Relevant and even prescient commentary on news, politics and the economy.

The Roar of the Greasepaint, the Smell of the Crowd

There is a brilliant moment in the first season of Buffy the Vampire Slayer where Giles explains to Willow that his problem with computers is “their smell.”

She replies, roughly, “But they have no smell.”

“Exactly. And smell is one of the most important senses there is.”

Apparently, with a hat tip to The New Yorker’s Book Bench, others have decided that it’s not the scent of the book so much as the scent with the book that should matter.

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The employment report appears to report that the rate of job loss is moderating and provides encouraging evidence that the economy probably is not falling as rapidly as it has been.

But the evidence is not that clear cut. Payroll employment reported a 345,000 drop in employment, a significantly smaller loss than in previous months. Moreover, the year over year drop in the household survey continues to be weaker than the payroll report– generally a leading indicator of a bottom.

However, hours worked fell sharply and that index just matched the 1974 recession as the most severe drop in hours worked. the hours worked data is not as encouraging as the headline data.

Apr-08 107.4
May-08 106.9 -0.47
Jun-08 106.4 -0.47
Jul-08 106.2 -0.19 -0.37
Aug-08 106.4 0.19 -0.16
Sep-08 105.8 -0.56 -0.19
Oct-08 105.0 -0.76 -0.38
Nov-08 104.1 -0.86 -0.73
Dec-08 103.2 -0.86 -0.83
Jan-09 102.5 -0.68 -0.80
Feb-09 101.9 -0.59 -0.71
Mar-09 100.7 -1.18 -0.81
Apr-09 100.4 -0.30 -0.69
May-09 99.7 -0.70 -0.72

This drop in this measure of economic weakness is also moderating, but it is not showing as much improvement as the other measures.
Moreover, wages gains are continuing to slow sharply.

The combination of weak wage growth and falling hours worked means that nominal weekly wages are actually falling. With oil prices rising this implies that real wages are highly dependent on tax cuts.

When you combine the weakness in weekly earnings growth with rising oil prices it is not especially surprising that the January and February pop in real retail sales has not been repeated. Hopefully, the May jump in auto sales to 9.9 million will generate a rise in real retail sales. But the preliminary reports from retailers are not encouraging.

Correction: the originally reported increase in February real retail sales has been revised away
and I failed to notice it before I posted. Thus, January was the only month to show rising real retail sales over the last eleven months.

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Sympathy for the Car Dealers?

by Tom Bozzo

A Washington Post article suggests that car dealers may be getting a bit more sympathy than other stakeholders in the GM and Chrysler bankruptcy adventures:

The dealer complaints have resonated in a way that the objections of bondholders and others have not. Many are leaders in their local communities, where they are a source of jobs and philanthropic dollars, and they are a potential political force for disrupting the Obama administration’s effort to quickly restructure the nation’s ailing auto giants.

(It also notes that it takes in substantial advertising revenues from Jack Fitzgerald, a Washington-area dealer profiled in the article.)

As Gail Collins says in a different context, “Hell hath no fury like a middleman scorned.”

I probably shouldn’t underestimate Congress’s inclination to protect those undeserving of protection, but remember these are car salesmen, fer goodness sakes. If you wouldn’t bail Joe Carsalesman out from the jaws of the Ravenous Bugblatter Beast of Traal, then with respect to John Cardealer, keep in mind that the Cossacks work for the Czar.

While Fitzgerald suggests he’s been targeted for criticizing GM and Chrysler for weak product, it’s worth remembering that dealers have played their own role in the decline of the Domestic Three. And a central irony is that the terminated dealers’ biggest problems stem in no small part from dealer-friendly state franchise laws that among other things helped shield these dealers from certain forms of competition. More below the jump.

For instance, terminated dealers in Wisconsin are subject to state laws which prohibit them from selling “new” cars without a franchise agreement; absent an ad hoc reprieve from the state, they’d be forced to hold onto unsold inventory until the model-year turnover when they could legally sell the cars as “used.” This is a particularly pressing issue for Chrysler dealers as their termination date is June 9. Now who do you suppose would (ordinarily) want to keep non-franchisees from selling “new” cars? Pick a state and you can almost certainly find franchise laws intended to insulate car dealers from competition but which may boomerang on dealers ejected from the club.

