Monday, January 31, 2011 5:26:31 PM
Obama and Business May Get On Well, but When Will That Produce Jobs?
By SIMON JOHNSON
President Obama is embarked on a major charm offensive with the business sector, as seen, for example, in the appointments of William M. Daley (formerly of JPMorgan Chase, now White House chief of staff) and Jeffrey R. Immelt (chairman and chief executive of General Electric and now also the president’s top outside economic adviser).
This should not be an uphill struggle – much of the corporate sector, particularly bigger and more global businesses, is doing well in terms of profits and presumably, at the highest levels, compensation. But when exactly will this approach deliver jobs and reduce unemployment? And does it increase risks for the future?
Republican rhetoric over the last two years was relentless in its assertion that the Obama administration was antibusiness. Supposedly, this White House attitude undermined private sector confidence and limited investment.
In reality, the opposite was the case. Relative to any postwar recession, the rebound in profits during the Obama administration has been dramatic. To be sure, the end of 2008 was shocking to many entrepreneurs and executives, as credit was disrupted in a much more dramatic fashion than they thought imaginable. Large and immediate cuts in employment followed.
But then the government saved the failing financial sector. The means were controversial, but the end was essential – without private credit, the United States economy would have fallen far and for a long time.
And profits rebounded almost at once. The financial sector recovered quickly on the back of implicit guarantees provided to our largest banks. The only bad quarter was at the end of 2008 (leading to great angst among bankers about their bonuses in 2009). The nonfinancial sector has done even better.
Profits for the private sector fell no more than 20 percent from top to bottom in the cycle, and in the third quarter of last year (the latest available data from the Bureau of Economic Affairs), profits were back at the level of 2006. After the deep recessions of the early 1980s, it took at least three times as long for profits to come back to the same extent (I went through this comparison in more detail last week for The New York Times’s Room for Debate).
Investment in plants and equipment has also recovered fast – this was the one bright part of the domestic economy in the last two years (the other being exports). Look around at the places you work, where you do business and where you shop. Is there any indication they have cut back on information technology spending recently?
Over all, the policies of late 2008 and early 2009, including the much-debated fiscal stimulus, protected corporate profits to an impressive degree. Even though this was the steepest recession of the last 70 years, profits fell only briefly and seem likely to be just as strong as they were before the crisis.
Large global American-based companies, in particular, are well positioned to take advantage of growth in such emerging markets as India, China and Brazil. But the link between corporate performance — measured in terms of profit or executive pay for American companies — and domestic employment has fundamentally changed in recent decades.
At the very least, employment responds more slowly now than in previous cycles as output and sales recover. Consider this chart from the Calculated Risk blog (and revisit it regularly). As the picture shows so vividly, we are still waiting for employment to turn back up decisively. Compared with previous recessions, the delay is simply stunning.
Ideally, in a situation like this, we’d provide more stimulus to the economy in some form. But our monetary policy is already close to exerting its maximum efforts, and the scope for using fiscal policy was undermined by high deficits during the “boom” years of the 2000s, so there is no safe fiscal space for action – even if the politicians could agree on what to do.
We are reduced to waiting for the private sector to recover enough to want to take on new employees. No one has a good answer for why this is so slow – perhaps because it is so easy and so cheap to hire workers in those emerging markets that are now booming, or perhaps because the skill mix available at prevailing wages in some parts of the United States is not what employers want.
Or perhaps companies are effectively keeping out new entrants, keeping profits artificially high and, at the sectoral level, limiting employment. The constraints on entrepreneurship in our post-credit-crisis economy need careful scrutiny.
Hopefully, the administration’s charm offensive will not prevent it from enforcing American antitrust laws, which were more than slightly neglected in the Bush years.
Listening attentively to the nonfinancial sector makes sense in this situation. In return, corporate leaders need to focus on creating jobs in the United States. But bending over backward to accommodate the wishes of the financial sector is exactly what got us into this mess to start with.
