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Thursday, February 23, 2012

Iceland Solves Banking Crisis by Indicting CEOs, Forcing Mortgage Relief

Via Mark Thoma's Economist View, I came across an interesting blog on financial regulation called Trust Your Instincts. Lately, the author, "Richard," has written a set of posts comparing two models of dealing with the financial crisis, which he calls the Swedish model (used by Sweden and Iceland) and the Japanese model (used by Japan, the U.S., and the U.K.).

Here is his description of the two models:
Regular readers know that under the Japanese model losses on the excesses in the financial system are only recognized as banks generate the capital to absorb them.  This is good for banks because the model involves hiding their true condition and pursuing policies designed to boost bank earnings.  It is bad for the economy because it distorts asset prices and access to capital (for proof, look at the performance of Japan's economy).

The alternative is a Swedish model that is bad for banks and good for the economy.  It is bad for banks because they are required to recognize the losses on the excesses in the financial system today.  It is good for the economy because it avoids the distortion in asset prices and access to funding associated with hiding the losses under the Japanese model (for proof, look at the performance of Sweden's economy).
 Richard points to recent events in Iceland as another successful application of Sweden's model. There, the country's banks forgave loans equivalent to 13% of gross domestic product, according to a Bloomberg article Richard cites. The equivalent in the United States would be about $1.95 trillion of mortgage debt writedowns. Icelandic banks agreed to forgive all mortgage debt over 110% of a home's value.

Not only that, Bloomberg relates a development that would meet, I believe, with the approval of Tea Party members and Occupy protesters alike: Bankers were held personally liable for crashing the country's economy. The CEO's of the country's three largest banks are among 200 who are facing criminal charges, and a special prosecutor expects up to 90 more indictments. The contrast with the United States could not be more obvious.

While Iceland is a tiny country with a population of only 317,000 and a $13 billion GDP, Trust Your Instincts is not the only blog paying attention to it. As Paul Krugman wrote yesterday, "I think I may have been one of the first commentators with a wide audience to point out how relatively well Iceland was doing." What he didn't mention, though his commentator "iInfoliner" did, is that the credit rating agency Fitch upgraded Iceland's debt to investment grade last week. Moreover, according to the Business Week story, the country can now borrow in U.S. dollars at a mere 4.77%. Compare this to Greece at 35.98% and Portugal at 12.77%; even Spain and Italy are a little over 5% (the FT link has no rates listed for Ireland).

The moral of the story is that a different approach to dealing with the banks is necessary, both to restore the U.S. economy but to prosecute financiers who broke the law. As it stands, bankers have gotten off scot-free while the country's economic growth has been largely anemic. While the job market has shown a few flickers of life recently, the country needs millions of jobs just to get back where it was before the crash, which actually wasn't all that good a situation for the middle class to begin with.

It could be worse, I suppose. As Richard says, Japan's economy remains smaller than 15 years ago. But Ben Bernanke was rumored to have learned the lessons of the Japanese experience. Whatever happened to that guy?

Wednesday, February 22, 2012

Romney Tax Plan Blows Hole in Budget, Remains Short on Specifics

Mitt Romney unveiled his tax plan today, but it revealed few surprises except for surprisingly few specifics. Via Chris Hayes (@chrislhayes), conservative economist Josh Barro estimates that the Romney plan consists of $5 trillion in tax cuts over 10 years, divided as follows:

$1 trillion from cutting the corporate income tax
$3 trillion from cutting all personal income tax rates by 20% (not 20 percentage points, by the way)
$1 trillion from miscellaneous tax cuts like abolishing the alternative minimum tax (AMT)

According to the Romney plan, the corporate income tax rate would fall from 35% to 25% and the U.S. would stop taxing countries on their foreign profits. Contrary to Romney's claim, making foreign profits tax-free would not encourage their investment in the U.S., but would instead give companies an incentive to make more of their profits appear to be foreign by creative use of transfer pricing to make profits show up in tax havens instead of the U.S. Under the Romney plan, companies would then be free to bring that money back to the U.S. without facing any tax, anywhere in the world.

Among the other non-surprises in the plan, Romney would not increase the 15% tax rate on his own main source of income, capital gains. He would repeal the Affordable Care Act, even though his version of it in Massachusetts gave the state the highest level of insurance coverage in the country at 95%. He would raise the eligibility age for Social Security and end Medicare as we know it a la the Ryan Plan, two staples of conservative talking points that would negatively affect the middle class.

