The New Economy
For weeks now, debate has raged over a mystery that only an economist could love: Why is the number of jobs growing faster than what the underlying growth of the economy would seem to justify?
Is the economy really growing faster than the numbers show? Or has the relationship between growth and employment changed? Or is the jobs number skewed?
On Friday, economists got the first piece of the answer. The Labor Department released a disappointing employment report, saying the US economy created 120,000 new nonfarm jobs in March, only half the total added in February and the smallest jobs gain since October. The argument that the economy is growing faster than the data show fell like a thud.
So, assuming that the relationship between economic growth and employment remains intact, the best explanation for the mystery is that the jobs number is out of whack.
The reason, many economists speculate, is that firms panicked during the recession and fired too many people. So when the recovery began, they had to hire more than the usual contingent of workers just to catch up with the growing demand. Fed Chairman Ben Bernanke himself championed the catch-up theory in a speech last month.
Another explanation for the better-than-expected job numbers from the winter is the weather theory. It suggests that everything from retail sales to construction was boosted because of the unusually warm winter enjoyed by much of the nation.
The challenge with both the catch-up and weather theories was that, at some point, there would have to be a payback. Exaggerated hiring under catch-up would level off once firms caught up with demand. Retail sales and hiring boosted in warm January and February would slow more than expected come spring.
So, it could be argued that the March employment report is the payback that many were expecting. The more pessimistic scenario is that spring 2012 will be a replay of the past two years, when an early rally and strong job gains gave way to spring and summer doldrums.
It's too early to predict which scenario is correct. A single month's data doesn't make a trend and, anyway, the Labor Department routinely revises its job numbers, sometimes substantially.
What does seem clear is that the job increases of January and February were probably a little overstated.
"Our read is that March is understating the underlying improvement in the labor market, while January and February overstated it," Nigel Gault, an economist at IHS Global Insight in Lexington, Mass., writes in an analysis.
Other recent economic data has come in slightly weaker than expected, but many economists – even skeptics of a bullish recovery – still see job growth ahead.
"Admittedly, the payback [in the employment report] is a little bigger than we had expected," writes Paul Ashworth
a Toronto-based economist with Capital Economics, in an analysis. "But we don't think this is the start of another spring dip in labour market conditions, as we saw in 2010 and 2011. Even factoring in the March disappointment, the three-month average gain is still 212,000 and we expect employment to continue rising at about that pace over the next few months."
That view is bolstered by other employment data, including the ADP employment report (which estimated a 209,000 rise in private-sector jobs in March), the Labor Department's weekly reports on first-time unemployment claims, and job-cut analysis from outplacement firm Challenger, Gray & Christmas, based in Chicago.
"Hiring demand continues to be strong," says Jim John, chief operating officer of Beyond.com, an online career network based in King of Prussia, Pa., for employers and job-seekers. He says job ads posted on his website in January (which would typically be filled in March) also suggested a slowdown in hiring after a very strong December. Since then, job postings have picked up again, rising 32 percent from February to March, which would suggest strong hiring in May.
Managers remain cautious and appear ready to restrain hiring at the first hint of a weakening economy, he warns. If Friday's employment report convinces them that the economy is slowing, "it could become a self-fulfilling prophecy."
So far, though, the March job numbers are just a partial answer to a mystery, which like most economic mysteries, raises new questions.
Employment grew at a disappointing rate in March, adding some 80,000 jobs fewer than what a consensus of economists had expected.
At least it was growth – 120,000 new jobs – and a tick down in the unemployment rate. But the recovery has left behind one important if less vocal class of worker: teenagers. Economists and advocates across the political spectrum are using words like “sobering” and “crisis” to describe historic levels of teen unemployment.
Last month, one quarter of young Americans age 16 to 19 was out of work. That's the highest rate in more than a year and, except for a run of more than a dozen months immediately after the Great Recession, the highest on record going back to 1948. Government and private groups are working on solutions. But with summer less than two months away, the numbers cast a dark shadow over the summer job prospects of US teenagers.
“Young people got beat up really bad in the last decade,” said Andrew Sum, director of the Center for Labor Market Studies at Northeastern University in Boston. “People say, 'Well, things are recovering,' but young people have not gotten one new job in the last two years. Fewer kids are working today then were two years ago.”
