Category: Economic Crisis

Cuomo Bans the Fracking that Could Revive New York’s Southern Tier

(p. A25) CONKLIN, N.Y. — The main grocery store here was replaced by a Family Dollar store, already faded. The historic front of the town hall, a castle no less, is crumbling, and donations are being solicited. The funds earmarked to strip off the lead paint from the castle’s exterior went instead to clear mold from the basement.
This town of roughly 5,500 residents looks alarmingly like dozens of other towns and cities in New York’s Southern Tier, a vast part of the state that runs parallel to Pennsylvania. Years ago, the region was a manufacturing powerhouse, a place where firms like General Electric and Westinghouse thrived. But over time companies have downsized, or left altogether, lured abroad or to states with lower taxes and fewer regulations.
. . .
In western New York, . . . , Gov. Andrew M. Cuomo, a Democrat, pledged $1 billion in 2012 to support economic development. Since then, he has poured hundreds of millions of dollars into numerous Buffalo-area projects.
The Southern Tier has proved to be a harder fix. It is predominantly rural and lacks a significant population core that typically attracts the private sector.
The region is resource rich, but landowners are angry the government will not let them capitalize on it. Some had pinned their hopes of an economic revival on the prospect of the state’s authorizing hydraulic fracturing, known as fracking; many of them can recite the payment formula gas companies were proposing: $500 a month per acre.
But the Cuomo administration, citing health risks, decided last year to ban the practice, leaving some farmers contemplating logging the timber on their land, a move that could destroy swaths of pristine forest.

For the full story, see:
SUSANNE CRAIG. “Former Hub of Manufacturing Ponders Next Act.” The New York Times (Weds., SEPT. 30, 2015): A20-A21.
(Note: ellipses added.)
(Note: the online version of the story has the date SEPT. 29, 2015, and has the title “New York’s Southern Tier, Once a Home for Big Business, Is Struggling.”)

Haiti Stagnates Under Crony Capitalism

(p. A13) A May 2015 World Bank “systematic country diagnostic” on Haiti is instructive.
. . .
As the World Bank report notes, Haiti suffers from crony capitalism that holds back economic growth.
. . .
The record of Haiti’s elected politicians, since the transition to democracy at the beginning of the 1990s, is dismal. The political class still uses its power for personal aggrandizement, as the infamous dictators François Duvalier and his son Jean-Claude did for almost 30 years.
Just as discouraging is that after more than two decades of going to the polls, Haitians have yet to taste economic freedom, and emigration has become the only option for those who hope to get ahead by hard work. The World Bank reports that between 1971 and 2013 gross domestic product per capita “fell by .7% per year on average.”
. . .
The World Bank authors gently speculate that there is “little competitive pressure.” They observe this “could be the result of high legal or behavioral entry barriers” and this “could facilitate tacit agreements among families/groups to allocate markets among themselves, which may harm productivity and incentive to innovate.”
This is polite jargon for collusion, which Haitians already know. They also know that absent the political will to open markets to competition, elections won’t matter much.

For the full commentary, see:
MARY ANASTASIA O’GRADY. “Diagnosing What Ails Haiti’s Economy; The World Bank fingers cronyism, of which Bill Clinton was for years a symbol.” The Wall Street Journal (Mon., Oct. 12, 2015): A13.
(Note: ellipses added.)
(Note: the online version of the commentary was updated on Oct. 11, 2015.)

The World Bank report mentioned in the passages quoted above, is:
HAITI: TOWARDS A NEW NARRATIVE SYSTEMATIC COUNTRY DIAGNOSTIC, May 2015.

