Paul Volcker

I’m starting to like the former Federal Reserve chairman more and more.

The Lost Generation

The Organization for Economic Co-Operation and Development sees the profound problems facing young Americans:

The current major economic downturn has brought about a significant worsening in the labour market performance of US youth. In the two years to September 2009, the employment rate of youth aged 16-24 fell by 7 percentage points to 46% and their unemployment rate rose by 7 percentage points to 18%. Despite talk that the worst of the recession may be over, there is little doubt that its labour market consequences will persist over the coming quarters.

Evidence from the aftermath of the early 2000s slowdown in the United States casts doubts on how quickly the youth labour market is likely to recover from the current deep recession. Indeed, in 2007, the labour market performance of youth still stood significantly below its 2000 level. The youth employment rate was 53% in 2007 compared with 60% in 2000; the youth unemployment rate, at 11%, was about 1 percentage point higher than its 2000 level…

In 2008, the incidence of long-term unemployment among youth in the United States was 7.1% versus an OECD average of 18.5% (Figure 1.7). This incidence increased over the past decade from 4.9% in 1998 whereas it declined for the OECD average. In particular, the incidence of long-term unemployment rose by 0.6 percentage points between 2007 and 2008 as a result of the ongoing economic crisis.

Any young person out of college and in his twenties — and perhaps even in his thirties — can tell you plenty of stories. The entire generation is generally upset, and rightly so. Here is what the OECD recommends that the U.S. government do:

• Temporarily relax unemployment benefit eligibility criteria for youths with some work experience, but apply strict job-search requirements;
• Expand existing early-childhood education programmes and provide more support for parents and children when they go to primary school;
• Extend vocational training by rolling out nationwide Career Academies, small learning establishments within high schools combining academic and technical education;
• Broaden the role of the Office of Apprenticeships to include funding responsibilities and introduce subsidies and sub minimum wages for apprentices in order to promote the use of apprenticeships in SMEs and for teenagers and at risk youths;
• Favour summer jobs programmes for at risk youths who are still at school;
• Expand the Job Corps programme for young adults and encourage teenagers to stay on the programme longer and do more vocational training.

I especially like the recommendation to increase the level of vocational training in the United States. The days when a person can earn a comfortable salary with benefits and a pension by being a cubicle-dweller are over. Those jobs can be outsourced — a plumber or auto mechanic cannot. A liberal-arts education is wonderful for a brain, but it no longer guarantees a good job. (See here, here, and here.)

The Economist’s Free Exchange blog is sympathetic, but it prescribes the wrong solution:

The broader point [of the data], I think, is that sustained, high levels of youth unemployment can lead to serious problems, including rising levels of crime, nationalism and economic populism, and lower growth potential as a generation of underemployed workers makes its way through the workforce. The cost-benefit analysis for generous assistance to young workers would seem to be pretty favourable, particularly if that assistance includes incentives to obtain more education.

The solution is not to send even more people to college — it is to help those who did go to college, took out tens of thousands of dollars in student loans, and are now close to poverty. Canceling or paying off the country’s student-loan debt would cost the government less than the various bailouts, and it would help the economy immediately by freeing up millions or billions of dollars to be spent on items like, well, homes. Two-thirds of America’s GDP is consumer spending, after all.

As Vox Day notes in a post on recent unemployment statistics:

This is also the result of the higher education bubble. I don’t remember who said it, but he was correct in pointing out that expanding higher education to the masses doesn’t mean that you won’t have sales clerks any more, it simply means that you’ll have sales clerks with PhDs.

Supply and demand. Economies of scale. I could enter any Economics 101 buzzword of choice to state what everyone should already know.

If something is not done to help younger people, the Baby Boomers will be facing intergenerational warfare. And with each passing year, their numbers dwindle even more.

American Paradoxes

When you take a step back and look at the big picture, it seems that the United States is frequently a land of paradoxes. Here are two of them.

• “The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.”

• “Americans have come to believe that spending government revenues on U.S. citizens here at home is usually a bad thing and should be viewed with suspicion, but spending billions on vast social engineering projects overseas is the hallmark of patriotism and should never be questioned.”

