Friday, November 09, 2012
Financial crisis can’t explain the current slow recovery
Carmen Reinhart and Kenneth Rogoff’s book, “This Time is Different,” has become the bible of the Obama administration. Their claim that recoveries after financial crises are naturally much slower than other recoveries has given President Obama a lot of cover. Their argument may be widely accepted by the media but has not been so readily accepted by economists.
Reinhart and Rogoff lashed out at academic critics a couple of weeks ago with an opinion piece in Bloomberg and again recently on CNN, attacking economists who disagree with them as blinded by support for Mitt Romney.
Our current recovery has been the weakest since at least World War II. Thirty-nine months since the recovery started in June 2009, job growth has been only 2 percent. During the average recovery since 1970, job growth over the first 39 months has averaged over 8 percent. The current recovery has failed to keep up with the growth in the working age population. Unlike past recoveries, much of the drop in the unemployment rate simply reflects people giving up looking for work. And there is no doubt there was a financial crisis.
But the financial crisis is not the explanation for the slow recovery.
The problem for Reinhart and Rogoff is that neither US historical data nor recent international comparisons support their assertion. Indeed, their claim is at odds with two well-known stylized facts:
1) Severe recessions are matched by strong recoveries, known as Zarnowitz’s law (the basis for Milton Friedman “plucking model” introduced in 1964 and supported by direct evidence in 1993).
2) Most severe recessions are accompanied by banking crises. Put these two stylized facts together, and even before looking at the data, you have to be somewhat skeptical about the Reinhart-Rogoff generalization.
When you do look at the data the results are clear. In five of the six financial crises since 1882 – the Great Depression of the 1930s was the sole exception – the strength of the recovery in real Gross National Product greatly exceeds the previous decline, by close to 6 percentage points over the eight quarters following the cyclical trough. This is similar to what we see in the two severe contractions in which there are no financial crises. The recent recession and recovery are more similar to the Great Depression than the other episodes.
Cross-country comparisons tell a similar story. Unemployment actually recovered faster in countries hit by a financial crisis than in those in a recession for other reasons. Of the nine foreign countries for which the Bureau of Labor Statistics has produced comparable unemployment data based on the same definition of unemployment, Reinhart and Rogoff identify four as suffering from a financial crisis (Germany, Japan, the Netherlands and the United Kingdom) and five as not (Australia, Canada, France, Italy and Sweden). From January 2009 to December 2011, the unemployment rates in the countries with financial crises actually increased less than in those that avoided such a crisis (0.66 percentage points versus 0.86 percentage points).
Countries identified as suffering a financial crisis by Reinhart and Rogoff also did not experience slower Gross Domestic Product (GDP) growth during their recoveries. From the third quarter of 2009, when the U.S. recovery started, the difference in GDP growth between the two sets of nations averaged just one-tenth of 1 percent.
The combination of Obama’s stimulus, multiple jobs bills and massive new regulations on everything from financial markets, housing, health care, credit cards and energy is a possible explanation for the difficulties in the U.S. labor market. Resources spent by the government must come out of someone’s pocket. Spending almost $1 trillion on various stimulus projects means moving around a lot of resources and jobs. People don’t instantly move between jobs, temporarily increasing unemployment. All the new regulations are similarly detrimental. And more regulations may be coming, creating substantial uncertainty about the future.
Canada provides a simple comparison. Our unemployment rates increased in lock step from August 2008 until six months later, in February 2009, when the stimulus was passed in the United States. The increased gap when the stimulus was passed is consistent with the stimulus, not something unique about the financial crisis, being the initial development that made things worse. Since the stimulus largely ended by the middle of 2011, the gap has decreased.
Americans have suffered two very slow recoveries – during the Great Depression and now. The most obvious common factor in both has been the Keynesian policies and massive regulations used to “cure” those downturns. Clearly, “financial crisis” can’t explain the current slow recovery.
Solzhenitsyn on what America has lost
However, in early democracies, as in American democracy at the time of its birth, all individual human rights were granted because man is God’s creature. That is, freedom was given to the individual conditionally, in the assumption of his constant religious responsibility. Such was the heritage of the preceding thousand years. Two hundred or even fifty years ago, it would have seemed quite impossible, in America, that an individual could be granted boundless freedom simply for the satisfaction of his instincts or whims.
Subsequently, however, all such limitations were discarded everywhere in the West; a total liberation occurred from the moral heritage of Christian centuries with their great reserves of mercy and sacrifice. State systems were becoming increasingly and totally materialistic. The West ended up by truly enforcing human rights, sometimes even excessively, but man’s sense of responsibility to God and society grew dimmer and dimmer.
