By Caitlin Kenney

MIT economist Daron Acemoglu is currently working on a book about economic inequality. In a Esquire essay this week, he offers us a taste:

How do we know that institutions are so central to the wealth and poverty of nations? Start in Nogales, a city cut in half by the Mexican-American border fence. There is no difference in geography between the two halves of Nogales. The weather is the same. The winds are the same, as are the soils. The types of diseases prevalent in the area given its geography and climate are the same, as is the ethnic, cultural, and linguistic background of the residents. By logic, both sides of the city should be identical economically.

And yet they are far from the same.

On one side of the border fence, in Santa Cruz County, Arizona, the median household income is $30,000. A few feet away, it's $10,000. On one side, most of the teenagers are in public high school, and the majority of the adults are high school graduates. On the other side, few of the residents have gone to high school, let alone college. Those in Arizona enjoy relatively good health and Medicare for those over sixty-five, not to mention an efficient road network, electricity, telephone service, and a dependable sewage and public-health system. None of those things are a given across the border. There, the roads are bad, the infant-mortality rate high, electricity and phone service expensive and spotty.

Continue reading "Recommended Reading: Fix The Government, Fix The Economy" >

By Caitlin Kenney

Economist Mark Thoma has a new blog over at MoneyWatch, and he's kicking it off with some interesting talk about unemployment. Today he asks whether there will be "a new normal" for unemployment once the recession is over. Here's a taste:

I expect structural unemployment to be higher than it was, particularly in the next few years. We had too many resources in housing, finance, and automobile production, and it will take time for the economy to make the necessary structural adjustments. When this is combined with continuing globalization, as well as the higher savings rate and correspondingly lower consumption expected from households in the future, both of which cause structural change within the economy, the expectation is that the new target rate of unemployment will rise above the 4 percent level it was at before the recession.

Exactly how much it will rise and for how long is hard to say. A 5 or 6 percent rate, or even somewhat higher is certainly imaginable, but getting it right is important.

Thoma says we aren't totally powerless in dealing with unemployment. He thinks job training programs could help match workers with available jobs.

Spotted at San Francisco's International Day of Climate Action. (Steve Rhodes /Planet Money Flickr pool)

By Caitlin Kenney

Here's a look at what you're reading today:

Twitter pal @reneerico shares an article about the employment picture in California. The SF Chronicle reports that the state's underemployment rate hit 21.9 percent in September. That's a whole lot of people who can't find as much work as they need.

Meantime, @kkemple is looking at the country's perception of stimulus spending. The Christian Science Monitor has a great graphic that shows how different community types (tractor country, emptying nests, boom towns, etc) feel about the government spending millions of dollars to get the economy moving again.

@philipkeeton is deep in tax land with an article from Tax Vox about whether fining people for not getting health insurance could be considered a tax on the middle class.

As for me, I'm digging into the archives over at the New York Times for articles about high Medicare costs in the 1970's. We'll have more on that on tomorrow's podcast.

Share your own recommended reading in the comments below.

Out of work and on line at the Salvation Army, circa 1935. (Hulton Archive/Getty Images)

By Laura Conaway

This week in the Great Recession marks the 80th anniversary of the "Black Tuesday" crash on Wall Street, an signal event of the Great Depression. As Sam Sanders writes for NPR, even that dark time had its winners.

Sanders looks at businesses and people who made themselves wealthy during those years -- from Mae West to Joseph Kennedy -- and at how everyone else eked by. For one thing, he notes, a lot of them were locavores before anyone had thought to call themselves such a thing:

Soup became a staple because it could be made with whatever was in the kitchen, could be cooked in one pot and could be stretched just by adding water. Depression soup was one part ketchup to two parts water. Stale bread became croutons or bread pudding.

Dishes began to be made from a variety of weeds, like dandelions, milkweed and cattails.

People also began gardening to produce their own food and butchered their own meat. But many could no longer afford meat and began relying on meatless dishes like nut hash, black-eyed pea sausage, and meatloaf made of cottage cheese, crushed peanuts and rice.