And, of course, these two paradoxes seemingly contradict each other while remaining accurate as well. The United States needs to get its fiscal act together if the country wants to remain a viable, economic superpower.

National Debt

This is what the Economist thinks the United States should do about its increasing government debt.

Value of Stamps

BELLEVILLE, Illinois — My father died two years ago, right about at the time that I was leaving Boston for Israel. Since I am back in the States on vacation, I have been going through the stamp collection that he left me. According to this website, here would be the values of some of my stamps, then and now, if they were still in mint condition (they are not):

• 1903 George Washington issue (scarlet-shield issue) — 2 cents — $20
• 1922 Statue of Liberty — 15 cents — $26.50
• 1931 Golden Gate Bridge — 20 cents — $16.50

I ran some quick calculations. The total return for these three stamps would be 9,900%, 17,600%, and 8,200% respectively. The average annual rates of return would be 93%, 202%, and 106% 6.7%, 6.1%, and 5.8% respectively.

This got me thinking. Since the Baby Boomers will be retiring over the next several years, they will be selling their positions in their retirement funds. As a result, the stock market might not provide its historical-average annual rate of return of ten percent anymore. So, investors, including young people, might put their money elsewhere — especially after society was spooked once again by the 50% decline in the stock market at the height of the financial crisis recently.

With these prospective rates of return on something as simple as stamp collecting, it is possible that people will eventually treat them as stable investments like bonds that are nearly guaranteed to increase in value (albeit at a low rate) each year as opposed to risky investments in stocks. why do people still purchase stocks? Still, I write this with the standard caveat — nothing, not gold or anything else, has any intrinsic value. Everything is worth only what someone will pay for it. If no one, for some reason, would want to pay for historic stamps anymore in the future, then such an investment would be worthless.

But, now, I am curious. I’m going to look up my old baseball cards and research their rates of return.

Correction: The earlier percentages listed were incorrect because I had miscalculated them. This is why I became a writer and first went into journalism.

Another correction: Thanks to commenter Mike for reminding me about the difference between simple and compound interest.

The Economic Future

Every American should watch this thirty-minute, non-partisan documentary on the financial apocalypse towards which the United States is heading.

Related: Why My Generation is Pissed Off and The Upcoming Generational War

Economic Future

Is the primary threat to the U.S. economy inflation or deflation? Check out the presentation in this blog post. The author believes it is the latter.

Israeli Start-Ups

RISHON LEZION, Israel — While discussing the new book “Start-Up Nation,” Rabbi Shmuley Boteach addresses why Israel is more economically viable in the long-term than oil-rich Arab countries:

Sidestepping the usual discussion of Israel as an embattled nation, [the book] focuses instead on the invincible ingenuity of the Israeli people, and their vast technological contribution to the global economy…

…as Start-Up Nation makes clear, Israel today is one of the most highly educated and technologically advanced nations on Earth, with one of the planet’s fastest-growing economies.

The time has come for world Jewry to see Israel as the place where the limitless potential of the Jewish people is finally being made manifest. All we needed was for people to get out of our way, and just look at how we thrive. And we prosper not as a self-absorbed nation but as a people who make vast contributions to all of mankind…

Many a Jew has wondered aloud why the Arabs got all the oil and Israel got none. What could God have been thinking in making despots and dictators like the Saudis and Libya’s Muammar Gaddafi so insanely rich, while Israel has to struggle for every shekel it earns?

Only now to do we see the truth. Oil is the greatest curse ever to befall the Arabs.

By simply digging a hole and having money flow from the ground, the Arab states had little incentive to build universities or a hi-tech industry. And when the day comes – and it will – when the world finally finds an alternative energy source, these despotic regimes will collapse, returning to the sand from which they arose.

This isn’t rocket science. All of us know at least one rich friend whose kids don’t have to work, and who consequently became indolent. Israel has had to struggle for everything it has. No country has ever been more unjustly reviled or more continuously attacked.

Conversely, no country better inspires the world to ponder the infinite capacity of humans to rise from the ashes of despair and build a shining state on a hill.

While Rabbi Boteach is correct on a macroeconomic level, the high-tech industry on a societal level here is more complicated than he knows. There are indeed positive aspects, but there are also negative ones.

