trade deficits were viewed as a serious problem, being a leakage of demand that undermined employment and output. Since 1980, trade deficits have been dismissed as the outcome of free-market choices. Moreover, the Federal Reserve has viewed trade deficits as a helpful brake on inflation, while politicians now view them as a way to buy off consumers afflicted by wage stagnation.

The new business cycle also embeds a monetary policy that replaces concern with real wages with a focus on asset prices. Whereas pre-1980 monetary policy tacitly aimed at putting a floor under labor markets to preserve employment and wages, it now tacitly puts a floor under asset prices. This is not a matter of the Fed bailing out investors. Rather, the economy has become so vulnerable to declines in asset prices that the Fed is obliged to intervene to prevent them from inflicting broad damage.

All these features have been present in the current economic expansion. Wages have stagnated despite strong productivity growth, while the trade deficit has set new records. Manufacturing has lost 1.8 million jobs. Prior to 1980, manufacturing employment increased during every expansion and always exceeded the previous peak level. Between 1980 and 2000, manufacturing employment continued to grow in expansions, but each time it failed to recover the previous peak. This time, manufacturing employment has actually fallen during the expansion, something unprecedented in American history.

The essential role of asset inflation has been especially visible as a result of the housing bubble, which also highlights the role of monetary policy. Despite the massive tax cuts of 2001 and the increase in military and security spending, the US experienced a prolonged jobless recovery. That compelled the Fed to keep interest rates at historic lows for an extended period, and rates were raised only gradually because of fears about the recovery’s fragility.

Low interest rates eventually jump-started the expansion through a house price bubble that supported a debt-financed consumer-spending binge and triggered a construction boom. Meanwhile, prolonged low interest rates contributed to a “chase for yield” in the financial sector that resulted in disregard of credit risk.

In this way, the Fed contributed to creating the sub-prime crisis. However, in the Fed’s defense, low interest rates were needed to maintain the expansion. In effect, the new cycle locks the Fed into an unstable stance whereby it must prevent asset price declines to avert recession, yet must also promote asset bubbles to sustain expansions.

So, even if the Fed and US Treasury now manage to stave off recession, what will fuel future growth? With debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted.

It is not enough to deal only with the crisis of the day. Policy must also chart a stable long-term course, which implies the need to reconsider the paradigm of the past 25 years. That means ending trade deficits that drain spending and jobs, and restoring the link between wages and productivity. That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth.

Edward Glaeser on Whether Open Markets Contribute to Growth

Harvard economics professor Edward Glaeser reviewed a new book, "Bad Samaritans" by Ha-Joon Chang in the New York Sun (hat tip Mark Thoma). Glaesar focuses on his objections to the book, but nevertheless concedes,

Readers who believe in free trade will not find much in Mr. Chang that challenges that belief, but the book is well written and far more serious than most anti-globalization gibberish.

I take that comment to be a notch better than damning with faint praise.

In the course of his review, Glaeser makes some observations about trade economics:

There is a substantial empirical literature that looks at the relationship between trade openness and economic development over the last 40 years. An early wave of research, associated with Jeffrey Sachs among others, claimed that trade openness increased growth. A second wave of research, led by Francisco Rodriguez and Dani Rodrik (a Harvard colleague), suggested that there was little robust connection across countries between trade and growth. My own research in this area found that openness had little impact on middle income places, but is particularly valuable for the poorest places. Certainly, there is no empirical consensus that openness is either good or bad for growth.

The lack of consensus on the connection between growth and openness does not imply that Mr. Chang's protectionism is equally attractive as the open borders urged by the Washington consensus. Adam Smith and David Ricardo didn't urge free trade because trade begets growth, but because trade makes goods cheaper for ordinary people. Smith's argument is still the strongest case for open borders. Even if protectionism does encourage industrial growth, it only does so by hurting ordinary people, who have to pay more to buy the goods of inefficient domestic producers.

Mr. Chang's protectionist brief suggests that the costs that tariffs impose on ordinary consumers are worth paying since the government can use tariffs to promote the right industries. Smith would have been skeptical about putting such faith in the government, and today's developing countries certainly deserve no more trust than the government of George III. Even if an incredibly wise tariff policy could protect future economic dynamos, the history of tariffs suggests that they are used more often to protect less than dynamic cronies.