The persistence of the problem extends nationwide, although there is a large disparity among states and cities, with low-income urban areas and minorities the hardest hit. In March, the unemployment rate for Hispanics in the 16 to 19 age range was 30.5 percent, and for blacks it was 40.5 percent.
The Great Recession can explain some of the decline in job opportunities for young people. During the mid-2000s, the overall teenage unemployment rate ranged between 14 and 18 percent. Then, the downturn hit and teen unemployment began to rise, peaking at 27 percent in October 2009 (overall unemployment peaked three months later at 10.6 percent). Since then, the recovery has created more than 1 million new jobs for adults and brought the unemployment rate down to 8.2 percent. But there's been no recovery for teens. For the past 41 months, the national average unemployment rate for teens has remained above 20 percent – a postwar record.
One factor behind the stark numbers is that the overall base of teen employment is eroding. For one thing, fewer teens are entering the workforce. That's not always a bad thing. The January issue of the Department of Labor's Monthly Labor Review cited an increase in school attendance, including summer school, as a major reason behind the decline in overall youth employment.
They also are facing more competition from adults, who are now more eager for jobs that they might have dismissed a few years ago. “If you look at the labor force participation of older workers, they are becoming a large contingent of the labor force," says Michael Saltsman, research fellow for the Employment Policies Institute, a research organization in Washington, D.C.
Also, new technologies are shrinking the number of available hourly jobs. ‘We’re at a transition point,” Mr. Saltsman says. Jobs like bagging groceries or working the counter at the local drugstore are increasingly being replaced by automated self-checkout counters and automated price checkers.
The concern about teen unemployment runs across the political spectrum, because research suggests that a job helps teenagers learn job skills and earn more in later years. A National Bureau of Economic Research study from 1995 found that high school seniors employed 20 hours per week were, six to nine years later, expected to earn approximately 11 percent more annually than their unemployed peers. A 2006 Journal of Human Resources study found that periods of unemployment, even as a teenager, were more likely to adversely affect the future successes of the job seeker later in life.
"The value of a summer job is more than just a paycheck, it’s the skills they pick up,” says Saltsman, whose conservative Employment Policies Institute is managed by a communications firm with ties to the restaurant, tobacco, and food industry. “It’s probably too early to write this generation off, but it’s something to be concerned about when you have young people who get discouraged and say they’d rather spend the summer hanging on the couch instead of out there learning something."
President Obama, a Democrat, has also called attention to the problem: “America’s young people face record unemployment, and we need to do everything we can to make sure they’ve got the opportunity to earn the skills and a work ethic that come with a job,” he said, when announcing his summer jobs initiative in January.
The president's “Summer Jobs +” initiative is an effort to encourage private-public partnerships and reach a goal of at least 250,000 teens hired this summer. So far the White House says it has received pledges from companies including AT&T, Bank of America, and CVS/Caremark that amount to 180,000 jobs. The number of jobs partners have pledged varies greatly, however, from just a dozen paid positions to thousands.
Jamba Juice, a national food and beverage chain, has pledged to hire at least 2,500 young people and recently hosted a national hiring day in 80 cities across the country. “The issue with teen unemployment is a compelling story,” says Kathy Wright, vice president of human resources, in an e-mail. “It made sense that the private and public sector work together to help put youth to work and we felt it was something that we could help out in doing. “
Others are not impressed with the White House plan. “The program [Mr. Obama] put out, let’s be honest, it’s a pretty pathetic initiative,” says Mr. Sum, the Northeastern University professor. He says a better solution would be to offer government-funded tax incentives or wage subsidies to companies willing to take on teen employees. Also, brokers need to be put in place to help connect out-of-work youths with hiring managers.
Brokers like TeenForce, a northern California start-up, serve as a go-between for low-income and at-risk teens in Santa Clara County. Acting as a hybrid matchmaker, human-resources representative, and payroll office, TeenForce streamlines the hiring process for area teens and employers alike. The teens are paid by the nonprofit directly, so employers don’t have to deal with paperwork or insurance.
“It makes it very convenient for employers,” Mr. Hogan says. “Our model is definitely designed to be replicated, and scalable. Just as any community would want to have an YMCA, our vision is every community would want a TeenForce jobs program, because they work. Our vision is to demonstrate that there is a better way, that kids have value, their labor has value, and that businesses will pay for it.”
