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from Edward Hadas:

For growth, focus first on jobs

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Most politicians and economists believe that GDP growth is the cure. It is considered not only the highest economic good but also the best way to create jobs. In search of higher output, governments run huge deficits, while central banks pass out money for free. The policymakers often invoke the name of John Maynard Keynes. But they twist the great economist’s ideas. As Pavlina Tcherneva points out in a recent article in the Review of Social Economy, Keynes thought “the real problem” governments should address during the Great Depression was “to provide employment for everyone”. In Keynes’s view, output follows jobs, not the other way around.

Keynes’s own preferred solution was for governments to organise projects with a high “elasticity of employment”. “There are things to be done; there are men to do them,” he said. “Why not put the two together? Why not put the men to work?” The best way for governments to create jobs quickly is still to hire people directly. A look at the dilapidated infrastructure of the United States suggests that Keynes’ prescription is still relevant.

Enthusiasts for small government might want to privatise such programmes, but they should still agree with the true Keynesian principle: it is better to pay people to work than to pay them not to. Programmes which protect the unemployed and disabled serve a valuable social purpose and payments for early retirement may be defensible, but programmes which create jobs are far preferable to either.

This Keynesian message has largely been lost in the current official policy mix, which aims at growth and hopes for jobs. Policies which support the financial system, put money in consumers’ hands and cut bloated government bureaucracies may eventually encourage job creation. Four years into the Lesser Depression, however, these highly indirect methods are at best working slowly.

from Breakingviews:

Eurovision a good metaphor for lack of euro vision

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The euro zone crisis is everywhere. The political and economic plight of Greece and Spain has reached fever pitch. And now awareness of the splintering currency area’s economic realities has reached the Eurovision Song Contest.

This annual musical cacophony, which dates back to 1956, features execrable europop sung by a succession of bizarre d-list pop stars who have somehow been deemed representative of their national culture. Voting takes ages and is conducted by hapless TV anchors of the host nation beaming live to all 26 participating countries in turn. In terms of efficiency, it has a lot in common with the actual euro zone.

This year it’s hard to resist hunting for subliminal messages in each nation’s songs. Part of the sober Finns’ entry translates as “Close Your Eyes”, summing up what most taxpayers in Helsinki want to do at the thought of fiscal transfers to the indebted periphery. On the other hand, Slovakia’s entry underlines the difficulty of getting all 17 members to reach a consensus: it’s called “Don’t close your eyes”.

Other entries are even more revealing. The Spanish have submitted “Stay with Me”, a transparent plea to German chancellor Angela Merkel to not abandon them. Germany’s own effort sums up its ponderous approach to the crisis. It’s called “Standing Still”.

But one entry actually addresses the crisis directly - and that country isn’t even in the euro zone. Montenegro’s song, “Euro Neuro”, is three minutes and five seconds of ostensible gibberish rapped by a middle-aged Montenegrin who goes by the unlikely name of Rambo Amadeus. But it contains a compelling message.

from Breakingviews:

US housing recovery shows subsidies need trimming

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own. The U.S. housing recovery shows it’s time to trim subsidies. The market finally looks close to bottoming out. Prices are reasonable and rates for borrowing mortgages are ultra-low. Mortgage interest tax deductions, loan guarantees and even some foreclosure assistance are looking increasingly unnecessary.

Take, for example, the delinquency rate. It dropped to 7.4 percent in the first quarter, according to the Mortgage Bankers’ Association. That’s almost a full percentage point below last year. The number of new homes being built is a third higher than this time last year, while sales of both new and existing homes are also on the up. And the National Association of Homebuilders index is 20 points above its nadir and now at its highest level since the end of 2007.

All this suggests that much of the assistance the state gives to the housing market is no longer needed. The home mortgage tax break, for example, is a pre-crisis crutch that primarily benefits those who don’t need the help - wealthier borrowers, who get more back simply because they pay more tax. Scrapping the deduction completely risks causing hardship to those borrowing more modest amounts, but capping it at $10,000 would limit its market distortion without removing a prop from middle-market housing.

The most obvious distortions to eliminate are the outsize guarantees on home loans provided by government-backed mortgage agencies. Fannie Mae and Freddie Mac backstop qualifying loans up to $625,500, while the Federal Housing Authority’s limit of $729,750 is even more excessive. These are both hangovers from the crisis. Capping guarantees at the old rate of $420,000, or even lower, would limit the subsidy to middle-class borrowers. That could then mark the first step in reducing the overall influence of the agencies on the market.