In the twentieth century, the American economy generally had stable, long-term growth because of the existence of large, national, and global companies whose purpose was to generate long-term profits and jobs by providing new products and services over time. But, as I have noticed in the several Israeli  companies where I have worked, the nature of start-ups is inherently different.

When I was working as a marketing manager, I overheard a conversation between a new hire and the chairman of the board. The chairman told the coworker that the exit strategy was to sell the company’s innovation to Google as soon as possible. The coworker rightly asked, “So, what will happen to me? Will I be out of a job?” The board chairman laughed, gave a dismissive answer, and changed the subject. (By the way, our contracts specifically stated that employees would receive no money from any sale of the company.)

As Shlomo Maital, a business columnist for The Jerusalem Report, asks in a recent interview with several Israeli business analysts (the article is not available online):

Israel’s business model was based on selling its brains, as start-ups, at inflated prices. These baby companies were “adopted” and their knowhow shipped overseas, before they could mature and create well-paying jobs and incomes for middle-class Israelis. Why has Israel failed to grow global companies in the past 10-15 years?

The interviewees responded by saying that the government needs to invest more in areas including alternative energy. But the major problem is that Israelis are a people with no patience for anything — including work life. The idea behind start-ups is not to build companies that will exist for the long-term but for the owners to get rich as quickly as possible. A classmate from my M.B.A. program once told me a story: A start-up CEO was told by a venture capitalist that the company could get $100 million if it offered an IPO the following month but that the firm could get $500 million if it waited for one year. The CEO, of course, chose the first option.

Another company for whom I worked would routinely fire employees just before three months or one year had elapsed to avoid salary increases or severance pay as mandated by our contracts and Israeli law. The stated reason for each firing, of course, was something false related to work performance. Start-ups frequently have little cash, and their existence depends on receiving future investment. So, in response, they must watch every single cost.

Smaller companies have many advantages over large ones including the ability to be quick and nimble rather than slow and bureaucratic, but they are generally more chaotic. Positions, job descriptions, and even the number of employees can change on a day-to-day basis. A long-term, stable career does not exist in this environment, especially when the owners and upper management have no patience and constantly worry about costs.

Israel has the fourth-highest level of income disparity — also known as the gap between the rich and the poor — in the world. It is not hard to understand the cause. Israel’s high-tech culture creates a few multi-millionaires whose only resulting contribution to the local economy is their increased consumer spending. Their companies and technologies are sold to Western countries, who then receive the later economic benefits. Lower-level employees move from start-up to start-up when one is either sold or bankrupt, rarely moving into upper management and receiving high salaries because the owners typically hold those positions on a day-to-day basis as well. Most other Israelis — those who are less educated or members of minority communities like Israeli Arabs — work in low-paying jobs in the blue-collar, service, or tourism industries.

Rabbi Boteach correctly notes that Israeli start-ups do benefit the world and provide the country with good branding, but Israeli society in general does not always see the benefits.

Elsewhere: The Freakonomics blog interviews the authors of “Start-Up Nation.”

The Dollar

While the U.S. dollar has been declining, the Economist thinks it is unlikely to collapse.

Another Crash?

This chart scares the crap out of me.

Angry Young Men

Thomas Friedman is starting to understand why my generation is so upset:

I am a 56-year-old baby boomer, and looking around today it’s very clear that my generation had it easy: We grew up in the shadow of just one bomb — the nuclear bomb…

But there are now two other bombs our children have hanging over them: the debt bomb and the climate bomb.

It doesn’t just end there. Yes, the primary, macroeconomic reason for the financial crisis, at least in the United States, is that consumers and the government have been going into debt to live beyond their means for the past thirty years. But there are many other social, political, and economic reasons why young Americans today are so, to be blunt, pissed off. A pessimist might say that the United States might be heading towards intergenerational warfare against the Baby Boomers in the near future.

Dollar’s Demise

The U.S. dollar might be in serious trouble.

Update: The story might have been fake.

Peter and Paul

I have yet to read the details, but does it strike anyone else as strange that the government is loaning money to banks and then banks are doing the reverse? It’s like a financial merry-go-round. Perhaps the money must keep moving for the economy to remain stable.