The best thing to come out of this book is its challenge to the advocates of free markets to explain why England and America did so well despite embracing policies that were not always that free. Mr. Chang has not made the case that those policies were helpful, but free marketers have an obligation to help us understand why those policies did not do more harm.

As we have noted earlier, Dani Rodrik has examined some of the efforts to quantify the benefits of more open trade and found them wanting.

Glaeser's argument, that inefficient domestic producers are in effect a tax on everyone and hurt average consumers most, ignores the cost side of the equation. The problem is that the benefits are diffuse and per Rodrik, appear not to be as great as many proponents claim, Yet the costs to workers who lose jobs and to those who keep them but may find their ability to bargain for better wages reduced considerably, have (to my knowledge) not been examined in a systematic or rigorous fashion. In other words, a debate that is important to advanced nations as economies and societies is being conducted in ignorance of a solid dimensioning of the gains and losses.

Another problem with the "consumers are better off" argument is that, even if it could be established that the benefits to society of more open trade (however defined) were positive, the process of achieving those gains can run afoul of Keynes' observation:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

We don't have good (more accurately, much of any) mechanisms redistributing some of the gains of trade to those who workers who have suffered significant losses due to trade-induced industry restructurings. Although many economists point out that those policies are increasingly necessary to maintain the public's support for liberal trade policies, few would bet that we'll see anything beyond token retraining programs any time soon.

Let me be clear: I am not saying opening markets is a bad thing, However, our current system is not open trade, but one that William Greider calls "managed trade." I suspect that given the system in which we operate, the US is not playing its cards as well as it could, and also focuses its policies on promoting corporate profits and reach rather than on broader goals.

As Glaeser concedes in his review, even if you don't agree with protectionists, they do have a point.

One in Five Working Families Struggling

The proponents of a "living wage" in the US have argued that setting minimum wages at a level that leaves full time workers at below subsistence level is bad policy, both economically and socially. While opponents argue that increasing pay for the lowest earners will reduce the number of jobs, elasticity of demand isn't all that high. A 10% increase in wages only results in a 2-3% decrease in employment, resulting in a marked gain in aggregate earnings.

Further confirmation of the downside of low wages comes in this article from MarketWatch. It's noteworthy that the authors have fallen into the Wal-Mart syndrome of looking for explicit public subsidies to compensate for inadequate wages. But does it make sense for taxpayers to augment the incomes of the working poor, rather than require employers to pay adequate wages? The issue needs to be addressed explicitly.

From MarketWatch:

About 1 in 5 Americans in working families can't afford basic needs, and many are scraping to get by on insufficient income and government aid, policy researchers conclude in a report released Wednesday.

Many of these workers earn too much to qualify for "work supports" such as Medicaid and food stamps, while their employer-provided health insurance doesn't cover enough of their basic medical costs, according to the report by the Center for Economic and Policy Research and the Center for Social Policy at the University of Massachusetts.

"We no longer live in a world where having a job means you're automatically able to make ends meet," said Heather Boushey, co-author of the report. "Our work-support policies need to be updated to support the millions of families with earners in bad jobs."

About 41 million people in working families can't afford such basic necessities as health care and housing, according to the report. The study, which examined conditions in nine states and the District of Columbia, found that government programs close abut two-fifths of the "hardships gap" -- a measure of the difference between a family's income, including all aid programs, and the local costs of goods and services.

"Families fall into the hardships gap because the low-wage labor market provides meager pay and few employment-based work supports for low- and moderate-wage workers," the report noted.

The report's authors recommend steps such as focusing on better wages and mandates for employers to provide employment-based benefits, and simplifying the eligibility criteria and application requirements for work supports.

"Public policy has not caught up to the reality that even working families may need public work supports," the authors wrote. "Without public work supports, they and their families go without health insurance, adequate child care, safe housing, or other necessities. Many of those in the hardships gap earn too much, or do not meet other eligibility criteria, to qualify for work supports, even through they are low-income."