Marxist Wrecks Brazil Economy

(p. A6) “The Brazilian model celebrated just a few years ago is turning into a slow-motion train wreck,” said Mansueto Almeida, a prominent commentator on economic policy. “Our political leaders want to point fingers at China or some external villain, but they cannot escape the fact that this self-inflicted crisis was made in Brazil.”
Even with the country’s legacy of economic turmoil, some historians say that Ms. Rousseff’s track record on economic growth ranks among the worst of any Brazilian president’s over the last century.
. . .
Hoping to prevent Brazil from cooling too much after the sizzling boom of the previous decade, Ms. Rousseff, 67, a former Marxist guerrilla who was tortured during the military dictatorship in the 1970s and took office in 2011, doubled down on bets that she could stave off a severe slowdown by harnessing a web of government-controlled banks and energy companies.
Ms. Rousseff pressured the central bank to reduce interest rates, fueling a credit spree among overstretched consumers who are now struggling to repay loans. She cut taxes for certain domestic industries and imposed price controls on gasoline and electricity, creating huge losses at public energy companies.
Going further, she expanded the sway of Brazil’s colossal national development bank, whose lending portfolio already dwarfed that of the World Bank. Drawing funds from the national treasury, the bank, known as the B.N.D.E.S., increased taxpayer-subsidized loans to large corporations at rates that were often significantly lower than those individuals could obtain from their banks.
Ms. Rousseff’s critics argue that she also began using funds from giant government banks to cover budget shortfalls as she and her leftist Workers’ Party headed into elections.
“They deliberately destroyed the public finances to obtain re-election,” said Antônio Delfim Netto, 87, a former finance minister and one of Brazil’s most influential economists. Taking note of the government’s inability to rein in spending as a budget deficit expands, Mr. Delfim Netto and other economists are warning that officials may simply opt to print more money, stirring ghosts in an economy once ravaged by high inflation.
. . .
Unemployment is expected to climb even higher as the authorities ponder ways to cut a federal bureaucracy that grew almost 30 percent from 2003 to 2013, to 600,000 civil servants.
A pension crisis is also brewing, partly because of laws that allow many Brazilians to start receiving retirement benefits in their early 50s, even though life expectancy has increased and the fertility rate has fallen, limiting the number of young people to support the aging population.
“How can a person who is 52 years old be able to retire with a pension?” Luiz Fernando Figueiredo, a former central bank official, asked reporters. “These things have to be confronted. If not, the country will become another Greece.”
Parts of Brazil’s business establishment are in revolt, openly expressing disdain. Exame, a leading business magazine, devotes an entire section called “Only in Brazil” to documenting problems with the public bureaucracy.
These examples include a $120 million light-rail system in the city of Campinas that lies abandoned because of poor planning, and a measure requiring companies to obtain a special license before allowing employees to work on Sundays.

For the full story, see:
SIMON ROMERO. “As Boom Fades, Brazil Asks How Sizzle Turned to Fizzle.”The New York Times (Fri., SEPT. 11, 2015): A1 & A6.
(Note: ellipses, and bracketed word and date, added.)
(Note: the online version of the story has the date SEPT. 10, 2015, and has the title “As a Boom Fades, Brazilians Wonder How It All Went Wrong.”)

Bernanke Not Clear if His Zero Interest Rate Policy Increased Inequality

(p. B3) . . . it is striking to find Mr. Bernanke . . . receptive to a . . . critique: that the bond-purchasing efforts, known as quantitative easing, increased economic inequality.
“Monetary policy is a blunt tool which certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear,” Mr. Bernanke wrote in a blog post on Monday.
This was not a white flag. Mr. Bernanke went on to argue that the stimulus campaign was justified irrespective of the impact on inequality. But it struck a surprisingly hesitant note on a day when the Brookings Institution, Mr. Bernanke’s new home, hosted a conference on the same subject that was largely devoted to evidence that the Fed’s efforts had reduced economic inequality.
. . .
Current Fed officials share Mr. Bernanke’s judgment about the basic economic impact of the program. “Did these policies work?” Stanley Fischer, the Fed’s vice chairman, asked rhetorically during a speech on Monday in Toronto. “The econometric evidence says yes. So does the evidence of one’s eyes.”
But the “eye test” has also suggested to many that the wealthy have benefited disproportionately. The stock market has soared, and investors have prospered, even as wage growth has stagnated. Kevin Warsh, a former Fed governor, has memorably described the Fed’s current role as a “reverse Robin Hood,” rewarding the rich at the expense of the poor.