Rosh Hashanah 2009/5770

RISHON LEZION, Israel — Benji Lovitt of the humorous blog “What War Zone?” takes a trip through the streets of Tel Aviv to interview Israelis on what they think of the Jewish New Year.

But do not be misled by the lightness of Lovitt’s video. As Israelis and Jews move into the year 5770, they are increasingly frustrated and anxious over recent events. Here are some headlines from just this past weekend:

• Iran reportedly has the ability to produce a nuclear bomb and is on the way to making a missile system that could deliver it.
• The Israeli government urgently warned Israelis in India that Islamic extremists are planning additional attacks there soon.
• Britain’s Trade Union Congress is calling for a boycott of Israeli goods.
• Iran is increasing its control over Hizbollah, the Islamist group in southern Lebanon.
• The Jerusalem Post remembers Capt. Assaf Ramon, who died recently in a military plane crash. His father was the first Israeli astronaut, and he died in the Columbia space shuttle explosion.
• IDF Brigadier General Avichai Mandelblit talks to the Post about defending Israel from international, legal criticism of the military’s conduct during the recent war in Gaza. The United States has said that a UN report on the issue was “unbalanced.”
• A United Nations conference condemned Israel’s atomic program.
• Jewish celebrities including Natalie Portman, Sacha Baron Cohen, Lisa Kudrow and Jerry Seinfeld are defending the Toronto Film Festival’s decision to spotlight Tel Aviv.
• There is still rioting in Jerusalem over the opening of a parking lot on the Sabbath.

But not all of the news is bad. (Besides, many Jews at Rosh Hashanah dinners over the holiday likely told the centuries-old joke with a shrug: “They tried to kill us, we won, let’s eat!”) Here is a collection of optimistic, inspiring, or light-hearted tidbits from the weekend papers.

• Israel and the United States are working together to prepare for “every possible scenario.”
• Amotz Asa-El commends Bank of Israeli Governor Stanley Fischer for saving Israeli from the worst of the worldwide recession and making the country one of the first to bounce back.

• The Jerusalem Post profiles twelve young Israelis for their contributions in areas ranging from the arts to sports to government to music.

• Herb Keinon interviews soldiers like Isabella Fhima, a 21-year-old, Moroccan Jew, who came to Israel by herself to join the army because she believes in the country. I know many lone soliders from all over the world, and each one deserves a feature in a national newspaper.

As for me, I’ve been listening to a recent pop song by the Israeli artist Sarit Hadad (in English) to get away from the headlines:

Although I generally hate pop music, I have to admit that this song is infectious and sunny. As non-Hebrew speakers can probably understand the video, the words are about running away from life’s stress for a short while and running to the beach. The summer is on its way out here, so we only have a few weeks left to do that.

Rule of International Law

The White House is proposing global measures (update here) to prevent another economic catastrophe like the one the world is experiencing:

President Barack Obama said tougher financial regulations are needed worldwide to protect consumers, provide economic stability and prevent future crises.

With the leaders from the Group of 20 nations set to meet next week in Pittsburgh, Obama said in his weekly address on the radio and Internet that international cooperation has “stopped our economic freefall.”

“We know we still have a lot to do, in conjunction with nations around the world, to strengthen the rules governing financial markets and ensure that we never again find ourselves in the precarious situation we found ourselves in just one year ago,” Obama said.

It is unclear whether Obama is proposing that all countries be encouraged to implement a similar set of financial regulations or whether some international authority be established since finance now operates in a globalized world. For the sake of argument, I will assume the latter.

In 1832, the state of Georgia ignored a ruling by the U.S. Supreme Court. In response, President Andrew Jackson, who agreed with Georgia, is said to have remarked, “[Chief Justice] John Marshall has made his decision; now let him enforce it!” This comment epitomizes the difficulty of enforcing legal rulings generally and international law specifically.

As Wikipedia correctly notes, “the Supreme Court cannot directly enforce its rulings; instead, it relies on respect for the Constitution and for the law for adherence to its judgments.” The same is true for international law and global regulations. Here is a not-so-secret reality of international relations: All countries cite international law when it benefits them, and they ignore it when it does not. Here is just one example: President George W. Bush cited Iraq’s violation of U.N. resolutions as a justification for war, but the United States essentially ignores the International Court of Justice as well. Every country acts in a similar way.