In the past decades, the legalistically selfish aspect of Western approach and thinking has reached its final dimension and the world wound up in a harsh spiritual crisis and a political impasse. All the glorified technological achievements of Progress, including the conquest of outer space, do not redeem the Twentieth century’s moral poverty which no one could imagine even as late as in the Nineteenth Century.
One of civilization's wonders
Jeff Jacoby looks on the bright side
Note: This short column was written on Election Day for the Boston Globe's early edition, which was printed and distributed before the election results were known
AS THE NATION'S ELECTORAL BRAWL drew to a close, I thought about a question posed by ABC's Martha Raddatz to vice-presidential candidates Joe Biden and Paul Ryan during their debate in Kentucky last month. She quoted "a highly decorated soldier" who was "dismayed" at the tone of the campaign. "The ads are so negative," the soldier had lamented, "and they're all tearing down each other rather than building up the country."
Raddatz challenged the candidates: "What would you say to that American hero about this campaign? And at the end of the day, are you ever embarrassed by the tone?"
Biden and Ryan sidestepped the question, resorting instead to their rehearsed arguments and talking points. Which was too bad, for that soldier's grievance deserved a response.
I wish the candidates had reminded him that the vitriol of US presidential competitions didn't begin with Barack Obama or Mitt Romney. In 1884, British historian James Bryce described the battle for the White House between James Blaine and Grover Cleveland as a "tempest of invective and calumny," and the nastiness of presidential campaigns was an old story even then.
Yet those campaigns end in what can only be described as a miracle. For months we fight over the most emotional, consequential issues in American life. The stakes always seem enormous. The hopes and fears of millions of voters are invested in the outcome. In much of the world and for most of history, only bloodshed could resolve disputes so momentous. But everyone knows how this election will end. The losing candidate will deliver a graceful concession speech; the victor will peacefully take the oath of office in January.
Yes, the meanness of these campaigns is regrettable. Politics isn't pretty anywhere. But here it ends with amazing dignity, in polling stations across the country, as a mighty nation calmly effects the transfer of power and authority. If that isn't one of civilization's wonders, what is?
Future Storms Like Superstorm Sandy Could Bankrupt States
Some state governments are so far into the insurance business that they could be bankrupted by storm claims
Superstorm Sandy killed over 70 people in the U.S., knocked out power for millions up and down the East Coast, flooded the New York Subway, and damaged thousands of homes. The final price tag for the storm's damage could exceed $40 billion, which would make it the most expensive storm to hit the U.S. since Hurricane Katrina.
Coming as it did, only a year after Hurricane Irene and eight years after Hurricane Ivan, some are asking whether it is part of a trend towards more damaging storms. The answer is yes—we humans are to blame for more damaging storms, but not for the reasons you might think. One of the main culprits is government intervention in insurance markets, which creates perverse incentives to build in danger zones, thereby increasing the threat posed by storms both to property owners and to taxpayers. If Sandy had hit Florida the way it hit New York and New Jersey, it might have bankrupted the state. To reduce the scale of future damage from storms like Sandy, and the threat of fiscal implosion, federal and state governments should get out of the insurance business.
There have been superstorms similar to Sandy in the past, including the blizzard of 1978, the Perfect Storm of 1991, and the Eastcoaster of 1996. But there doesn’t seem to be a trend in the number or intensity of either hurricanes or Sandy-like superstorms. Martin Hoerling, a meteorologist at the National Oceanic and Atmospheric Administration, says there is no trend in the number of hurricanes or extratropical cyclones. Nor is there any evidence of a relationship between the numbers of either type of cyclone and climate change. However, there has been a significant increase in the amount of damage caused by hurricanes and similar extreme weather events over the past 50 years. There are two main reasons for this. First, we have become much wealthier: inflation adjusted average per capita income in the U.S. rose threefold, from $13,250 in 1960 to $39,800 in 2008. Second, the number of people living along the coast has increased dramatically: from 1960 to 2008 coastal population rose by 84 percent, whereas the non-coastal population rose by 64 percent. As a result, there is simply more valuable property in coastal areas that is likely to be affected when a big storm hits.
One reason coastal population rose more than non-coastal population is that government disaster insurance programs have actively encouraged people to locate close to the coast. In addition to the National Flood Insurance Program, the federal government’s second largest fiscal liability next to Social Security, many states run property insurance plans out of the residual market intended to provide a lower cost of insurance for owners of homes and businesses in more risky areas, which would normally be difficult or impossible to obtain in the private market. Such state-run insurance plans are offered through Fair Access to Insurance Requirements (FAIR) plans, Beach and Windstorm plans, or in Florida and Louisiana, state-run insurers of “last resort.”