By Laura Conaway

Simon Johnson blisteringly asks whether the same regulators and systems that helped cause the economic crisis are being rewarded for staving off the worst of the calamity. Johnson asks whether we're all watching a case of firefighter arson.

He writes on Baseline Scenario:

No one is suggesting that our illustrious financial firefighters deliberately triggered a crisis. But, for over two decades, they and their close mentors oversaw the operation and development of a banking and securities system with profound instability hard wired into its DNA.

Johnson, former chief economist for the International Monetary Fund, has been a critic of the official response from the outset of the crisis. He argued that the Obama administration should nationalize troubled banks, and here he unloads on the new plan for overhauling financial regulation:

President Obama said on Tuesday that Ben Bernanke helped avert a second Great Depression. That is a considerable achievement, but why then are this administration and the Federal Reserve proposing only minor adjustments in oversight and governance for the financial system that ran amok -- producing "financial innovation" that harms consumers and destabilizes everything?

By Laura Conaway

Morning! Three recommended reads and one news item, followed by a fun picture after the jump.

-- If you're trolling for pure juicy reading, start with "How Firms Wooed a U.S. Agency With Billions to Spend," a New York Times story with glamorous names -- Black Rock, Goldman Sachs -- and some great numbers, too, like $1.6 billion.

-- Eliot Spitzer's living all over the American middle class (and the health care overhaul) with "In Sickness and in Wealth," a Slate column about the growing gap between rich and poor in the U.S. and the question of whither the middle class. Call it the question that keeps on giving.

-- Brad Setser takes a long, fruitful walk into the weeds on the new accord between China and the U.S. Yesterday, U.S. Treasury Secretary Tim Geithner announced a new resolve to reduce the trade imbalance by getting Chinese consumers to shop more and Americans to save more. Setser gives you a graduate seminar in this complicated dance.

-- Pure news: The U.S. Census Bureau reports that new orders for manufactured durable goods -- the big stuff like refrigerators and washing machines -- fell by 2.5 percent last month. The orders had gone up for two straight months. If you take out transportation, new orders increased 1.1 percent. Shipments fell for the eleventh straight month, by .2 percent, and inventories for the sixth straight month, by .9 percent. Think of the declines as air slowly leaking out of a balloon. Economist Ian Shepherdson's take: "Overall, the core picture has stabilized."

If you're reading something great, please add it in the comments.

Thanks to Twitter pal @beckerben for the picture after the jump.

Continue reading "From Durable Goods To China Trade: What We're Reading" >

On today's podcast, we're going to be talking about some of the ways in which the government has aided Goldman Sachs since the beginning of this crisis. That discussion will be available later this afternoon, but in the mean time, we thought we'd give you a chance to get caught up on some light Goldman-related reading.

A lot of you have recommended Matt Taibbi's piece in Rolling Stone last month, The Great American Bubble. Alex Blumberg says he prefers Michael Lewis' piece in the current Vanity Fair, The Man Who Crashed the World.

Willem Buiter, Professor at the London School of Economics and Political Science, has a great critique of the Federal Reserve over at the Financial Times. Buiter says the Obama administration's plans to enhance the Fed's powers and turn it into the country's systemic risk regulator spells trouble. He writes:

If the same institution, the central bank, has to be in charge of both normal monetary policy and systemic risk regulation (albeit jointly with the Treasury for the systemic risk role), there is no elegant, first-best solution. Either monetary policy will be driven by politicians whose macroeconomics is limited to a partial understanding of the Keynesian cross and whose monetary policy views can be summarized by the proposition that the have never seen an official policy rate so low they would not want it even lower, or the central bank continues to act as an off-budget, off-balance sheet special purpose vehicle of the Treasury.

Buiter isn't the only one calling for greater independence at the Fed. Over 350 economists signed a petition, which was sent to Congress today, urging lawmakers to "reaffirm their support for and defend the independence of the Federal Reserve System."