Allowing our largest banks to become even bigger and more dangerous would be a very bad mistake.
______________
Geopolitical unrest and world oil markets
Change is on the way in the Arab world, with Egypt the latest focal point. Here I review recent events and their implications for world oil markets.
I begin with a timeline, if not to connect the dots, at least to collect the dots in a single list.
• Sudan, Jan 9-15: Country holds a referendum whose apparent outcome will be a split of South Sudan into its own a separate country.
• Lebanon, Jan 12: Key cabinet ministers resign in protest against impending indictments from a U.N.-backed investigation into the 2005 assassination of former prime minister Rafiq al-Hariri, toppling the governing coalition. U.S. Secretary of State Hillary Clinton offered this assessment:
We view what happened today as a transparent effort by those forces inside Lebanon, as well as interests outside Lebanon, to subvert justice and undermine Lebanon's stability and progress.
• Tunisia, Jan 14: President Ben Ali flees the country in response to widespread protests.
• Iraq, Jan 17-27: Over 200 people killed in a spate of recent bombings, a sharp and tragic increase from the recent norm.
• Egypt, Jan 29: Cairo appears to be near anarchy as a result of an uprising against President Mubarak.
• Yemen, Jan 29: Demonstrations and rallies have resulted in clashes with police, with unclear implications at this point for the stability of the regime.
An optimist might see the common thread in many of these developments to be the realization across parts of the Arab world of the power of popular will to overthrow dictators, the first step toward democracy and a better life for the people. A pessimist might see in at least some of these situations deliberately orchestrated chaos for purposes of seizing power by a new group of would-be ruthless leaders. A realist might acknowledge the possibility of both factors in play at once, and worry that ideologically motivated uprisings have often turned out to be usurped by groups with their own highly anti-democratic agenda. In the event that some of the transitions of power prove to be more chaotic than peaceful, let me comment on their potential to disrupt world oil markets.
continued
http://www.econbrowser.com/archives/2011/01/geopolitical_un.html
By SIMON JOHNSON
President Obama is embarked on a major charm offensive with the business sector, as seen, for example, in the appointments of William M. Daley (formerly of JPMorgan Chase, now White House chief of staff) and Jeffrey R. Immelt (chairman and chief executive of General Electric and now also the president’s top outside economic adviser).
This should not be an uphill struggle – much of the corporate sector, particularly bigger and more global businesses, is doing well in terms of profits and presumably, at the highest levels, compensation. But when exactly will this approach deliver jobs and reduce unemployment? And does it increase risks for the future?
Republican rhetoric over the last two years was relentless in its assertion that the Obama administration was antibusiness. Supposedly, this White House attitude undermined private sector confidence and limited investment.
In reality, the opposite was the case. Relative to any postwar recession, the rebound in profits during the Obama administration has been dramatic. To be sure, the end of 2008 was shocking to many entrepreneurs and executives, as credit was disrupted in a much more dramatic fashion than they thought imaginable. Large and immediate cuts in employment followed.
But then the government saved the failing financial sector. The means were controversial, but the end was essential – without private credit, the United States economy would have fallen far and for a long time.
And profits rebounded almost at once. The financial sector recovered quickly on the back of implicit guarantees provided to our largest banks. The only bad quarter was at the end of 2008 (leading to great angst among bankers about their bonuses in 2009). The nonfinancial sector has done even better.
Profits for the private sector fell no more than 20 percent from top to bottom in the cycle, and in the third quarter of last year (the latest available data from the Bureau of Economic Affairs), profits were back at the level of 2006. After the deep recessions of the early 1980s, it took at least three times as long for profits to come back to the same extent (I went through this comparison in more detail last week for The New York Times’s Room for Debate).
Investment in plants and equipment has also recovered fast – this was the one bright part of the domestic economy in the last two years (the other being exports). Look around at the places you work, where you do business and where you shop. Is there any indication they have cut back on information technology spending recently?