For the full commentary, see:
Binyamin Appelbaum. “The Upshot; Ben Bernanke Says Fed Can’t Get Caught Up in Inequality Debate.” The New York Times (Tues., JUNE 2, 2015): B3.
(Note: ellipses added.)
(Note: the online version of the article has the date JUNE 1, 2015 and has the title “The Upshot; Ben Bernanke Says Fed Can’t Get Caught Up in Inequality Debate.”)

Feds Constrain Startups

(p. A15) Virtually every state has suffered a drop in startups, which suggests that this is a national, and not a regional or state, problem.
. . .
If history is any indication, many of today’s economic heavyweights will ultimately decline as new businesses take their place. Research by the Kaufman Foundation shows that only about half of the 1995 Fortune 500 firms remained on the list in 2010.
Startups also have declined in high technology. John Haltiwanger of the University of Maryland reports that there are fewer startups in high technology and information-processing since 2000, as well as fewer high-growth startups–annual employment growth of more than 25%–across all sectors. Even more troubling is that the smaller number of high-growth startups is not growing as quickly as in the past.
. . .
Surveys by John Dearie and Courtney Gerduldig, authors of “Where the Jobs Are: Entrepreneurship and the Soul of the American Economy” (2013), show that entrepreneurs report being hamstrung by difficulties in finding skilled workers, by a complex tax code that penalizes small business, by regulations that raise the costs of doing business, and by difficulties in obtaining financing that have worsened since 2008.

For the full story, see:
EDWARD C. PRESCOTT and LEE E. OHANIAN. “Behind the Productivity Plunge: Fewer Startups; New businesses were created at a 30% lower rate in 2012 than the annual average rate in the 1980s.” The Wall Street Journal (Thurs., June 26, 2014): A15.
(Note: ellipses added.)
(Note: the online version of the story has the date June 25, 2014.)

Venezuelans Irritated by Short Supply of Cerveceria Polar Beer

(p. 5A) CARACAS, Venezuela (AP) — Venezuelans are facing the prospect of a heat wave without their favorite beer, the latest indignity in a country that has seen shortages of everything from disposable diapers to light bulbs.
Cerveceria Polar, which distributes 80 percent of the beer in the socialist South American country, began shutting down breweries this week because of a lack of barley, hops and other raw materials, and has halted deliveries to Caracas liquor stores.
“This is never-never land,” said Yefferson Ramirez, who navigated a rush of disgruntled customers Thursday behind the counter at a corner store in posh eastern Caracas. The shop has been out of milk and bottled water for months, but the beer shortfall is provoking a new level of irritation.

For the full story, see:
Associated Press. “Venezuela’s top beer scarce amid heat wave.” Omaha World-Heraldl (Sat., Aug. 8, 2015): 5A.
(Note: the online version of the story has the date Aug. 7, 2015.)

Venezeuelan Socialists Seize Warehouses of Cerveceria Polar Beer

PolarWorkersProtestSocialistsSeizingProperty.jpg “Polar workers protested the government’s decision to expropriate warehouse land in Caracas on Thursday [July 30, 2015].” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. A7) CARACAS, Venezuela–The government ordered major food companies, including units of PepsiCo and Nestlé Inc., to evacuate warehouses in an area where the state plans to expropriate land to build low-cost housing.
. . .
Manuel Larrazábal, a director at Polar, said he hoped the government would reconsider the measure. “We don’t doubt that they need to construct housing, which is so important, but we ask why it has to affect active industrial facilities.”
. . .
Some workers painted messages including “No to expropriation” and “Let us work” onto the walls of the industrial park and on dozens of trucks that lined the streets outside, which were blocked by police and National Guard. Polar said the move would affect some 600 workers, as well as 1,400 employees who transport their goods around Caracas and two neighboring states.
. . .
Polar suspended operations at its facility after getting the order Wednesday night. The expropriation order extends a history of shaky relations between it and the government, which began under the late leader Hugo Chávez and continues under his protégé, Mr. Maduro.
In recent months, the company, which is the largest beer maker in Venezuela, said it had to halt work at several plants and breweries due to labor strife. It has also struggled with difficulties in acquiring raw materials and U.S. dollars to pay overseas suppliers, a process controlled by the government due to complicated currency regulations.