There’s no quick and easy fix for the housing market. But it’s looking healthier each month. That makes keeping some of these more egregious distortions in place harder to justify. Cutting them would restore some balance to the market and allow the cash to be put to more productive uses.

from Edward Hadas:

Bad ideas spawn Lesser Depression

On September 15, 2008 Lehman Brothers collapsed in a heap, a bankruptcy that was followed by a recession in most rich countries. As time goes on, the severity of the disruption becomes both more apparent and more puzzling.

When Lehman failed, it was reasonable to expect the pain to be brief and concentrated. While too many houses had been built in the United States, most of the world’s real economy (comprising factories, offices, retail outlets, construction projects) was doing well. The global financial sector was more distorted, even before investors took fright at the decision to let Lehman go under. But by the middle of 2009, governments and central bankers had agreed to provide bankers and brokers with anything needed to keep them healthy.

Optimism was not justified. Although the countermeasures stopped the deterioration, the rich world now seems stuck in a Lesser Depression - many years of poor economic results and a series of financial crises. In the United States, the euro zone, Japan and the UK, real GDP per person is still lower now than it was four years ago. In all of them, GDP growth is currently either slow or non-existent.

The consumption setback shouldn’t cause too much concern - it wasn’t so bad five or six years ago, when real GDP was last at today’s level. But the enduring recession in the labour market is another matter.

In April 2008 the unemployment rates in the United States, euro zone and UK were respectively 5, 7.3 and 5.3 percent. In April 2012, the corresponding percentages were 8.1, 10.9 and 8.4. More refined indicators - youth unemployment, involuntary part time work and disaffected ex-workers - are even more discouraging. The post-Lehman economy is failing a significant number of people in a fundamental way.

Some economists argue that this real suffering is the necessary price to pay to bring order to the financial world. That’s a dubious argument, since people are more important than money and credit. But the ethical debate isn’t necessary. Despite the real economic pain and the official aid, the financial world looks as ill as ever. On the monetary side, policy remains in shock territory - buyers of safe government debt receive negative real returns. Fiscal positions are equally alarming. Deficits everywhere remain at levels more suitable for wartime mobilisation than for a sputtering economy.

The puzzle is why a relatively small problem in the real economy has led to this Lesser Depression, especially when the authorities have followed expert advice throughout. Surely, if the counsel were sound, the depression would have lifted by now.

from Edward Hadas:

What price beauty?

From a narrow economic perspective, the art world is working brilliantly. But the success shows just how narrow that perspective really is.  

Start at the very top end of the art market: last week's sale of Edvard Munch's "The Scream" for $120 million, a record for any artwork sold at auction. It may seem bizarre for an icon of cultural despair to become a token of financial exuberance, but the transaction reinforced the social meaning of art among the elite.  

Sociologists talk of positional goods: possessions and activities which express social standing. A normal skiing holiday is like a sign saying, "I'm solidly middle class". A mansion states, "I'm rich." A multi-million dollar painting tells the story of money to burn. And a $120 million pastel screams out, "I'm at the top of the heap, and cultured besides."  

The industrial economy has changed and developed, but it has consistently supported the positional value of artworks and other so-called collectibles. Demand has expanded along with the number of wealthy people. Prices have risen along with the quantity of money available for ostentatious spending. The recent increase in the share of global income and wealth taken by the very rich has accelerated that trend.  

Prices would be even higher if the supply of positional art had not also expanded. That growth is puzzling. The number of worthy artworks from the past available for purchase is actually decreasing, as museums expand their collections. Contemporary art isn't an obvious substitute, because there's no scarcity and no way to know what's really good. The possession of something of uncertain quality that is readily available should bring little social status.  

But collectors have overcome this supply problem with a tacit agreement to assign high values to just enough stuff to keep prices up. I can't explain how this arrangement is made - the formation of social consensus is always a mysterious business - but for some reason a preserved shark by Damien Hirst is deemed worthy of a high price, while a stuffed tuna signed by his cousin probably would not be.  