The federal deficit topped $1 trillion for the first time today, just nine months into the budget year. If you're itching to understand that, check Simon Johnson and James Kwak's "National Debt For Beginners."

Johnson and Kwak, of Baseline Scenario, help you sort through the questions of what national debt means, whether it's OK, and if so, how much.

As the Obama administration prepares to announce its plans for financial regulation reforms, several academics are focusing on the issue of executive compensation. In an op-ed in today's Wall Street Journal (subsq req'd.), Harvard's Lucian Bebchuk and Berkeley's Jesse Fried argue how to best tie compensation to long-term performance. They write:

...The period during which vested equity incentives may not be cashed out should be fixed. For example, when an executive's options or shares vest, one-fifth of them could become unblocked, and the executive would subsequently be free to cash them out, in each of the subsequent five years. Because the blocking period would be fixed, the executive's actions wouldn't be distorted by a desire to accelerate the cashing out of equity incentives. And as long as the executive is working for the firm and options and shares continue to vest, the executive would always have an incentive to care about the company's performance several years down the road.

Bebchuk and Fried argue against so-called "hold till retirement" requirements. They say forcing executives to wait until retirement to cash out only provides them with an incentive to leave their firms.

Bonus: Bebchuk's testimony before the House Financial Services Committee.

A group of academics are on the lookout for protectionism. The group led by the Centre for Economic Policy Research have started a new website, Global Trade Alert to provide "information in real time on state measures taken during the current global economic downturn that are likely to affect foreign commerce."

Right now the website is tracking two U.S. measures that may affect trading relations with Canada -- the Water Quality Improvement Act of 2009 and new EPA procedures on the construction or maintenance of water infrastructure.

BONUS: The World Trade Organization tracks similar data on their site.

F is for foreclosure. Love in the Time of Foreclosure

While we try to figure out the best way to keep track of your struggles to get your mortgages modified, check out this blog of one couple's journey -- Love in the Time of Foreclosure. Here's a taste:

In today's mail, we received 7 more NOTICES OF TRUSTEE'S SALE.

Seven. Enough to form an F.

As though the 12 total notices we've received via mail so far weren't enough, there was another posted on our garage door today for all the world to see.

We discovered it as we were leaving to see a movie-- an attempt to carve out a little bit of fun in this long weekend. We stepped out onto the driveway and there it was. In plain view. BAM! The thing that we've been trying desperately to avoid for months.

I tore it down immediately out of embarrassment. Hoping none of our neighbors would see. It wasn't until later in the day after having some time to cool down that I taped it back up for purposes of this photo.

How I felt? Like a big loser. Like a failure. And afraid.

The New York Times Magazine had a great series of articles about debt this weekend. I really enjoyed Edmund Andrews' piece on his own "Personal Credit Crisis."

Andrews writes:

I felt like a crack addict calling up my dealer. It was April 2006, and I had just reached Bob Andrews, our once and future mortgage broker, on his cellphone.

I was surprised at how glad I was to hear his voice. In his own way, Bob knew more about my messy life than almost anybody else. He never seemed judgmental or condescending. Instead, he seemed to think that money trouble and failed marriages were natural parts of life, even for good people with decent jobs. I felt relieved to have the chance to unload my problems and ask for his advice.

Andrews' description of his interactions with his mortgage broker seemed eerily similar to the same techniques being used by credit card companies that Charles Duhigg described in his piece and on the Friday podcast.

Continue reading "A Personal Crisis " >

For a better recession, be older. Click for more stats. Pew Research Center

 

From Twitter pal @olevia, news that in the Great Recession, age matters:

[O]lder adults are living through what for them has been a kinder, gentler recession -- relatively speaking. They are less likely than younger and middle-aged adults to say that in the past year they have cut back on spending; suffered losses in their retirement accounts; or experienced trouble paying for housing or medical care. They're more likely to report being very satisfied with their personal finances. And they're less likely to say the recession has been a source of stress in their family.