In 2005, about one-fifth of workers were in "bad jobs" -- those that paid less than the median wage in 1979 in inflation-adjusted dollars, and did not offer health insurance or a retirement plan, according to the report. Employer-based benefits are good for people with access to them, but most low-wage workers aren't offered or can't them, the report said.

"While workers with moderate or high earnings commonly receive health insurance, paid time off, and retirement plans, low-wage workers most often do not," the report noted.

The median monthly hardship gap for families in the states covered by the report was $1,524. After work supports, that gap decreased to $855. Therefore, the typical family with a hardships gap sees a savings of about $8,000 in work supports.
"However, we find that many low-income working families are either ineligible for work supports, or do not receive the supports to which they are entitled," the authors wrote.

Part of the problem is that the work supports don't reach all who are eligible due to a complex registration process and a lack of resources.

Boushey said government financial aid programs could draw a lesson from the earned income tax credit, which has a relatively straightforward system for eligible recipients to receive benefits.

New Consumer Funding Source: 401(k)s

As the housing market has deteriorated, some observers expected to see a slowdown in consumer spending, since mortgage equity withdrawals have provided a boost in a period of stagnant real wages for average workers (last year, an exception to a longstanding trend, saw a wee pickup).

But defying this logic, consumer spending has continued to be fairly robust. What gives?

It turns out that there are signs that consumers are raiding a different piggybank, namely, their retirement accounts. And while 401(k) plans do permit borrowing, most advisers recommend against it, since the interest isn't tax advantaged and failure to repay results in nasty penalties.

It's too early to tell if the increase in 401(k) borrowings and redemptions is a small uptick or the beginning of a sustained, and therefore more troubling trend.

From the Wall Street Journal:

Despite potential tax and investment consequences, more individuals have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months, some retirement-plan providers say.

Not all plans have seen jumps, and more-comprehensive statistics won't be available until next year. But a number of plan providers that follow month-to-month patterns, including T. Rowe Price Group Inc., Hewitt Associates and Hartford Financial Services Group Inc., have seen a small but noticeable uptick.

"I don't think it's a groundswell, but it's enough to be noticed," says Rick Meigs, president of 401khelpcenter.com, which provides information on 401(k) plans.

To be sure, the indications are preliminary, and some big providers, such as Fidelity Investments, say they haven't seen any increase in 401(k) borrowing. About 20% of Fidelity 401(k) investors have a loan, a figure in line with the industry.

Even those firms that are seeing increase in 401(k) borrowing aren't sure what to ascribe it to, though financial advisers say it could be due to the effects of the credit crunch and slumping housing prices....

Tom Foster, a national spokesman for Hartford's retirement plans, says that he considered borrowing from his 401(k) when he was saddled for more than a year with an extra mortgage, but decided against it.

"Most Americans see this as a panacea, but instead it erodes time in the market and adds a new payment," he says.

Even a person who pays such a loan back on time, and therefore avoids the 10% penalty, is getting taxed twice, says Bill Arnone, a partner at Ernst & Young LLP -- once when repaying the loan with after-tax dollars, and a second time when the money is withdrawn at retirement.

People who take the loans also lose out on potential retirement earnings while the money isn't invested.

Should you lose your job, the costs could be even higher. Borrowers who are fired, laid off or quit typically have to pay off the loan within 90 days, or face additional taxes and penalties, says Stuart Ritter, a financial adviser at T. Rowe Price.

David Wray, president of the Profit Sharing/401(k) Council of America, a not-for-profit association of companies that sponsor plans, expects that higher payments on adjustable mortgages will have people "looking for ways to make up that gap," and "a significant number of people with 401(k) plans are going to be affected."