Dealers also shoulder some of the blame for the current market’s coolness to the Detroit automakers. Those of us of an age to remember family loyalties to particular domestic makes may also remember that their automotive nadir was also a dealer-service nadir. GM, in particular, implicitly acknowledged this through the Saturn dealership model, with its customer service aspirations styled on Japanese makes and low-pressure sales approach. That must have done a pretty good job of reforming widely detested sales practices and lousy after-sales service, since it’s hard to pin Saturn’s goodwill and modest early success on its cars. (My receptiveness to “oh but early Saturns really were wonderful” arguments is tempered by 2-1/2 years of living with my wife’s late ’96 SL1, which admittedly wasn’t remotely as bad as my mother’s long-deceased ’85 Buick [the car which drove her to Hondas].)

It’s been a measure of how screwed-up GM is that Saturn now has a sensible lineup of decent cars (which could be further improved by reference to GM’s latest European models) and the closest thing to a rationalized dealer network in the GM brand family, yet seems never to had the chance afforded GM’s more damaged traditional brands that had, pre-crisis, much lower sales to boot.

We’re encouraged to feel a little sympathy for small businessmen whose lots were stuffed with cars using what sound like high-pressure sales tactics. Some of the reported sales methods sound like they’re somewhere between ‘bullshit promises‘ and mild deception. Then again, it’s car dealers on the other end of the transactions. Should they not be able to resist pitches of the “I gotta meet my quota and we’ll remember you for helping” form?

My problem with “travesty” theories of the Chrysler and GM bankruptcies is that they tend to lose sight of the basic situation that the automakers are well and truly busted, and that the next best alternative to the “travesty” is liquidation in a highly unfavorable market. There’s especially little reason to believe that New Chrysler has a future with all of its legacy franchise agreements dragged along.

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Follow up to Pro life position and good business

by cactus

Following up my post earlier this week on abortion, I was thinking about some of the comments left by readers and I decided to follow a simple thought experiment. I was thinking about what happens when parents split up and one gets custody of the kids – usually the other is required to pay some sort of child support. (Let me right from the start make clear – none of this involves me in any way. I can say, with five nines reliability, that I am not anyone’s father.)

The theory (i.e., actually, a set of starting assumptions) here is two-fold:

1. The added support is in the best interest of the children
2. Whether that parent wanted children or not (and often that itself is the cause of dispute), there was some consensual action by that parent at one time that led to the creation of the child. Hence, that parent bears some responsibility for the very existence of the child, whether that was their intention or not.

But that leads me to wonder – what if the child was born partly as a result of the, er, intervention of outside forces. For example, my understanding is that a pregnancy resulting from the chance meeting of two random strangers is more likely if alcohol is involved. Of course, beer makers should not be held responsible – after all, there is no particular reason to expect that the use of alcohol will result in pregnancy. But what about the makers of, say Viagra? Or a company that sells fertility drugs? Or a clinic that provides in vitro fertilization? Surely, each of these should expect that use of their product or service makes pregnancy more likely. In fact, for companies in the fertility business and the associated pharmacies and clinics, that’s the whole point.

If the parents of a child should be responsible for supporting that child because a) the added support is in the best interest of the child and b) the parent took actions which resulted in the birth of the child, whether intentionally or not, shouldn’t these fine companies have the same responsibility, if not more?

Now, bear in mind that the above is not my opinion of the way things should work, in large part because outside of this thought experiment I have a slightly different set of initial assumptions. However, the set of assumptions are sufficiently widely held (they were stated by readers a few times in the comments to my earlier post) that its worth looking at where those assumptions lead.
by cactus

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Told You So

Robert Waldmann

So, in the end, it turns out that the FDIC trust fund will not be raided in order to bail out banks by buying overpriced legacy loans. The FDIC retained control, and has no inclination to blow its trust fund, that is, it refused to make no recourse loans to make it possible to buy pools of mortgages at prices banks are willing to accept (that is at the make believe value that the mortgages currently have on the banks books).

I threatened to type this, and give myself no choice.

I told you so.

Many very smart* people assumed that the 85% financing by no recourse loans meant the FDIC had to write and give away a hugely valuable Geithner put. I thought so too until sammy snarked me into actually reading the plan as announced.