FAIR was established by the federal government as part of an urban redevelopment program following the riots of 1968, with the express intention of encouraging people to buy property in depressed areas. The plans do that, but by reducing the cost of insuring against risks such as flooding and storm damage, they also encourage people to build properties in storm and flood-prone areas. That increases the damage done when a storm hits.
These insurance plans also suffer from risk concentration—in direct violation of one of the basic principles of insurance: risk diversification. When a state provides disaster insurance coverage to a group of people within its borders all of whom face similar risks, it is concentrating risk. When disaster strikes and a significant proportion of those insured suffer major losses, the state’s insurance fund may suffer a catastrophic shortfall—with dire consequences for the state’s fiscal position. According to the Insurance Research Council, U.S. residual market exposure has grown an average of 18 percent per year since 1990 in large part because of the artificially low cost of such state-backed insurance. In other words, the FAIR Plans developed in the 1960s have exacerbated the problem of risk concentration by encouraging development and population growth on the coast.
This has been especially problematic in Florida, where the state-run Citizens Property Insurance Company (CPIC) has grown to cover at least 25 percent of homeowners in the state, mostly in extremely high-risk areas prone to hurricane damage. Because they are covered by CPIC, policyholders pay rates that are not actuarially sound, underfunding the potential claims payouts. To make matters worse, the Florida Hurricane Catastrophe Fund (FHCF)—a state-run reinsurance fund which provides reinsurance to both private insurers in Florida and CPIC—has been estimated to underfund its $17 billion in obligations by at least $3.2 billion. If CPIC and FHCF fail to make ends meet to pay out claims in the event of a large storm or series of storms, Florida taxpayers will be on the hook for the bills.
Rather than sending a market signal warning of the cost of coastal living, subsidized insurance has compounded the problem, with demand for FAIR and Beach Plans more than tripling. In the wake of major storms such as Andrew and Katrina, the total number of FAIR and Beach Plan policies has increased from 931,550 in 1990 to 3.3 million in 2011. Over the same period, the total exposure to loss covered under the nation’s FAIR and Beach Plans increased 1,517 percent, from $54.7 billion in 1990 to $884.7 billion in 2011. The combination of more policies and greater coverage has pushed state-run plans to record deficits, after facing high volumes of claims from bad storm seasons. According to the Insurance Information Institute, of the 31 FAIR plans for which data are available, 28 have incurred at least one operating deficit since 1999. Of the six Beach and Windstorm Plans, all have sustained at least one underwriting loss since 1999.
While much of the increase in the number of state-backed policies has been driven by Louisiana, Florida, and other Southern states, Northeastern states have also seen increases in the amount of coverage provided by their FAIR plans. In particular, Massachusetts has seen a 336 percent increase in the number of its FAIR plan policies, representing an increase in coverage by $72.6 billion.
Government subsidies to insurance may have been well intentioned but by incentivizing people to build homes in danger zones, they have created enormous fiscal risk. If states want to avoid this looming fiscal trouble, they would do well to address all the causes. In the case of insurance, they can begin right away by ceasing to issue new policies and retiring policies when the renewals come due. That would force property owners to seek insurance on the private market, or move.
Alaska gold rush for laborer’s union: "The Alaska Policy Forum recently exposed that the state’s legislature in 2011 and 2012 appropriated millions of tax dollars to finance a Laborer’s International Union of North America local’s facilities. As is the case with numerous state government spending initiatives today, it violates the state’s Gift Clause — a constitutional protection in 47 of 50 states that forbids government from allocating tax dollars to private entities for non-public purposes."
The conflation trap: "It is not only mainstream libertarians (and of course, to a far greater extent, conservatives) that tend to conflate the results of crony corporatism with those of free markets; such conflationism is all too common on the traditional left as well. The difference is that the evaluations are reversed; where the right-wing version of conflationism treats the virtues of free markets as reason to defend the fruits of corporatism, the left-wing version of conflationism treats the objectionable fruits of corporatism as reason to condemn free markets."
Is the state anarchistic?: "We’re playing pretend when we think that the Constitution protects us, and we’re playing pretend again if we think that elections can regulate the politicians. Here’s the truth ... The State is an ANARCHISTIC institution. It’s ruled by no one, and it obeys no laws."
For more blog postings from me, see TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH, POLITICAL CORRECTNESS WATCH, FOOD & HEALTH SKEPTIC, AUSTRALIAN POLITICS, IMMIGRATION WATCH INTERNATIONAL, EYE ON BRITAIN and Paralipomena . GUN WATCH is now put together by Dean Weingarten.
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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)
Posted by JR at 12:05 AM