Robert Reich: The Moral Hazard Double Standard

Robert Reich tells us that despite the talk about moral hazard, the rich have plenty of safety nets:

The real moral hazard in this saga started when Fed Chair Ben Bernanke cut the Fed’s discount rate (charged on direct federal loans to banks) and announced that the Fed would take whatever action was needed to "promote the orderly financing of markets." Translated, this means that lenders, credit-rating agencies, financial intermediaries, and hedge funds will be bailed out, one way or another, because they’re simply too big to fail. Note that behind every one of these institutions lie thousands of well-paid executives who would have lost big if the Fed didn’t come to their rescue. Even though they had more information and experience at risk-taking than the suckers who borrowed their money, and even though executives at the top of these institutions typically earn more in a day than the borrowers do in a year, moral hazard somehow doesn’t apply to them.

When it comes to risky behavior in the market, America has a double standard. We’re told that economic risk-taking as the key to entrepreneurial success, but when big entrepreneurs take big risks that fail it’s amazing how often they get bailed out. Indeed, the history of modern American business is littered with federal bailouts, loan guarantees, and no-questions-asked reorganizations. Some are well known, such as the Chrylser bailout of 1979, the savings and loan bailout of 1989, and the airline bailout of 2001. Most occur in the relative dark, such as the 1998 bailout of giant hedge fund Long-Term Capital Management (courtesy of former Fed chair Alan Greenspan), the not infrequent bailouts of under-funded corporate pension plans by the government’s Pension Benefit Guarantee Corporation, price supports for big agribusinesses facing market downturns, or the current bailout of Wall Street being engineered by Ben Bernanke’s Fed. Behind every one of these bailouts are CEOs or financial executives who were rescued from their bad bets.

CEOs get away with stupid mistakes all the time. Some, like Robert Nardelli, the former CEO of Home Depot, drive their company’s stock low that their boards eventually oust them. But they leave with eye-popping going-away presents nonetheless. (Nardelli got several hundred million dollars on his departure.) If you’re an average American who gets canned from his job, even through no fault of your own, you probably won’t even get unemployment insurance (only 40 percent of job-losers qualify these days). Conservatives tell us that unemployment insurance reduces their incentive to find a new job quickly. In other words, moral hazard.

Some CEOs use bankruptcy as a means of getting out from under pesky labor contracts they might have "known they could not afford" when they agreed to them (Northwest Airlines most recently, for example). Others use it as a cushion against bad bets. Donald ("you’re fired!") Trump’s casino empire has gone into bankruptcy twice -- most recently, last November, when it listed $1.3 billion of liabilities and $1.5 million of assets -- with no apparent diminution of the Donald’s passion for risky, if not foolish, endeavor. After all, his personal fortune is protected behind a wall of limited liability, and he collects a nice salary from his casinos regardless. But if you’re an ordinary person who has fallen on hard times, just try declaring bankruptcy to wipe the slate clean. A new law governing personal bankruptcy makes that route harder than ever. Its sponsors argued -- you guessed it -- moral hazard.

Bush’s "ownership society" has proven a cruel farce for poor people who tried to become home owners, and his minuscule response to their plight just another example of how conservatives use moral hazard to push their social-Darwinist morality. The little guys get tough love. The big guys get forgiveness.

You can argue with some of Reich's examples, but the general picture isn't wide of the mark.

I've come to wonder whether one of the defects of capitalism American style is our notion that corporations (when managed correctly) are inviolate entities. If the company goes down in flames, unless there was fraud, the managers and directors can dust themselves off and move on to the next situation.

Commonwealth countries set a much tougher standard. If a company is found to have been "trading insolvent," meaning it is continuing to operate even though it is technically bankrupt, the directors are personally liable:

Under UK law, if a company is trading insolvent, a director may be liable for wrongful trading. If the director knew or should have known that the company could not avoid becoming insolvent but still continues to trade then he or she must cease to trade immediately and take steps to liquidate the company.

The director of a company which is facing financial difficulty should ensure that there is a reasonable prospect that the company will avoid insolvent liquidation before being party to any decision to trade on.....

Directors may escape liability for wrongful trading if they can prove adequate steps were taken to minimise the loss to creditors after it became apparent that the company was insolvent.

Now I am sure there will be howls from the audience. Our corporate bankruptcy system allows businesses to reorder their affairs and survive. Forcing them to fold at the first sign of trouble is inefficient. And the prospect of personal liability would discourage new business formation and keep good people from serving on boards.