In the short term, teens who do want a job when school lets out need to start thinking about possibilities, and be prepared to get creative.
While fast food and retail may seem like the obvious places for teens looking for work, Rick Parker, senior vice president in marketing at Snagajob, an hourly employment network site, recommends applying for positions in more unexpected sectors, like car care, for example.
Snagajob conducts an annual survey of over one thousand hiring managers nationwide, in advance of the summer season, to get a feel for current trends in the hourly labor market. This summer, it’s all about timing.
“We're seeing that hiring mangers are hiring earlier this year than they have, in the past. Eighty percent will complete their summer hiring by Memorial Day,” Parker said. “If teens want the best paying jobs, the best types of jobs, they should be looking early, in fact they really already should be looking.”
Some of America's most closely watched housing numbers are starting to suggest that the big decline in housing is coming to an end, at least in some metros.
Home prices in Seattle, Minneapolis, and Denver have begun to trend upward in the past few months, according to the S&P/Case-Shiller housing indices. Even hard-hit metro areas such as Tampa, Fla., and Phoenix have seen a modest rebound.
But in Atlanta home prices not only continue to fall, the declines are accelerating. They now stand at a 14-year low.
That artifact should give homeowners pause, especially those who expect a quick rebound in housing. Nationally, prices haven't been this low since 2003. In Atlanta, they haven't been this low since early 1998.
"Atlanta continues to stand out in terms of recent relative weakness," said David Blitzer, chairman of the index committee at S&P Indices, in a statement. Of the 19 cities tracked in January, Georgia's largest metro saw prices fall 2.1 percent from a month earlier and a whopping 14.8 percent over the last year, the biggest year-on-year decline since the depths of the Great Recession..
So is Atlanta an oddity – or a troubling signal that other homeowners should worry about?
"Atlanta's a real quirky market," says Hank Miller, real estate broker and certified appraiser based in Roswell, Ga. With no natural boundaries, developers expanded wildly during the housing boom, so that outer suburbs in the south and near Hartsfield-Jackson Atlanta International Airport are awash in homes that are depressing prices. But in many suburbs north of the city, "it's actually a very tight and stable market, stable to the point that people are building new homes. I've got three new homes under contract for over $500,000 in the last two weeks."
Some other sprawling metros are also witnessing continuing declines, such as Chicago (down 6.6 percent over the past year) and Las Vegas (down 9.1 percent). Other sprawling centers, however, are seeing small declines, such as Minneapolis, or stabilization, such as Denver.
The 19-city Case-Shiller index (which this month was missing data from Charlotte, N.C.) stands somewhere in-between these cities and Atlanta. Prices are down 3.8 percent over the last year, on par with year-over-year declines seen in previous months and nowhere near the declines in the depth of the recession.
Atlanta, for all its recent decline, has not seen prices fall half or more from their peaks, as Las Vegas, Phoenix, and Miami have. Its average home price would have to fall another 20 percent to reach their level of distress. So it's natural that these local real estate markets go through a period of volatile adjustment as buyers and sellers find the floor for prices.
But there are no guarantees that housing prices will go up. Mr. Miller, for one, isn't expecting any quick turnaround. He points to the huge inventory of foreclosed and other homes still waiting to come onto the market. "You still have a couple years to shake this thing out," he says.
The Woodlands in greater Houston is a planned community that draws middle- and upper-income families looking for good schools, safe neighborhoods, and a suburban lifestyle. So who's moving in?
Wealthy Mexican entrepreneurs escaping the violence in Mexico, says Bill Gottfried, broker and owner of a Houston real estate firm and a member of the international advisory group of the Houston Association of Realtors. In his informal polling of other brokers catering to international clients, he estimates that roughly a third of home sales in the Woodlands have been to Mexican nationals in the past year.
If the battered housing market hasn't inspired Americans to rush into real estate – existing home sales fell nearly 1 percent from January to February, the National Association of Realtors (NAR) reports – it is attracting foreigners. They're snapping up homes in increasing numbers for various reasons: Home prices have fallen, the value of the US dollar has weakened against some currencies, and the US market is seen as safe and stable. That investment is helping to stabilize US home prices, at least in metropolitan areas popular with foreigners.