Although global internationalists would never admit this publicly, the very idea of international law in the current global community is ludicrous. The rule of law — domestic or international — depends on three things: 1.) The consent of the governed; 2.) A respect for the rule of law; and 3.) The means to enforce legal rulings. The United Nations — and all international bodies, for that matter — is ignored as often as it is followed, and the organization has no independent ability to enforce its rulings other than countries taking it upon themselves, like the United States against Iraq, to do so as they see fit.

So, in light of Obama’s comments, I wonder how a global, regulatory environment in finance could work in such a legal context. In a globalized world in which countries have less and less power over their economic affairs and policies, there needs to be some international standardization and cooperation. But, realistically speaking, how can this occur?

Another Housing Bust

It’s not over yet: Now, option ARM mortgages are going to reset across the United States next year.

Another Recession?

In an earlier post, I predicted that the U.S. recession is approaching — or has already passed — its nadir. Here and here are counter-arguments.

Debtors’ Revolt

In the words of the Consumerist article, “run people’s interest rates up to over 25% and eventually one of them is going to snap.”

Consumer Spending

The Economist notes that U.S. consumers are still saving more and spending less:

BEHOLD the American consumer: worn out. Income and consumption data for the month of July was released this morning, and any naif still expecting personal consumption to lead the way out of the recession will again be disappointed.

After rising just 0.1% in June, real personal consumption expenditures increased by 0.2% in July. Increases in spending on durable goods led the way in both months. According to the Department of Commerce all of the July increase in durable goods expenditures and most of the June increase can be attributed to sales of motor vehicles. July data was, of course, boosted by the government’s cash for clunkers programme.

But the most important comment is at the bottom:

Until the American economy finds something other than domestic consumption to drive its engine, recovery will be excrutiatingly slow.

As I wrote in a prior essay, an economy that is seventy-percent dependent upon people buying stuff is based on a flimsy foundation. But what could replace the two-thirds of GDP that is currently consumer spending?

One Decade, $9 Trillion

Paul Krugman thinks the projected deficits over the next ten years are not as bad as you might believe.

Men Living at Home

RISHON LEZION, Israel — One-third of British men under forty are reportedly living with parents:

Cost was the main factor for 59 per cent of them, but 57 per cent of women and 16 per cent of men also admitted that they liked being looked after by mum. Another 11 per cent of men said they would miss their parents too much if they left.

A lucky 56 per cent of adults who live at home get their meals cooked for them, while 55 per cent admitted that mum still does their washing.

Eighteen per cent even had their packed lunch made for them every morning.

With such pampering, many have no intention of leaving any time soon.

Nineteen per cent said they would stay until they became fed up with their parents and another 30 per cent intended to stay at home until they wanted to move in with a boyfriend or girlfriend.

One of the differences I have noticed between Israel and the United States is the attitude that people have towards living with families. Israel is a more-traditional country that places a great emphasis on family, but America has always been an individualistic country whose society has always encouraged people to leave home early and make something of themselves. In Israel, living with parents is common; in the United States, it is a sign of failure.

Nearly every twentysomething person I know — male or female — in here lives with his or her parents. The reasons are numerous. Wages are typically lower here. Minimum wage for a full-time job is the equivalent of $5.50 an hour, and even educated, non-management workers in the high-tech industry earn the equivalent of $2,000 a month before taxes. These lower wages come with higher taxes than in the United States to fund the country’s universal health-care system, and big-ticket items such as rent, electronics, and clothing can cost as much in in America as well.

In addition, those Israelis who do go to college take longer to finish their degrees. Nearly everyone serves in the military after high school until the age of twenty (for women) and twenty-one (for men). Then most people spend a year or more traveling throughout the world before settling down back in Israel. So they start college at twenty-two or later. Moreover, most Israelis study part-time while working full-time. Unlike Americans, Israelis do not want to take on student-loan debt — so they pay for it themselves through working and living at home. As a result of all these reasons, young people do not live on their own.

It is very likely that this phenomenon will spread to the Western world, at least for men, as well. First of all, more men then women are suffering as a result of the ongoing economic turmoil. Fields such as education, health-care, non-profit, and government — those that tend to attract women — are not as affected by the financial collapse as the fields of manufacturing, finance, and business — those that tend to attract men. Fewer men are going to college as well.