For the full story, see:
KEJAL VYAS . “Venezuela Takeover Order Riles Companies; Maduro’s government wants industrial zone to build housing for poor.” The Wall Street Journal (Fri., July 31, 2015): A7.
(Note: ellipses added.)
(Note: the online version of the story has the date July 30, 2015.)

Banks Used “Regulatory Arbitrage” to Rent Seek at Taxpayers’ Expense

(p. 21) Between 2009 and 2011, a group of economists at New York University’s Stern School of Business published an influential series of reports and books that sought to explain what, exactly, happened during the financial crisis. The depth of the inquiry was notable because the school is generally thought of as a Wall Street-friendly training ground for future bankers. One of the most striking findings was that between 1980 and 2000, the large banks in America had significantly moved away from productivity ­enhancement and toward rent-­seeking.
For the reports’ principal authors, Matthew Richardson and Viral Acharya, the evidence of this shift came from careful study of the various ways that banks have legally evaded regulation of their capital requirements. A fundamental tenet of bank regulation is that banks shouldn’t borrow too much, because being overleveraged makes them vulnerable to collapse. But banks can most easily make huge profits if they borrow huge amounts, and they tend to pursue unsafe levels of borrowing. Then, the authors observed, they use their power as essential tools in an economy to negotiate bailouts from the government, forcing taxpayers to guarantee their losses. Richardson and Acharya showed that it was precisely because our banking regulations were so extensive and complex that banks were able to seek rents. They called this “regulatory arbitrage,” a term that means banks have harnessed regulation and turned it into a powerful business tool.

For the full commentary, see:
ADAM DAVIDSON. “Wall Street Is Using the Power of Dodd-Frank Against Itself.” The New York Times Magazine (Sun., May 31, 2015): 18 & 20-21.
(Note: ellipsis added.)
(Note: the date of the online version of the commentary is MAY 27, 2015, and has the title “Wall Street Is Using the Power of Dodd-Frank Against Itself.”)

One of the relevant papers by Acharya and Richardson is:
Acharya, Viral V., and Matthew Richardson. “Causes of the Financial Crisis.” Critical Review 21, no. 2-3 (2009): 195-210.

Henry Paulson Fears Chinese Economy “Will Face a Reckoning”

(p. B1) About 340 pages into Henry M. Paulson’s new book on China, a sentence comes almost out of nowhere that stops readers in their tracks.
“Frankly, it’s not a question of if, but when, China’s financial system,” he writes, “will face a reckoning and have to contend with a wave of credit losses and debt restructurings.”
. . .
(p. B2) Like the United States crisis in 2008, Mr. Paulson worries that in China “the trigger would be a collapse in the real estate market,” and he declared in an interview that China is experiencing a real estate bubble. He noted that debt as a percentage of gross domestic product in China rose to 204 percent in June 2014 from 130 percent in 2008.
“Slowing economic growth and rapidly rising debt levels are rarely a happy combination, and China’s borrowing spree seems certain to lead to trouble,” he wrote.
Mr. Paulson’s analysis in his book, “Dealing With China: An Insider Unmasks the New Economic Superpower,” is all the more remarkable because he has long been a bull on China and has deep friendships with its senior leaders, who could frown upon his straightforward comments.

For the full commentary, see:
Andrew Ross Sorkin. “DEALBOOK; A Veteran of the Crisis Tells China to Be Wary.” The New York Times (Tues., APRIL 21, 2015): B1-B2.
(Note: the online version of the review has the date APRIL 20, 2015, and has the title “DEALBOOK; A Veteran of the Financial Crisis Tells China to Be Wary.”)