Let me deal with the arguments in reverse order. There are plenty of people who would like a corporate directorship, and UK and Australian companies don't seem to be wanting in capable directors. In fact, a tougher regime might weed out people who are more interested in the prestige and networking opportunities and less keen about rolling up their sleeves.

As for deterring new business formation, many (most?) new businesses are sole proprietorships or otherwise unincorporated. Moreover, credit cards (along with personal savings, friends and family) are a major source of funding for small businesses. Read the fine print of that corporate credit card agreement. The card issuer can go after the business owner in the event of default. So many small business owners have put their personal assets at risk.

As for the virtues of our bankruptcy system, that's been debated in the academic literature and the jury is still out. While there is a belief that Chapter 11 encourages risk-taking, it may instead be that the causality runs the other way: our society is more tolerant of risk taking, hence of washouts, and that's why we have the bankruptcy laws we have. In other words, even if the UK and Europe adopted US style bankruptcy laws, the stigma they attach to failure might mean the legal change would not lead to much difference in behavior.

If you look at Reich's examples of welfare for the rich, quite a few would have been forestalled if the US shared the UK's attitude of not letting the equity holders take too many liberties with their creditors. And who know if a more tough minded attitude towards making good on one's commitments might have a broader impact on the business culture.

Whether Bernanke cuts interest rates this month will say a great deal, not just about him, but about the society in which we live.

Is the Public Wrong to be Anti-Globalization and Income Inequality?

Apologies to be somewhat late to this item and more terse (and spare on links for some of the arguments) than I'd normally be (I'm at sea and the satellite connection is pricey).

Monday, the Financial Times reported that a poll it commissioned jointly with Harris found widespread international opposition to globalization, as well as rising income inequality (I haven't done my usual checking around the logical suspects in the US media, but I have a sneaking suspicion this item went underreported in the US):
A popular backlash against globalisation and the leaders of the world's largest companies is sweeping all rich countries, an

FT/Harris poll today shows.

The British have the least admiration of any national group for the leaders of their country's largest companies, and a large majority believes the government should impose a pay cap on the heads of companies to limit their rewards.

Large majorities of people in the US and across Europe want higher taxation for the rich to counter a widespread belief that rewards are unjustified.

Believing that globalisation is an overwhelmingly negative force, citizens of rich countries are looking to government to cushion the blows they perceive have come from the liberalisation of their economies to trade with emerging countries.

Those polled in the UK, France, the US and Spain were about three times more likely to say globalisation was having a negative rather than a positive effect on their countries. The majority against globalisation was smaller in Germany, with its large export base.

Corporate leaders fared little better with only 5 per cent or fewer people in the US and all large European economies, except Italy, saying they had a great deal of admiration for those who run large companies.

In the UK, nearly 80 per cent of those polled thought corporate executives earned too much,60 per cent said they should be taxed more and the same proportion thought the government should limit their pay directly.

In response to fears of globalisation and rising inequality, the public in all six rich countries surveyed wanted their governments to increase taxation on those with the highest incomes.

Europeans overwhelmingly support the principle of free competition within the EU, contrary to Nicolas Sarkozy's wishes at the recent European summit, but in France, Germany and Spain the populations want their political leaders to play a larger role in managing their economies.

The depth of anti-globalisation feeling in the FT/Harris online poll, which surveyed more than 1,000 people in each of the six countries, will dismay policymakers and corporate executives. Their view that opening economies to freer trade is beneficial to poor and rich countries alike is not shared by the citizens of rich countries.

Now one can quibble with the methodology of the survey. Online surveys probably have a bigger element of self-selection, since there isn't a live human being to arm-twist the hesitant into participating. However, the fact that the survey may have gotten a higher proportion of cranks than in the population at large was probably partially, if not entirely offset by the fact that Internet users (at least in the US) are more educated and affluent than the population at large and therefore one would assume they'd look more favorably upon free trade and income inequality (they would be presumed to come out ahead on both counts).

Now doubtless many pundits will bemoan how dumb the public is, how they are taking positions that are contrary to their economic interests (we will leave aside for the moment that people are not merely economic automatons and might have ot