Although the reason for this societal change is negative, I think the end result might be beneficial for the West. Much of the problems that plague modern, American society stem from extreme individualism. More men and women are choosing to live a single life of purported fun rather than get married. Men are choosing to live in a “Guyland” of immature hedonism rather than act responsibly. Part of the reason for the economic turmoil is the selfish desire of finance managers to earn as much obscene profit as possible regardless of the risk to their firms and society as a whole. Middle-aged Americans put their parents in nursing homes rather than take care of them as people throughout the non-Western world do. In an extreme example, customers at an Indiana convenience store ignored a clerk who had been shot in a robbery and continued to shop rather than help him.

In such an environment, the United States should welcome a return to family and closeness rather than individual success at any cost.

Credit Bubble

Citigroup is unilaterally increasing the interest rates for millions of users of their credit cards. Good luck with that. The credit bubble will be the next — and the largest — one to burst, and corporate decisions like this are only making it worse.

There is little to stop millions of U.S. credit card users from simply walking away from their credit card payments, especially if the interest is increased for no reason — because the debt is unsecured. The only possible threat is that their credit histories will be harmed as a result of the bankruptcy — but how negative is that really if everyone in America has a bad credit score as a result of unemployment and other factors relating to the economic crisis?

A person’s credit score is meaningless by itself unless it is viewed in the context of the general population.

Debt Burden

This graphic is both the most mezmerizing and the most frightening I have ever seen.

Lehman Brothers

Want to understand how one of the world’s largest financial firms went bankrupt seemingly overnight? Read this concise story. Bonus: it’s written by a student who started undergraduate studies at Oxford University when he was fifteen!

Consumer Debt

The Harvard Business Review looks at how much the U.S. economy depends on consumers going into debt:

A furniture company offers 0% financing and no payments for a year. Consumers gladly take this free credit. Sales skyrocket. Buoyed by rising revenues, the company takes out a loan and opens a second store, expecting to pay its employees, its suppliers, and its bank with future revenues.

Unfortunately, this isn’t the only financing the company’s current and potential customers are using. Rather than paying off their credit card bills every month, more and more people are leaving balances, and those balances are growing larger. People are taking out 72-month loans to finance their new cars; they’re just starting to make payments on the home appliances they bought 12 months ago with those other buy-now-pay-later deals. They’re tapping into home-equity lines of credit to go on vacation.

More and more of their disposable income is going to pay off their debts. New purchasing slows abruptly. Some people start defaulting on their cards altogether, turning past purchases into present bad debt.

Sales slow dramatically at the furniture store, and it closes the second store, laying off workers. This has an impact on not just the retailer but also its suppliers and its financers, some of whom don’t survive. Other companies that do business with those unfortunate suppliers and former employees find their operations affected as well.

Scale up this scenario even a little bit, and it starts to be clear that the degree to which consumers have come to depend on easy, inexpensive credit is a far bigger threat to the economy than most people realize. Few companies are immune to the risks. Consumers are using record levels of debt to purchase goods and services, leaving the corporations selling to them greatly exposed, sometimes fatally.

Anya Kamenetz looks at the big picture:

So the average American household OWES 20% of their assets, 28% of their net worth, and 130% of what they earn in an average year. That includes mortgages, student loans, auto loans, and credit card debt–everything.

This bubble–everything but mortgages– actually has yet to pop, and when it does, all kinds of businesses will be affected…

People are furiously trying to get out from under this debt. Savings rates have bounced from -0.5% to almost 6% in scarcely a year. Until they pay it off, the US economy can’t recover. And after they pay it off, it’s hard to see how we can go back to the spending rates the economy depended on before.

One of the main reasons that I am pessimistic about the future of the U.S. economy is that it has been dependent upon people going into debt to buy stuff — after all, roughly two-thirds of GDP is comprised of consumer spending. Now, people can no longer afford to make unnecessary purchases — and, if and when the economy recovers, the memories of this present fiscal mess might scar Americans and turn them from spenders into savers.

So, the core question is: How can the United States successfully change its entire economy from one based on consumer spending to one based on something else? And what could that be?