High priced art gets most of the headlines, but the industrial economy has also successfully turned artistic production into a mass product, much like food, clothing and medicine. From the normal economic perspective, art looks like another consumer success story.  

from Breakingviews:

A post-Chavez Venezuela is no investment bonanza

By Raul Gallegos The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The health of Hugo Chavez has piqued the market’s interest. Long stretches of silence from the cancer-stricken Venezuelan president have brought a certain morbid optimism to investors, who have sent the country’s debt to highs not seen in years. But any new regime will still have to wrestle with the legacy of backwards Chavez policy. Unwinding years of economic mismanagement won’t be easy.

In anticipation of Chavez’s possibly bowing out of upcoming October elections, Venezuela’s sovereign debt has surged by 23 percent this year, far outpacing the JPMorgan EMBI global index of emerging bonds, which is up just 6 percent. And while the country’s high level of debt issuance made its credit riskier than Argentina’s earlier in the year, Venezuela’s five-year credit-default swaps have tightened considerably and now trade some 200 basis points lower than that of its fellow South American state.

What’s more, the traditional Chavez discount - created by his financial policies, lack of transparency and high deficits even with soaring oil prices - is gone. Venezuela’s 2022 bonds now sell at a rather rich premium.

But investors are getting ahead of themselves. For starters, Chavez still has an edge. Even while fighting the cancer that has curbed his normally frequent public appearances to sporadic tweets, Chavez is as much as 13 percentage points ahead of opposition rival Henrique Capriles Radonski. And though polls indicate Capriles would be a front-runner if Chavez were to throw his support to Foreign Minister Nicolas Maduro, his lead would be narrow.

A Chavez defeat also wouldn’t necessarily clear an easy path. Chavistas would still control the Congress until 2015. This would be sufficient power to tie up the plans of any new president, including issuing new debt or refinancing older paper, making Venezuela’s financial policies unpredictable.

Opposition leaders have given investors fair warning. They concede that unwinding Chavez’s age-old capital controls would take time. The state’s massive spending on social programs also probably wouldn’t go away any time soon. And just how far a new government could cut social programs without a backlash isn’t clear. A post-Chavez Venezuela is almost certainly good for investors, but it’s no immediate bonanza either.

from Breakingviews:

The rupee looks vulnerable

By Jeff Glekin The author is a Reuters Breakingviews columnist. The opinions expressed are his own. India’s ballooning trade deficit means it has to run just to stand still. Without steady capital inflows, the currency will collapse. But without a steady currency, it is hard to attract foreign capital. The rupee’s 19 percent fall against the dollar over the past year is worrying.

During most of the last decade, the current account deficit has been funded without great difficulty. Foreign direct investment, portfolio investments and about $60 billion a year of remittances have usually exceeded the shortfall in trade. India has accumulated around $300 billion of foreign currency reserves, equivalent to 17 percent of GDP.

But the annual trade gap has widened from $104 billion to $185 billion. At 3.7 percent of GDP, the current account deficit is the highest since 1980, when the International Monetary Fund starting collecting data. High energy prices are the main culprit for the recent deterioration - oil accounts for two-thirds of the country’s import bill. Of course, the blow would have been less painful if India had a stronger export sector.

The support of foreign investors is more necessary than ever, but New Delhi’s mismanagement has discouraged them. Foreigners bought an average of $3 billion dollars a month of Indian debt and equities in the first three months of 2012, according to the Securities and Exchange Board of India’s website. So far in April, they have been net sellers of $403 million.

The currency’s fall threatens to create a negative spiral. More expensive imports are inflationary and put pressure on corporate profits. Government subsidies of domestic fuel prices become more costly, adding to the fiscal deficit, which swelled to 5.9 percent of GDP in the fiscal year that ended in March. Furthermore, the rupee’s slide creates financial stress for Indian companies that have borrowed in dollars.

India’s currency reserves provide a buffer. But if capital flows turn sharply negative the reserves could melt away quickly. And if investors start to believe that the rupee is a one-way downwards bet, they will race for the exit. Predictions of a declining currency - UBS suggested a further 6 percent fall last week - could prove self-fulfilling.

from MacroScope:

Blame small government for U.S. GDP downer

Weak U.S. economic growth in the first quarter was driven in part by a pullback in business investment -- but a sharp decline in government spending also played a role. Gross domestic product grew 2.2 percent, well short of the Reuters consensus forecast of 2.5 percent. Business spending fell 2.1 percent while government expenditures saw a 3 percent drop linked to lower defense spending. Consumer spending proved a bright spot in the report, climbing 2.9 percent. Still, there is concern that this too could fade because an unusually warm winter may have brought some spending forward.