The book discussed above is:
Paulson, Henry M. Dealing with China: An Insider Unmasks the New Economic Superpower. New York: Twelve, 2015.

Federal Government Main Cause of 2008 Financial Crisis

(p. A11) How much did the federal government contribute to the financial crisis? The question is quantitative, and the answer requires the kind of number crunching and careful thinking than cannot fit into an op-ed or television interview. Peter J. Wallison ‘s “Hidden in Plain Sight,” is the book that answers the question most meticulously of any written since 2008.
At this point, seven years on, most readers of this newspaper will recognize that the federal government’s role has been to force American taxpayers to subsidize trillions of dollars of risky lending. But each reader of Mr. Wallison’s book will come away a bit embarrassed at having neglected or forgot about one or more of Washington’s many contributions to the financial crisis.
. . .
In my opinion, a financial crisis is not only a likely consequence of implicit subsidies for risky lending but a necessary one because that is when implicit guarantees ultimately become real-life bailouts and trigger the taxpayer payments necessary to fund Washington’s longstanding lending goals. Mr. Wallison gives taxpayers the inside story of how housing policy was like a siphon hidden inside their wallets–and why it hurt so much.

For the full review, see:
CASEY B. MULLIGAN. “BOOKSHELF; Capitol Hill Pickpockets; Risky loans made by Fannie and Freddie were the biggest factor that led to the financial crisis–and the direct result of federal policy.” The Wall Street Journal (Weds., Feb. 25, 2015): A11.
(Note: ellipsis added.)
(Note: the online version of the review has the date Feb. 24, 2015.)

The book under review is:
Wallison, Peter J. Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again. New York: Encounter Books, 2015.

Recovery Slows When Start-Ups Are Taxed to Pay for Bailouts of Failed Firms

Vernon Smith, whose views are quoted below, won the Nobel Prize in economics in 2002.

(p. A11) The rescue of incumbent investors in the government bailout of the largest U.S. banks in the autumn of 2008 has been widely viewed as unfair, as indeed it was in applying different rules to different players. . . .
. . .
The rescue, . . . , had a hidden cost for the economy that is difficult to quantify but can be crippling. New economic activity is hobbled if it is not freed from the burden of sharing its return with investors who bore risks that failed. The demand for new economic activity is enlarged when its return does not have to be shared with former claimants protected from the consequences of their risk-taking. This is the function of bankruptcy in an economic system organized on loss as well as profit principles of motivation.
. . .
Growth in both employment and output depends vitally on new and young companies. Unfortunately, U.S. firms face exceptionally high corporate income-tax rates, the highest in the developed world at 35%, which hobbles growth and investment. Now the Obama administration is going after firms that reincorporate overseas for tax purposes. Last week Treasury Secretary Jack Lew wrote a letter to the chairman of the House Ways and Means Committee urging Congress to “enact legislation immediately . . . to shut down this abuse of our tax system.”
This is precisely the opposite of what U.S. policy makers should be doing. To encourage investment, the U.S. needs to lower its corporate rates by at least 10 percentage points and reduce the incentive to escape the out-of-line and unreasonably high corporate tax rate. Ideally, since young firms generally reinvest their profits in production and jobs, such taxes should fall only on business income after it is paid out to individuals. As long as business income is being reinvested it is growing new income for all.
There are no quick fixes. What we can do is reduce bureaucratic and tax barriers to the emergence and growth of new economic enterprises, which hold the keys to a real economic recovery.

For the full commentary, see:
VERNON L. SMITH. “The Lingering, Hidden Costs of the Bank Bailout; Why is growth so anemic? New economic activity has been discouraged. Here are some ways to change that.” The Wall Street Journal (Thurs., July 24, 2014): A11.
(Note: last ellipsis in original, other ellipses added.)
(Note: the online version of the commentary has the date July 23, 2014.)