Full read: Not your grandfather's recession -- literally

Judging from the messages you're sending, the Planet Money audience has fallen in love with this from the Onion: "Nation Ready To Be Lied To About Economy Again." Frank Carlson called it "writing lies to tell the truth" and picked out a key bit.

"I don't need to be constantly reminded that the lack of regulations on Wall Street compounded with failing institutions like AIG basically plunged the world economy into a global recession," said 32-year-old office manager Alexis Harrington. "What I want is for someone to tell me with a straight face that the GDP is through the roof so that I can feel better and instantly forget what all these terms even mean."

The Federal Reserve has released a paper describing the data and process it used to conduct stress tests on the country's biggest banks. The results of the tests won't be released until early May, but we already know none of the banks will fail the test. We haven't had time to dig into the report yet, but we'll definitely be talking about it next week. In the meantime, let us know what you think.

Despite the government's best efforts, many banks still aren't lending to consumers. Why? Some say they're scared that borrowers won't be able to pay them back or they're already too strapped to hand out any more cash. Douglas Diamond and Raghuram Rajan from The University of Chicago Booth School of Finance have another idea. They say it's "the fear of being short of funds if investment opportunities get even better." They write:

Take, for example, the possibility that a large indebted financial institution becomes distressed in the future and starts dumping assets in the market.

Not only will the price of those assets fall if there are only a few entities with the liquid funds to buy them, the absorption of market liquidity by the distressed institution will ensure that it will be very hard for any institution that does not already have liquid funds to borrow at that time. If financial institutions expect that those with liquidity could make a killing in the future (by buying financial assets or banks at fire sale prices), they will restrict their lending or investment today to very short maturities or liquid securities and not lock up liquidity in term loans.

Continue reading "Why Banks Won't Lend " >

The Economist reports on a new study that shows stressed-out human beings, maybe even Wall Street human beings, tend to take bigger risks than calm ones:

What is worrying is that today's traders are in truly uncharted (and very cold) waters, and under such conditions, experience is little help; split-second decisions have to be taken that have never been encountered before.

A research paper in the Journal of Monetary economics argues that long-term corporate bonds have been a terrific predictor of changes in the economy. The economists tracked the yields of low- and moderate-risk corporate bonds against the performance of U.S. Treasury bills. When the spread widens between the corporate bonds and the Treasuries, look out world.

The Wall Street Journal (subscription requ'd.) takes a fairly plain-language view of the study:

With the massive widening in corporate-bond spreads last fall, the economists' model predicts industrial production will fall another 17% by the end of the year, and the economy will lose another 7.8 million jobs on top of the 5.1 million it has shed since the recession began.

Calculated Risk sounds less than convinced, posting a chart of bond spreads that should have predicted "a few extra recessions."

A still photo from the William K. Black interview Bill Moyers Journal

 

This one is more recommended viewing that reading, but in any case several of you forwarded the recent Bill Moyers interview with William K. Black, author of The Best Way to Rob a Bank Is to Own One. Black argues that the current economic crisis is driven by fraud. He tells Moyers:

Fraud is deceit, and the essence of fraud is 'I create trust in you, and then I betray that trust and get you to give me something of value.' And as a result, there is no more effective acid against trust than fraud, especially fraud by top elites. And that's what we have."

Bill Moyers' site also includes a full transcript. It sounds like Black's not much for retention bonuses.

Continue reading "William K. Black On Fraud" >

Simon Johnson, Planet Money pal and Baseline Scenario blogger, has just published an Atlantic Monthly article titled "The Quiet Coup," his take on what the IMF would say to the U.S. if it could. Johnson, a former chief economist at the IMF, writes:

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty--in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy--ultimately making the problem much harder to solve. Yet the principal characteristics of the government's response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

Bonus: Joe Nocera says the Geithner plan makes sense.

The world's major economic players are getting together next week for the G20 summit, and boy, does that sound like fun. China has been calling for a new world currency. The European Union president labeled the Obama stimulus plan "a way to hell."

