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Archive for May, 2010

As  I noted a few days ago, some nations have managed even larger budget adjustments than the one that Greece faces today.  Several commenters rightly noted, however, that this slim reed of hope becomes even slimmer when you consider other factors such as the pace of adjustment (Greece would have to cut very quickly) and its inability to devalue its currency (unless it leaves the eurozone).

Michael Cembalest of JP Morgan put together a sobering chart that highlights how severe Greece’s challenges are compared to other nations that have accomplished major budget adjustments in the past (hat tip: Paul Kedrosky at Infectious Greed):

Today Greece finds itself high on the vertical (i.e., needing a very rapid fiscal adjustment) with minimal growth prospects and no ability to devalue.

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In testimony before Congress’s Joint Economic Committee today, Treasury Assistant Secretary Alan Krueger provides further evidence that small employers have been particularly hard hit by the financial crisis and economic downturn.

Using research data from the Bureau of Labor Statistics Job Openings and Labor Turnover Survey data (known as the JOLTS data), Alan found that the pace of job openings has been rebounding at large employers (in green), but remains low at smaller employers (red and blue):

He also found important differences in the way that large and small employers reacted to the worsening of the financial crisis in September 2008:

[S]mall establishments responded by quickly laying off a large number of workers.  Mid-size establishments … and large establishments … responded by sharply cutting back on hiring in the months immediately after the crisis, and while they also increased layoffs, the increase was not as large as that seen by the small establishments. [See his testimony for the corresponding charts.]

His bottom line:

[T]he improvement in the labor market seen to date has been unevenly distributed across establishments of different sizes.  On the positive side, labor demand has generally trended up at large private sector establishments since reaching a trough in February 2008. Moreover, large establishments have apparently increased employment in five of the six months since September 2009–a possible early sign of durable job growth.  At the lower end of the size distribution, however, labor demand by small establishments has continued to be weak, with notably low rates of new hires.

P.S. For an earlier discussion of the JOLTS data, see this post.

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Treasury Secretary Tim Geithner appeared before the Senate Finance Committee today to push the Administration’s proposal for a Financial Crisis Responsibility Fee, more commonly known as the Bank Tax. The purpose of the fee is to

[M]ake sure that the direct costs of TARP are paid for by the major financial institutions, not by the taxpayer.  Assessments on these institutions will be determined by the risks they pose to the financial system.  These risks, the combination of high levels of riskier assets and less stable sources of funding, were key contributors to the financial crisis.

The fee would be applied over a period of at least ten years, and set at a level to ensure that the costs of TARP do not add to our national debt.  One year ago we estimated those costs could exceed half a trillion dollars.  However, we have been successful in repairing the financial system at a fraction of those initial estimates. The estimated impact on the deficit varies from $109 billion according to CBO to $117 billion according to the Administration.  We anticipate that our fee would raise about $90 billion over 10 years, and believe it should stay in place longer, if necessary, to ensure that the cost of TARP is fully recouped.

As noted by other participants in today’s hearing, the bank tax raises a host of questions: Is it possible to design the tax so that it is ultimately paid by major financial institutions (by which I presume Geithner means their shareholders and top management), or will it get passed through to their customers? How much, if at all, would the tax reduce bank lending? Is it fair to target the banks even though the bank part of TARP actually made money for taxpayers? Would the tax reduce risks in the financial system?

Those are all interesting questions, but today I’d like to highlight another one: Can Congress embrace the idea of a bank tax that would be used to “ensure the costs of TARP do not add to our national debt”?

As described by the Administration, the bank tax would be used to reduce the deficit, thus offsetting budget costs of TARP. Congress, however, is hungry for revenues that it can use to offset the budget costs of new legislation, e.g., extending the ever popular research-and-experimentation tax credit or limiting the upcoming increase in dividend taxes. With PAYGO now the law of the land (for many legislative proposals), some members are looking at the $90 billion of potential bank tax revenues as the answer to their PAYGO prayers.

All of which points to a looming budget battle: Will the bank tax be used to pay off the costs of TARP, as the President has proposed, or will it be used to pay for other initiatives?

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The latest Technology Review has a great information graphic showing the sources and uses of energy in the United States.

The most important take-away? That almost 45% of energy input is lost as waste heat. And, of course, that almost 85% of energy inputs come from oil, natural gas, and coal.

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Greece needs money fast. The International Monetary Fund (IMF) and members of the Euro-zone have that money. But before they lend it to Greece (at very favorable interest rates), they are demanding that Greece get its fiscal house in order.

As a result, Greece is proposing an austerity plan that would reduce its out-of-control budget deficits (currently standing at more than 13% of GDP) by at least 10-11% of GDP.

You might wonder whether that’s possible. History suggests the answer is yes, at least in principle. Indeed, several countries have achieved even larger deficit reductions.

According to an IMF study that I discussed a few months ago, the past three decades have witnessed at least nine instances in which developed nations have cut their structural deficits by at least 10% of GDP:

  1. Ireland (20%, 1978-89)
  2. Sweden (13%, 1993-2000)
  3. Finland (13%, 1993-2000)
  4. Sweden (13%, 1980-87)
  5. Denmark (12%, 1982-86)
  6. Greece (12%, 1989-95)
  7. Israel (11%, 1980-83)
  8. Belgium (11%, 1983-1998)
  9. Canada (10%, 1985-99)

This list demonstrates that large-scale budget improvements are possible. But they don’t always stick. Sweden, for example, makes two appearances in the top nine. Its gains in the 1980s were undone in the financial crisis of the early 1990s, so it had to undertake a second round of austerity. And Greece itself is a repeat offender, as its gains from the early 1990s have all been lost.

Greece faces enormous practical and political challenges in its austerity efforts, and success is hardly guaranteed. The nation can take some encouragement, however, from the fact that other nations have addressed even larger budget holes.

With some hard work and luck, perhaps Greece will join Sweden as a two-time member of the Large Deficit Reduction Club.

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