economy

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This CollegeHumor parody eTrade ad has been making the rounds. In light of the recent stock market “correction”, what is underscored is there is a two-tiered market, as Jon Stewart claimed when he had Jim Cramer on The Daily Show in 2009—one for the powers that be and one for the rest of us. Economic sociology blasts apart the naïve assumption that markets have “atomized” agents guided by rational choice. There are embedded social networks and institutional factors that create information asymmetries, with the deck stacked in favour of those “in the know”. The individual investor and those relying on the market through defined contribution plans, IRAs, etc. for their retirements might relate to this parody ad far too well. Oh, how we should long for the days of the defined benefit pension.

As an aside, as one who has ditched the ivory tower for navigating the entrepreneurial waters, I can say one thing that I knew all along, but is abundantly clear in so many ways—the system is geared towards business and doors open that are closed to individuals, save for those with great means.

In light of the threat of the “r” word—recession, it’s easy to second-guess the “jobless recovery” and US economic policy aimed at bailouts {Obama style} and propping up the capital markets. While corporations are better off than they were three years ago, they have grown accustomed to sitting on cash and extracting more out of the labour force because it’s a buyers’ market. The unanimous consensus is that the economic indicators aren’t rosy and the prospects for US GDP growth are dim. The political focus on deficits is the last thing that the economy needed.

Was the stock market yet another bubble that’s about to burst? Canada’s housing bubble should cause worries, as well, as Canadian unemployment is still relatively high. Of course, Canada’s Finance Minister, Jim Flaherty, refuses to acknowledge there’s a housing bubble, hoping the Canadian economy grows out of any and all predicaments, which is exactly what Obama, Geithner, et al were hoping from day one.

US Unemployment & Interest Rates

Today, the Canadian Finance Minister Jim Flaherty tabled a budget with plenty of emphasis on reducing the deficit, much like what’s going on in the US. This, despite the fact that the interest rates are telling a story where financial markets are not that concerned about the deficit. This pattern is evident in both Canada and the US. Interest rates are showing there’s no crowding out—government spending taking up capital and resources that businesses can use. The reality of the situation is uncertainty and a dearth of good prospects is causing the business community to sit on huge stocks of capital.

Nevertheless, for various political reasons the deficit is touted as a menace that must be dealt with, not just in North America, but globally. The media is contributing to the Jedi mind trickery, dubbed the “Beltway Deficit Feedback Loop”. The WaPo blog by Greg Sargent states::

“The relentless bipartisan focus on the deficit convinces voters to be worried about it, which in turn leads lawmakers to spend still more time talking about it and less time talking about the economy,”

while linking to a National Journal study examining the gap between mentions of “unemployment” versus “deficit”::

“the broadening gap demonstrates just how effective conservatives have been at changing the narrative of economic policy from one dominated by talk of fiscal stimulus to one now in lockstep with notions of fiscal austerity.”

In Canada, the opposition parties aren’t on the same page with the Finance Minister and the Conservative Party, but don’t have the votes to stop the budget. While ink is being spilled about how fast the deficit will be reduced in Canada and whether of not the Conservative projections are wide of the mark and overly rosy, the elephant in the living room is the lingering high unemployment rate::

2008-2011 Canada unemployment rate

The problem with the deficit discourse is it fails to address the issue of unemployment and real economic problems, with the only way the issue goes away is if the economy grows. In fact, I feel being a deficit hawk in this economic climate is playing with political dynamite. The economic indicators do not support deficit reduction, given that the business community is loathe to expand. So, if the deficit hawks are wrong and unemployment and economic stagnation persists, they are opening themselves up to criticism. I think the hope is that a business cycle upswing will render the deficit issue moot, so the perception is that it’s “riskless” to jump on the deficit reduction bandwagon.

In the US, both Democrats and Republicans are viewing the deficit as the evil menace that must be thwarted at all costs with ample help of the media. While a Republican presidential candidate would differentiate themselves by embracing a populist and expansionary economic approach, it would be political suicide. Any politician advocating increases in government spending would face an uphill battle and be forced to educate the public on matters many don’t have the time and the patience for.

The jury is still out on how the New Democrats and Liberals play the deficit card in Canada in the future, but it may be an easy one to play if unemployment remains relatively high, businesses remain tentative, and the economy continues to stagnate.

Obama & Clinton
Barack Obama & Bill Clinton

I made a trip south of the border yesterday.  I drove all day to South Bend, IN to drop off a proposal and had dinner in Grand Rapids, MI, so I missed Obama’s Afghanistan speech.  I didn’t miss hearing the fallout from both the left and the right.  So, I’m wondering about what’s going to happen in next year’s midterm elections and I’m curious on what my fellow bloggers and the readers have on the subject.