As Barro points out, Romney has said before that he will increase American military spending (already tops in the world by far). This makes it even more difficult for him to offset the $5 billion in tax cuts without huge cuts to programs that the middle class depends on. Thus, I think the inescapable conclusion is that of Benjy Sarlin: "Romney's Tax Plan Still a Boon to the Rich, Despite 1% Talk."

Tuesday, February 21, 2012

Bad Trends in Economic Development: Weak Negotiating, Job Piracy and Blackmail

Greg LeRoy at Good Jobs First's "Clawback" blog reports that Sears has now announced 100 layoffs in its headquarters in Illinois, despite receiving a subsidy of $275 million (nominal value) to stay in the state when it threatened to move last year. It's bad enough that Sears threatened relocation in order to extract subsidies from the state, as Julie Irwin Zimmerman ably discussed in December. What's more troubling, as LeRoy points out, is that under the agreement Sears can lay off a total of 1750 headquarters workers (which would take the firm from its initial 6000 jobs to 4250) without penalty. This is a stunning capitulation that represents backsliding from a trend to require more of subsidized companies (see the December 2011 Good Jobs First report Money for Something).

But it's not the only example of this sort of backsliding. As I reported in September, the state of Tennessee did not include clawback clauses in huge subsidy agreements with Electrolux, Hemlock Semiconductor, and Wacker Chemie. The jobs crisis apparently has made some states afraid to assert themselves in investment incentive negotiations.

Sears is only one high-profile example of actual or threatened relocations that resulted in subsidies. As Good Jobs First reports on Minnesota (2006) and Ohio (2011)  have documented, 250 companies and over 24,000 jobs were relocated on the taxpayer's dime over various study periods in the Minneapolis/St. Paul, Cleveland, and Cincinnati metro areas alone, with sprawl-enhancing effects in all three cases.

To see how widespread subsidized relocation is, I performed a simple search in the Nexis news database (subscription required). It was:

relocat! AND "tax incentives" OR "tax breaks"

With the wildcard "!" symbol, Nexis searches for all variants of the word "relocation." When I set the time period for articles in the last year, I got 1,000 results, the maximum it will return. Searching for the last six months: 1,000 results. Searching for the last three months: 998 results. Only when I narrowed the search to the last month did I get a mere 519 results.

Of course, not all the stories are from the U.S., many are not about job piracy, and there are often duplicate articles. But these huge numbers over such a short period of time suggest that there is a great deal we have yet to discover about relocation incentives, and they may be far more prevalent than I would ever have imagined.

Sunday, February 19, 2012

Basics: Length of Unemployment is Worst Since World War II.

Update: As has been pointed out to me several times, "historically unprecedented" is not correct. I assume that duration of unemployment was longer during the Great Depression. The FRED data below obviously only goes back to 1947. So while "completely unprecedented historically" is literally not correct, duration of unemployment is still off the charts for the postwar era, at just under twice the previous peak.

One thing I've learned since I started blogging is how much people want to see information that puts our current economic situation in perspective. One way to do that, a natural one to me since my specialty is international relations, is to use multi-country comparisons to see where the U.S. stands. Usually this means comparisons with other industrialized countries, although my post on employment protection had data for Brazil, Russia, India, and China as well because the Organization for Economic Cooperation and Development provided it. Moreover, it was striking that the United States would have even worse standards than some developing countries.

Besides that kind of "cross-sectional" comparison of multiple countries at a single point in time, another way to gain perspective is through "longitudinal" comparison of data on one issue through time. Today's post takes that approach. I decided to learn how to use the St. Louis Federal Reserve Bank data you often see in other blogs--although it turns out "learn" is too strong a word because the "FRED" website ( is so simple to use. That set me up for a shock to find out how bad long-term unemployment (usually defined as 26 weeks or more) is today. This is a critical issue because the longer you are out of work, the less likely you are to ever find a job again. Unemployment is also critical for health care, as most Americans still get their health insurance through their employers.

As everyone knows, long-term unemployment has been a big problem in the current crisis. But "knowing" isn't the same as having perspective. For that, we need a comparison. It turns out that the average duration of unemployment over the last few months is almost exactly twice as high as the previous peak in 1983 in the aftermath of the Reagan recession. The current average of over 40 weeks is completely unprecedented historically (as is the median length of unemployment, which was also twice that of prior peaks at about 22 weeks when Politifact reported on it in May 2011). But you have to see it to really understand it: Unemployment duration has increased steadily even since the end of the official recession, and may finally have topped out at 40.9 weeks in November 2011. Let's hope we're finally seeing a reduction.

FRED Graph