Foreign sales of residential property grew nearly a third in the year ending March 2011, according to the latest figures from the NAR. At $82 billion – only about 8 percent of existing home sales – foreign purchases aren't doing too much to boost home prices in, say, Iowa. But in the states where foreign sales are concentrated, the influx of international buyers appears to be buoying the real estate market. Several of those states are the ones hit hardest by the bursting of the housing bubble.
Take Florida. All by itself, the foreclosure-battered state attracted 31 percent of all foreigners' purchases, according to the NAR. In a separate survey in conjunction with its Florida branch, the NAR estimated that foreigners accounted for a quarter of all the state's residential sales in the 12 months ending in June 2011. That level of sales can have a big impact.
Foreign sales in Florida may be doing more than buoying the market. "Iit may be enough to turn it around, depending on the selling pressures," writes Susan Wachter, professor of real estate and finance at the University of Pennsylvania's Wharton School in Philadelphia, in an e-mail. "It is not just that a quarter [of buyers] are foreigners, it is that foreigners are likely to be the marginal buyers – those that are offering top dollar. Their wealth has not been hit by the crisis, unlike the balance sheet of the US buyer."
Two other states hit hardest by the housing bust are among the four most popular states for international buyers, according to the NAR: California (12 percent of international sales in the US) and Arizona (6 percent).
The US is also the most popular locale for international buyers of commercial real estate. Perennially the No. 1 destination of investment money, the US received fewer first-place votes in 2011 than in 2010, as other locales, such as Brazil, grew in popularity, according to a survey released in January by the Association of Foreign Investors in Real Estate, based in Washington. Still, 60 percent of the commercial investors in the survey said they planned to increase their property purchases in the US this year.
In Texas, commercial and residential real estate investors are increasing their activity. Texas accounted for 9 percent of foreigners' residential sales in the US, according to the NAR.
"We are seeing a larger component of international buyers coming into the Houston metro area," says Mr. Gottfried, the local broker and owner of Gottfried International Estates.
With its diversified economy of oil, electronics, and health-care, Houston has long attracted buyers from Mexico and other Latin American destinations. Their purchases have increased in the past two to three years, Gottfried says, and half or more of them purchase properties to live in while they work in the Houston area.
"We have very good pricing for our properties," Gottfried says. "We are seeing our numbers moving up."
April 1 is often a day for pranks. In the tax world, however, it will mark something more serious. Barring another Fukushima Daiichi-like catastrophe (which delayed its plans last year), Japan will cut its corporate tax rate by five percentage points. That move will leave the United States with the highest corporate tax rate in the developed world: 39.2 percent when you add state and local taxes to the 35 percent federal rate.
The corporate income tax is a particularly problematic way to collect tax revenues. Corporate taxes are often more harmful for economic growth than ones on personal income or consumption, as noted in a recent study by the Organization for Economic Cooperation and Development. Moreover, a high corporate rate is an invitation for US multina-tionals to play games with their accounting, locating profits overseas while reporting as many tax-deductible expenses as possible here at home.
That's why there's a growing bipartisan consensus that the federal rate needs to come down. President Obama recently proposed lowering it to 28 percent. His likely Republican challenger, Mitt Romney, wants to bring it down to 25 percent.
But corporate tax reform can't just be about lowering the statutory rate. America faces enormous budget challenges and cannot afford to simply cut future revenue. Moreover, the high statutory rate isn't the only problem with our system. The code is riddled with tax subsidies and loopholes. Those tax breaks, more generous than those in many nations, reduce corporate tax burdens significantly.
That leaves us with the worst possible system. It maximizes the degree to which corporate man-agers must worry about taxes when making business decisions but limits the revenue that the government actually collects.
One side effect is that the system plays favorites among different businesses. Retailers and construction companies, for example, pay an average tax rate of 31 percent, according to recent Treasury Department calculations, while utilities pay only 14 percent and mining companies (which include fossil fuel producers) pay only 18 percent.
I know of no reason why the tax system should favor utilities and mining while hitting construction and retailers so hard. Far better would be a system in which investors deployed their capital based on economic fundamentals, not the distortions of the tax system.
Another problem is that the system perversely favors debt financing over equity. Interest payments are tax-deductible, while dividends are not. Corporations thus have a strong incentive to finance their investments by borrowing. Given what our economy's been through, it is hard to believe that the tax system ought to subsidize more debt.