Let’s turn back the clock.  Sixteen years ago, in late November of 1993 and Bill Clinton’s approval rating dipped under 50%.  Recently, Barack Obama’s ratings also dipped below 50%.  This got me thinking about some other trivia tidbits::

  • A complex health care reform plan was under attack by William Kristol.  The “Harry and Louise” ads, funded by lobbyists aired to cast doubt on Clinton’s reform, using the catchy phrase, “they choose, we lose.”

  • Clinton, a moderate Democrat, was being pushed around by conservative Democrats in Congress.  They felt he didn’t have a mandate with 43% of the popular vote [1] and won only because Ross Perot split the Republican vote.
  • The Democrats enjoyed an 82 seat advantage in the House in 1993.  The current margin is 79 seats.  The Democrats had a 56/44 advantage in 1993.  The current advantage is  59/41.
  • The stock market was on an upswing in 1993 {DJIA}.  This year, the market has spent the year recovering and is about where it was in 2004 [2].

On the other hand::

  • Unemployment was 6.5% in December 1993, not 10.2% {Nov. 2009} [3]
  • The Gulf War {Desert Storm} was a fading memory in 1993, while in 2009 Obama is gearing up for a Afghanistan surge at a $30B/year pricetag.

Historically, in 1994 there was a Republican landslide and the GOP took over both the House and Senate {although Clinton won re-election handily in 1996}.  Will history repeat itself?  I’m not sure.  In 1994, there was a clear and concerted effort by the Republicans.  Newt Gingrich and the “Contract with America” captured the imagination of many voters.  I’m not sure the GOP can pull that off in 2010.

While the Obama Administration has faced criticism from the right, he’s also under fire from the left on the issues of the economy and the war in Afghanistan.  While the Democratic Party machine would resist this, will the current circumstances provide opportunities for left-leaning Congressional candidates a rare window of opportunity?  What about the Republicans?  Will they regroup?  What about Libertarians?  Is this an opportunity for them?

Twitterversion:: Politically in the US, it feels strangely familiar to 1993.But,it’s not. What will happen in 2010 midterms? #ThickCulture http://url.ie/3d5n  @Prof_K

In Off the Books, Sudhir Venkatesh offers us a compelling and nuanced look at the underground economy in the South Side of Chicago. His key insight is that the boundaries between the “legitimate” and “illegitimate” economy is blurred. He notes that legitimate businesses often engaged in illicit practices to supplement licit income:

Some, like Ola Sanders, are well-known proprietors whose businesses have suffered in recent years. They cannot resist the opportunity for immediate cash to supplement their legitimate earnings. So they rent out their space to a gang or another underground trader. They develop creative hustling schemes and do not report their income. They might even exchange services with each other off the books, letting barter replace taxable income altogether.

What struck me about Venkatesh’s description of the economy of the South Side neighborhood he studied was how much it mirrored my own experiences growing up in a Cuban-American enclave in Hialeah, Florida, a suburb of Miami. When compared to Blacks, Cuban Americans are often considered a “model minority,” but Venkatesh’s work could just as easily apply to my neighborhood where “hustling” was an essential part of the local economy.

This is the house I grew up in. Most of the houses on my block have “efficiency” apartments that homeowners would rent out in violation of city zoning laws. Many people in my neighborhood operated businesses out of their homes without licenses. It wasn’t unusual for people to have “free cable” or suspiciously cheap electronic goods in their homes. Nor was it unusual for people to get “arreglos” (fixes) from “gente de confianza” to get insurance companies to pay for hurricane damage that never happened or car repairs that were not caused by accidents.

Despite the fact that all this was going on, the people engaged in these exchanges were good folks who went to church, raised good children, and build a vibrant and thriving community. I appreciate Venkatesh’s perspective in describing the South Side economy he studied:

Despite the moralizing of some, we cannot truly understand the “shady” economy if we see it as a dirty, lawless world of violence and disrepute, one that tarnishes an otherwise pristine sphere where everyone pays their taxes, obeys the laws, and turns to the government to solve disputes and maintain order.

I could just be sympathizing with “my people,” but part of what I think is going on with these exchanges is not simply a lack of jobs in the inner city, but a lack of trust in the rule of law. In the example of my community, my family were Cuban exiles fleeing communism. This set of early exiles constituted an entrepreneurial class. This group, for good or ill, had strong anti-statist views. They perceive government to be corrupt and predatory. As a result, many people I’ve talked with in my old neighborhood see government as something to “get around.” At the same time, they were and are very pro-American and defend American ideals like the rule-of-law.

What do you think about underground economies. Are the things I described unethical? Are we in a position to moralize? Does any of this mirror your own experiences?