The Government Kills a Bank, Small Business, and Jobs

In my introductory economics classes, I teach that a well-run bank spends its time getting to know it customers and then makes loans to those who are credit worthy. I point out that the most important employees of banks are its loan officers, whose job it is to know its customers.

With creation of the mega-bank, much of this wisdom has been lost. Mega banks lend money to customers they do not know. They buy syndicated mortgage derivatives they do not understand, and they are surprised when they are left holding the bag with worthless paper. Once bitten, they fear making loans and sit on he cash reserves.

Main Street Bank of Kingwood Texas, was one of the traditional banks I teach about in my class. It got to know its local customers. It made loans primarily to small local businesses – the very ones who provide jobs for the local community. Man Street Bank was profitable, and its portfolio of bad loans was well below the national average.

Enter the federal regulators.  In July of 2010, Federal regulators ordered the bank to boost its capital and bring in a new top executive. More tellingly, it ordered the bank to shrink its lending to small businesses. It ordered that small business loans be dropped from 90 percent to 25 percent – there were too many eggs in one basket.

On Wednesday August 10, Main Street Bank surrendered its bank charter and sold its four branches. We lost a bank that was doing exactly what the economy needs – a  bank that actually makes loans to small business customers whom it knows well.

This intrusive regulation is part of the federal program to identify excessive risk and prevent bank meltdowns. As you can see, the Feds are using a one-size-fits-all approach. Regulation of this type is scheduled to get even worse with the looming Dobb-Frank Act.

Do we wonder why there is so little lending and so few jobs? Do we really need Washington bureaucrats telling small banks how to run their business? Do we really think that a Washington bureaucrat can foresee risks that private companies that are risking their own money cannot see?

What Jobs Program, Mr. President?

President Obama took advantage of the signing of the debt limit increase to “pivot” to jobs.

He proposed that Congress pass the following jobs program:

1)      Extend unemployment insurance

2)      Enact a payroll tax credit for employees

3)      Overhaul patents

4)      Approve free trade deals

5)      Create an infrastructure funding bank

In his remarks, the President rebuked Congress: “It should not take the risk of economic catastrophe to get folks in this town to work together and do their jobs.”

The problem is that, other than approving free trade deals, the President’s job programs will not create any jobs.

Extending unemployment benefits subsidizes unemployment and keeps the unemployment rate high.

A temporary payroll tax credit does not alter firms’ hiring decisions because they know the credit cannot last long. (PS. Economists know that it does not matter who pays the tax – the employer or employee, but having the employee payment credit makes for better politics.)

The overhaul of patents may be a good idea, but its effect will not be felt for a very long period of time.

The approval of free trade deal will raise employment but this will not happen because of Democrat lobbying for too generous adjustment benefits for displaced workers.

The infrastructure bank would be a new Fannie Mae financial disaster set up to fund boondoggles for political cronies. It would establish yet another “independent” corporation with implicit guarantees of government bailout. Ten years down the road we must face the huge cost of bailing out Obama’s infrastructure bank.

In my view, this is not an employment program, Mr. President. Congress should ignore it. We'd be better off if the President pivots to something else where he can do little harm.

A “Serious” Jobs Program: Germany’s Haartz IV (Will Obama Repeat the Elder Bush’s Mistake?)

I am taken aback, to say the least, that I have yet to see a “serious” jobs program offered for our widely proclaimed “jobs crisis.”  We hear mainly Keynesian rhetoric and the wrong policy proposals: Keynesians warn we must increase aggregate demand so that there are more jobs to make the products in greater demand. Also we must continue unemployment insurance to bolster aggregate demand, and, by the way, the unemployed spend every penny, so we get a larger multiplier. On the other side, we get good advice: Economic growth creates jobs; so we must craft a pro-growth fiscal policy which in the long run will create jobs. This position is correct but it offers long-term rather than short term solutions.

Economics 101 texts provide an alternate view of unemployment that has been  overlooked in the current debate. It began with the natural rate of unemployment work of Milton Friedman and Edmund Phelps. They suggested we consider employment and unemployment as yet another of our economic decisions. In the job market, we have people looking for jobs (even those currently employed look for better jobs) and we have jobs being offered. The labor market matches people to jobs via a search process in which employers and job searchers do not have perfect information.

How quickly people find jobs depends on costs and benefits, just like any other economic decision. A longer search might land me a better job than the choices I have right now.  If my spouse is working, the costs of continuing to search are lower. If I have generous unemployment benefits, the costs of remaining unemployed are lower.