* Please excuse Dr Black’s extensive use of technical jargon such as “shit” and “shitpile.”

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Current Recession vs the 1980-82 Recession

By Spencer.

We are getting an interesting debate between different economic bloggers today and I thought I would put in my two cents worth.

Casey Mulligan at economix began it with an argument that the current recession is not as severe as the 1981-82 recession because that recession was really two recessions and if you combine them they were more severe than this recession.

I agree, we never really had a recovery from the 1980 recession and the second recession before the economy returned to full employment.

But that does not necessarily mean that the combined 1980-82 recession was more severe than the current recession.

To judge that one needs to look at the depth of the recession and see how much excess capacity the double 1980-82 recession created compared to the current recession. Maybe the best way to do that is to look at the GDP GAP or the gap between actual Real GDP and Potential Real GDP as this chart does. You can see how the recovery from the 1980 recession was incomplete and the economy was significantly below potential real GDP when the 1981-82 recession began. But we had something similar this cycle. The 2002 -2009 expansion was so weak that real GDP never got back to potential this cycle just as it did not in 1981. The current recession is not yet over. But if you assume that second quarter real GDP falls at a 4% annual rate it creates a GDP GAP of -8.4% as compared to -8.3% at the 1982 bottom. So even when you build into your comparison that the 1980 -82 recession was really two recession, you still come to the conclusion that the depth of this recession is about the same as the combined 1980-82 recessions. So by this standard, the current recession is just as severe as the 1980-82 recession even when you take into account that the earlier recession was a double recession.

A second way of measuring the depth of a recession is to compare how much excess industrial capacity is created and manufacturing capacity utilization does that. Again the chart shows how in both the 1981 recovery and the 2002-2008 expansions the economy failed to recover to prior peaks and entered the recessions with significant excess capacity already existing. But now manufacturing capacity utilization is at 65.7% versus 68.6% at the 1982 bottom. So again this measure shows the depth of the current recession to be greater than the combined 1980-82 recessions even though the current recession is not yet over.

Finally, we can compare the unemployment rate in the two recessions. The unemployment rate peaked at 10.8% at the end of 1982 as compared to the current rate of 8.9%. Of course the current rate is probably not the peak rate. So we will just have to wait and see how this comparison ends.

But when the depth of the current recession is evaluated in term the GDP GAP, capacity utilization and the unemployment rate it is obvious that this recession is creating as much excess capacity as the combined 1980-82 recessions did. So by these measures the argument by Casey Mulligan that the 1980-82 recession was more severe than this recession just does not stand up.

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Robert Waldmann

lifted from
Robert’s Stochastic Thoughts

From Scotusblog via Hilzoy.

In Pappas v. Giuliani, 290 F.3d 143 (2002), [judge Sotomayor] dissented from the majority’s holding that the NYPD could fire a white employee for distributing racist materials.

OK so the reverse racist Latina wasn’t quite so intollerant of white racism as the majority of the appeals court or Rudolf Giuliani. Of course it is well known that Giuliani hated the NYPD and was always trying to get them.

Why is it that the person to actually look at Sotomayor’s opinions is not a print journalist but rather blogger Tom Goldstein ?

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Made in China means quality


The blog Name Wire poses a potent question on perception of value and who builds a product:

The recent news that China has surpassed the US as the world’s second largest exporter — now making more cars than Detroit — has got me thinking about what “Made in China” means to US consumers.

Nowadays, “Made in China” on a brand name product no longer means cheap and cheerful, according to the Washington Times. Even Nokia Phones are being made in China. When it comes to fashion brands, however, “Made in Spain” and “Made in Italy” have a certain cachet, but this may be waning.

An Asian Times Online article “China’s Global Luxury Brand Workshop” notes that high end luxury brand names like Prada, Armani and Burberry are outsourcing to China.

By 2009, 60% of the world’s luxury brand names will have their products made there.

Don’t believe me? French fashion brand Louis Vuitton is putting up a factory in China this year. Prada, for its part, outsources its products to so many countries that they are considering putting “Made by Prada” on their labels.

China now makes high end trains and rail, tennis rackets, and lenses.

GE is producing wind turbine blades there and Chinese made Chery are the top selling autos in China last month, for the first time ever.

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