David sends over James Surowiecki's take on the latter, in this week's New Yorker. Surowiecki writes:

[I]n effect, Europe is refusing to carry its share of the global economic burden and is piggybacking on us. But it's hard to see how things could have turned out otherwise. The U.S. economy, much more than Europe's, is like the proverbial shark: if it doesn't keep moving forward, it dies (or at least creates a lot of misery). In some sense, we need economic growth more than Europe does. It's not surprising that we're going to be the ones who end up paying for it.

Seeking Alpha is holding a live chat at 2:30pm Eastern time today on the Treasury Department's new plan to clean up bank balance sheets. They've got a great line up of guests: Felix Salmon, James Kwak, Brad DeLong and Mark Thoma. It should be an interesting conversation. Check it out here.

We just visited the Financial Times, where Adam interviewed Martin Wolf about who we should blame for the crisis. The interview will be on tomorrow's podcast along with some discussion of the FT's popular Economists' Forum. For PM readers who've never heard of it, Wolf describes the forum as a place where a number of economists and others gather to share different angles on the current crisis. Today's piece comes from Ricardo Caballero, head of the department of economics at Massachusetts Institute of Technology:

No matter how many inefficient contortions and conversions individual financial institutions may do, until the problem of systemic panic is resolved, it is only a matter of time until the next crisis blows up in our faces. Those that think that solving the problems of one bank, by nationalizing it or otherwise, will restore confidence, fall into an extreme fallacy of composition: What may be the right solution for an isolated case, is not for a systemic problem.

Read the full essay here.

@aimeesblog sends a great article from Bloomberg: Hidden Pension Fiasco May Foment Another $1 Trillion Bailout.

Pension funds are major investors -- returns from the market are a key part of the model. The funds have been leaning on long-term stock market returns of 8 percent or more, but in reality getting closer to 3 percent, or less. From Bloomberg:

"It's pitiful, isn't it?" says Frederick "Shad" Rowe, a member of the Texas Pension Review Board, which monitors state and local government pension funds. "My experience has been that pension funds misfire from every direction. They overstate expected returns and understate future costs. The combination is debilitating over time."

Guess who gets to help when the pension funds come up short?

GQ "Men + Money" columnist Joel Lovell has a refreshingly honest column in the Washington Post today about how difficult it is right now to give financial advice. He writes:

Should you jump into the market now and buy low? Should you keep everything in cash for the next year or two or five? Should you invest in China or natural gas or gold? Beats me. I've been writing this column for about a year and a half, so I've done my research, talked to a bunch of investment analysts and made an effort to understand what's going on now and where we might be headed. But really, I can't begin to claim to know.

Continue reading "Confessions of A Money Guru" >

Click to enlarge: December '08 gain in unemployment. Tim Murphy/BLS/via Daily Yonder

 

December was a tough time for making a living in the heartland. The Daily Yonder reports that the rural unemployment rate was half a percentage point higher than the urban rate. In the first 12 months of the recession, rural counties lost just under 15,000 jobs, compared to 282,000 in December 2008 alone.

Any given place lost jobs for its own reasons, from the RV shutdown in Elkhart County, Ind., to the houseboat collapse of southeastern Kentucky. And then there's this:

In Deschutes County, Oregon, the unemployment rate has nearly doubled in the past year even as the number of jobs has increased. The problem in the fast-growing area around Bend is that more people are moving into the region than there are jobs being created. "The phenomenon we've seen here is what happens all the time, is they move here without jobs," said Roger Lee with Economic Development for Central Oregon.

You know those Internet ads for help finding a personal slice of the Obama stimulus package? The Big Money's Chadwick Matlin saves you a trip by running down the scam:

All of the blogs tell you to use the free software to get the $12,000 grants. To order that software, the blogs link off-site to a variety of Web sites filled with testimonials about how great their free grant-finding software is. What they don't say is that if you fail to cancel your subscription--a subscription the sites don't reveal exists outside --they'll charge your credit card until you discover their scheme and tell them to stop.