Jay Feldman at Credit Suisse breaks down the numbers:

The big downside surprise from our vantage point was in federal government spending, which contracted 5.6% in the quarter (we expected an increase given the firmer readings in monthly Treasury data). Most of the shortfall was concentrated in defense (-8.1%). Combined with the ongoing contraction in state and local government output (-1.2%), the government sector overall shaved 0.6 percentage point from top line GDP.

Yet this pales in comparison to what might happen if Congress fails to break a budget logjam by the end of this year. If left unaddressed, the resulting spending cuts and expiring tax breaks -- the dreaded fiscal cliff -- could easily tip the world’s largest economy back into recession.

from Edward Hadas:

Prosperity need not kill religion

Thomas Carlyle’s fulminations against the spiritual damage wrought by factories are almost two centuries old, but the sentiment is current wherever industrialisation is rampant. “The huge demon of Mechanism,” he wrote, “smokes and thunders, panting at his great task, oversetting whole multitudes of workmen ... so that the wisest no longer knows his whereabout.”

In China, today, government leaders and dissidents alike worry that, as one commentator put it, “frenzied competition for a better life [has] lobotomized the people of inherent values like common decency, compassion and feelings of fellowship”.

A century ago, Max Weber described the process as “disenchantment”. The German sociologist thought the transition from a culture of faith and farming to the narrow-minded and bureaucratic “iron cage” of modern civilisation required the destruction of a spiritual worldview. He saw a modern society made up of "specialists without spirit, sensualists without heart".

Weber was certainly on to something: industrialisation does break down old religious ways. In pre-industrial societies, the transcendental and the everyday were closely woven together. Social rituals couldn’t be separated from ethical expectations. Such unity is impossible in a world of material plenty, big cities, and high technology.

Vast increases in wealth, consumption and education create opportunities for personal expression and eliminate the economic rationale for many socio-religious restrictions. Urbanisation brings people physically closer, but often as anonymous neighbours rather than in communities with shared values. Omnipresent media, telecommunications and transport erode the borders between the ‘us’ of family or village and the ‘them’ of the outside world. The old religious and spiritual ways cannot survive this transition.

But Carlyle, Weber and many modern social observers make bolder claims: common religious belief and shared moral values are gone forever; modern society has no room for old-fashioned certainties; there is no exit from what the philosopher Charles Taylor calls “A Secular Age”.

Are they right? In a rich economy, the grim fight for survival is eased and there is more time for emotional and religious exploration. Modern scientific knowledge invites speculation and wonder. As Weber noted, spiritual discipline is required for the “worldly asceticism” which makes modern economies so productive. Prosperity and urbanisation might engender greater spirituality.

from Chrystia Freeland:

The Triumph of the Social Animal

BERLIN — Does fairness matter? As France prepares to elect a president this spring and the United States gets ready to elect a president in the autumn, that old philosopher’s chestnut is gaining tremendous real-time political relevance.

Economics, by contrast, hasn’t traditionally been much concerned with fairness. Instead, economists have based their analysis on “Homo economicus,” a model human being who is perfectly rational and perfectly guided by self-interest.

The financial crisis of 2008 made it hard to believe in a world of perfectly rational actors, even when they earn million-dollar salaries and have advanced degrees. Now, a growing body of research is challenging the second part of the definition of Homo economicus — that he is guided purely by self-interest.

The alternate view was advanced by Armin Falk, a Bonn University economist, at a recent economics conference in Berlin organized by the Institute for New Economic Thinking. It emphasizes the importance of fairness and trust to human behavior. This approach takes as its starting point the idea that we are social animals, driven powerfully by how we fit into our community.

The social animal school may sound touchy-feely, but one of its favorite research tools is the M.R.I. That is the machine Dr. Falk and his colleagues used to try to figure out whether we care most about the absolute material reward we get for our work — as a rational Homo economicus should — or whether fairness matters, too.

In one experiment, subjects were paid 50 percent more, the same amount or 50 percent less than a peer for doing the same amount of work. Crucially, the absolute payment the research subject received in each case was identical.

But brain scans showed that fairness had a strong impact at a neurological level. Anyone who has ever held a job or has a sibling won’t be surprised to learn that the most powerful response was evoked when the research subject was underpaid, compared with his identically tasked peer. Interestingly, when researchers simulated low social status in their testers, unfair treatment mattered less. The meek may inherit the earth, but in the meantime they have been conditioned to accept less than their fair share.