This brings me to unemployment benefits and unemployment. In the current debate, the extension of unemployment benefits is perversely presented as a “pro jobs” program. In reality, it is an anti-jobs program. Empirical studies have shown that the unemployed are most likely to accept jobs on the eve of the expiration of unemployment benefits. If policy makers want the unemployment rate to drop, they should not extend unemployment benefits.

A case in point is Germany after 2005, when Germany began to reduce benefits associated with the state of unemployment. In Germany, the unemployment rate fell from 11 percent to slightly over six percent, while unemployment rates were rising elsewhere.

In Germany, the so-called Haartz IV program that was passed in  2004 called for the reduction of unemployment benefits for the long-term unemployed for whom unemployment benefits and “social help” had become an entitlement. Since 2004, unemployment benefits have fallen gradually and new types of jobs have been created that lower the costs of employment to German employers. In 2011, additional adjustments to Haartz IV were made to ensure that people who worked earned more than those who did not. The Haartz IV legislation was passed despite fierce opposition from the SPD, but it is largely credited for the new German miracle – a growing economy located in the heart of Europe with falling unemployment during an anemic world economic recovery.

The U.S. is about to begin its own Haartz IV experiment. Extended unemployment benefits are set to expire, earlier in some states than others. We can therefore capture the effects of expiring unemployment benefits at different times and in different places.  If the search theory of unemployment is correct, we should see a falling unemployment rate first in those states in which unemployment benefits expire first.

The Haartz IV program in Germany also de facto reduced minimum wages. It introduced different types of jobs, one of them called “mini jobs,” that, in effect, set aside minimum wage standards. Employers were encouraged to hire by the offer of low-wage employees.

Currently, the majority of forecasters foresee a high rate of unemployment rate in the United States on Election Day. If the administration wishes to see it lower, they can do two things: First, make sure that unemployment benefit eligibility is not further extended. Second, they must lower the minimum wage, especially for youths.

The unemployment rate measures whether people have jobs or not. It does not measure the quality of jobs. In Germany, the main reason for the falling unemployment rate is the fact that people, who earlier would not have taken jobs below their expectations, now do. The same will be true for the United States. All we will see will be a falling unemployment rate.

George H.W. Bush was bullied by Congress into extending unemployment benefits in the run up to his reelection campaign against Bill Clinton. Although the unemployment rate was dropping on election day, it was still too high. It gave Clinton the opening to claim, almost comically,  “the worst economy since the Great Depression.”

Obama Didn’t Save Union Jobs, He Saved Union Pay

Contrary to popular belief, bankruptcy does not mean companies close their doors and send employees home. This is the false message President Barack Obama tried to sell on his victory tour of Detroit. If General Motors had gone through a normal bankruptcy without taxpayer bailouts, there would still be GM jobs–maybe even more than there are now. We do not know because that was the road not taken.

We do know, however, what happened to the airlines that went through bankruptcy. Their planes kept flying, and pilots, mechanics and flight attendants reported to work, even if there were fewer of them.
Over the past decade, no industry has had worse breaks than the airlines. They took a huge hit from 9/11. They have been buffeted by fuel prices. The TSA’s intrusive airport screening angered passengers. Furthermore, the airline industry is cyclical; it suffers disproportionately from economic downturns.

Compared to the airlines, GM has had a cake walk.
Continue reading Paul Gregory at Forbes.com…

The President’s Waste-of-Time Jobs Council

It took GE’s Jeff Immelt and Amex’s Ken Chenault and their “26 private sector leaders and people standing up for the rights of workers” 90 days to issue five “fast-action” recommendations to create “more than one million jobs.” (WSJ, June 13 “How We're Meeting the Job Creation Challenge”).

The Presidents Jobs Council’s recommendations are either:

1) Obvious (better education and training), or

2) Require more government spending (more SBA loans, more infrastructure spending), or

3) Make money for GE (install energy saving devices in buildings) or for Amex (issue more tourist visas), or

4) Call upon federal, state, and local licensers to do their jobs expeditiously as they are supposed to do anyway.

The Jobs Council will issue longer-term recommendations later. I lose all optimism, when I read that “government, business and labor (read: crony capitalists and big labor) need to work together to get this done.”

I do not need 90 days and millions of government money to give you my “Jobs Council” recommendations:

1) Reduce energy costs by halting the EPA’s attack on coal and drop regulations that require renewable energy to produce electricity. These measures lower the costs of doing business and encourage hiring.