Over all, the policies of late 2008 and early 2009, including the much-debated fiscal stimulus, protected corporate profits to an impressive degree. Even though this was the steepest recession of the last 70 years, profits fell only briefly and seem likely to be just as strong as they were before the crisis.
Large global American-based companies, in particular, are well positioned to take advantage of growth in such emerging markets as India, China and Brazil. But the link between corporate performance — measured in terms of profit or executive pay for American companies — and domestic employment has fundamentally changed in recent decades.
At the very least, employment responds more slowly now than in previous cycles as output and sales recover. Consider this chart from the Calculated Risk blog (and revisit it regularly). As the picture shows so vividly, we are still waiting for employment to turn back up decisively. Compared with previous recessions, the delay is simply stunning.
Ideally, in a situation like this, we’d provide more stimulus to the economy in some form. But our monetary policy is already close to exerting its maximum efforts, and the scope for using fiscal policy was undermined by high deficits during the “boom” years of the 2000s, so there is no safe fiscal space for action – even if the politicians could agree on what to do.
We are reduced to waiting for the private sector to recover enough to want to take on new employees. No one has a good answer for why this is so slow – perhaps because it is so easy and so cheap to hire workers in those emerging markets that are now booming, or perhaps because the skill mix available at prevailing wages in some parts of the United States is not what employers want.
Or perhaps companies are effectively keeping out new entrants, keeping profits artificially high and, at the sectoral level, limiting employment. The constraints on entrepreneurship in our post-credit-crisis economy need careful scrutiny.
Hopefully, the administration’s charm offensive will not prevent it from enforcing American antitrust laws, which were more than slightly neglected in the Bush years.
Listening attentively to the nonfinancial sector makes sense in this situation. In return, corporate leaders need to focus on creating jobs in the United States. But bending over backward to accommodate the wishes of the financial sector is exactly what got us into this mess to start with.
Allowing our largest banks to become even bigger and more dangerous would be a very bad mistake.
______________
Geopolitical unrest and world oil markets
Change is on the way in the Arab world, with Egypt the latest focal point. Here I review recent events and their implications for world oil markets.
I begin with a timeline, if not to connect the dots, at least to collect the dots in a single list.
• Sudan, Jan 9-15: Country holds a referendum whose apparent outcome will be a split of South Sudan into its own a separate country.
• Lebanon, Jan 12: Key cabinet ministers resign in protest against impending indictments from a U.N.-backed investigation into the 2005 assassination of former prime minister Rafiq al-Hariri, toppling the governing coalition. U.S. Secretary of State Hillary Clinton offered this assessment:
We view what happened today as a transparent effort by those forces inside Lebanon, as well as interests outside Lebanon, to subvert justice and undermine Lebanon's stability and progress.
• Tunisia, Jan 14: President Ben Ali flees the country in response to widespread protests.
• Iraq, Jan 17-27: Over 200 people killed in a spate of recent bombings, a sharp and tragic increase from the recent norm.
• Egypt, Jan 29: Cairo appears to be near anarchy as a result of an uprising against President Mubarak.
• Yemen, Jan 29: Demonstrations and rallies have resulted in clashes with police, with unclear implications at this point for the stability of the regime.
An optimist might see the common thread in many of these developments to be the realization across parts of the Arab world of the power of popular will to overthrow dictators, the first step toward democracy and a better life for the people. A pessimist might see in at least some of these situations deliberately orchestrated chaos for purposes of seizing power by a new group of would-be ruthless leaders. A realist might acknowledge the possibility of both factors in play at once, and worry that ideologically motivated uprisings have often turned out to be usurped by groups with their own highly anti-democratic agenda. In the event that some of the transitions of power prove to be more chaotic than peaceful, let me comment on their potential to disrupt world oil markets.
continued
http://www.econbrowser.com/archives/2011/01/geopolitical_un.html
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