2) Limit the duration of unemployment insurance. Unemployment insurance cannot be a permanent entitlement. Empirical studies show unemployed persons exit unemployment near the end of their benefits.

3) Withdraw the NLRB’s ruling against Boeing’s new plant in South Carolina. The federal government and its regulators cannot be seen as blatantly anti-business. We cannot have an economy in which the government interferes in key investment decisions.

4) Allow for increased mobility of occupational licenses across state borders by attacking special-interest protection of licensed occupations. Increased mobility lowers unemployment.

5) Drop all attempts to prop up underwater mortgages and let the housing market clear as quickly as possible. Phase out Fannie Mae and Freddie Mac. Housing will not expand until the industry reaches an equilibrium.

6) Have a bi-partisan agreement that reduces government spending and debt now, not in the distant future. The lack of agreement creates too much uncertainty about future taxes.

7) Provide businesses certainty as to their current and future tax liabilities. No business will hire without knowing its bottom line after taxes. Keep marginal tax rates low.

8) Adopt a bi-partisan solution of the unfunded liabilities of Social Security and Medicare starting now, not in the distant future.

9) Reform the education system to teach everyone basic skills of reading, writing, and math. With these skills, people can acquire the specific skills business needs.

10) Put teeth in the requirement that all regulations must produce benefits in excess of costs with realistic estimates of both.

11) Repeal Obama Care to give employers certainty as to their true employee costs. Let employers compete for workers by offering better health insurance and employees choose among employers for health insurance benefits.

12) Follow the dictum of Franklyn Delano Roosevelt and prohibit collective bargaining for public employees. The public is the "boss" of public sector workers not greedy capitalists.

13) Ratify outstanding free trade agreements. Expansions of trade lead to job expansion.

I guarantee that my jobs program will actually create jobs and economic growth. I imagine most honest economists would agree with me.

Neither political party, however, has the will or gumption to enact it.

NYT’s Expose: But GE Is Doing Exactly What is Expected of Them (Subtitle: Jeffrey Immelt is James Taggart in Ayn Rand’s Atlas Shrugged opening on April 15)

President Obama’s appointment of GE CEO Jeffrey Immelt as his job czar signaled his “move to the center.” The pro-business President declared a “government-business partnership” to create jobs, green technology, and other good things. Now a NYT investigation reports that GE paid no U.S. taxes, aggressively lobbied Congress for subsidies and sweetheart deals, and spends millions (billions?) to minimize its tax bill. The NYT was shocked, as was Claude Rains in Casablanca, to find such skullduggery, from GE, no less. The NYT concludes that one of the most striking advantages of GE is not its jet engines and washing machines but “its ability to lobby for, win and take advantage of tax breaks.”

Written to buttress the case against reductions in the corporate tax rate, the NYT investigation unwittingly strikes a deeper vein --- that GE is faithfully pursuing Obama’s vision of, what is called in other countries, crony capitalism. Under this philosophy, “crony corporations” should follow where government incentives lead them. If Obama wants green jobs, they will build windmills, with healthy subsidies of course. If the government wants more lending, crony corporations will lend with a bailout if the loans go bad. A “green car” should be no problem. The government will pick up most of the price tag for leery consumers. Insofar as crony corporations, like GE, can “negotiate” their tax bill with Congress, they are a ready source of campaign contributions or other perquisites.

Such crony capitalism changes the normal rules of economics. Those who play the “business-government partnership game” better than others win. Those who do not play well lose, even if they are superior entrepreneurs or innovators.

From an economic perspective, it is not even clear that GE is a real “winner.” In pursuing subsidies and tax advantages, GE engages in activities that yield lower returns than other alternatives. The government payoff compensates them for making otherwise unwise economic decisions. The GEs of the world also have to waste enormous resources on the lobbying game.

If we factor in all these economic costs and losses, GE may have been better off not playing the crony capitalism game after all. The public, surely, is made worse off by the misallocation of resources and other economic losses.

The NYT’s disclosures, coupled with Obama’s appointment of Immelt, are an embarrassment, but they offer a rare backroom glimpse of crony capitalism in action. Our crony capitalism takes place, respectably and legally, in board rooms, in congressional and executive offices, or “on bended knee” before Charles Rangel. In other less civilized countries, it takes the form of shakedowns, threats of violence, and arbitrary prosecutions, but the game is played with the same results. In Russia, it is called State-Mafia capitalism. In the U.S., it is corporate welfare.