The solution to all this is to reduce the corporate tax rate while taking a hatchet to many corporate tax breaks. Done right, that would level the playing field across different businesses and between equity and debt and maintain revenues.
Mr. Obama and Mr. Romney have proposed reforms along these lines, albeit with much more clarity about the rate-cutting than the base-broadening. That isn't surprising. Leveling the playing field (while maintaining revenues) will require that some companies pay more so others can pay less. Politicians would rather focus on potential winners, not losers. But losers there will be.
The US Chamber of Commerce has said that it "will be forced to vigorously oppose pay-fors [tax increases] that pit one industry against another." But such pitting is exactly what will be necessary to enact comprehensive corporate tax reform.
– Donald B. Marron is director of the Urban-Brookings Tax Policy Center.
Yes. Already the fourth largest energy consumer in the world, India's demand for oil looks set to rise inexorably as more of its people buy cars and take to the road. Ditto for China and other emerging markets. Their rising demand is pushing up prices for everyone.
This consumer competition is usually subtle. For decades, Americans were king of the road. When they put the pedal to the metal, the world rushed to produce the oil and gasoline to fuel the ride. (The exceptions, from OPEC nations, were temporary.)
Now, however, world producers of oil and gas are not going to jump quite so fast. There are other, more dynamic markets to serve than the United States.
Have you driven on the East Coast, lately? Prices surged there late last month for all the normal reasons plus one: the increasingly dire state of refining in the Northeast.
The East Coast facilities are old and set up to process the wrong kind of fuel (crude from Europe and Africa, which is selling at a premium because of the West's tensions with Iran). They're also located in the wrong place. Although the Northeast market is huge, it is stagnant. Regional demand for gasoline is actually down 7 percent since its peak in 2005.
As a result, refiners are losing money. Last year, two refineries in Pennsylvania closed. Another one, a US Virgin Islands facility that supplied the East Coast, shut down last month. Those closures have stretched the region's capacity to produce enough gasoline for the region and pushed up prices. If Sunoco closes its huge Philadelphia refinery this July, which it says it will do if it can't find a buyer, it would eliminate a third of the region's refining capacity and probably cause gasoline prices to rise even more over the next several months, the US Energy Information Administration says.
Why not build new refineries? Oil companies don't want to build new facilities in declining markets.
"You go where the growth is," says Andy Lipow, an independent oil analyst in Houston. That means Asia. India boasts the largest oil-refining complex in the world, itself equal to all the refining capacity in the Northeast US.
Prices in the Northeast are high enough that the oil industry will figure out how to meet demand, especially once the fate of the Sunoco refinery is settled. That might mean more gasoline brought in from the Gulf. Or it could be more gasoline imported from overseas.
India, notably, already delivers 40,000 barrels of gasoline a day to the East Coast. Rising prices in New York might coax a little more gasoline out of the subcontinent. But India also has the world's second-fastest growing car market after China. By one estimate, it will have more cars on the road midcentury than any other nation in the world.
So where is its gasoline going to go in the long term? Bangalore. Not Boston.
Drivers in the fast-growing nations of the developing world have grabbed the steering wheel. And they're not going to let go.
America's job engine is starting to crank up speed. For the third month in a row, the United States has produced more than 200,000 new jobs per month. At this slow but steady pace, the economy will recover all the jobs it lost during the Great Recession by December 2013.
But are they good-paying jobs?
Take a snapshot of the economy, and the trends don't look bad. In February, employment grew by 227,000, helped by growth in almost every sector: from low-paying to high-paying positions, the Department of Labor reported Friday. And wages trended up 0.1 percent between January and February.
Private employment companies echo the view.
"The news is solid," says Jim John, chief operating officer of Beyond.com, a career networking website based in King of Prussia, Pa., that brings together employers and job seekers. "Our sweet spot [of jobs posted] is between $55,000 and $85,000 in salary. And we're seeing jobs posted in a very nice distribution across that spread."
The larger picture, however, is more sobering. The share of income going to labor instead of capital is at or near 60-year lows. Almost all the income gains since the recovery has gone to the top 1 percent of earners, according to a new report by Emmanuel Saez, an economist at the University of California at Berkeley.
A continued recovery should help alleviate the first trend, but not push labor's share of income back near previous highs. "The modest pickup so far is because the upswing has only just started," writes Paul Ashworth, chief US economist with Capital Economics in Toronto, in an e-mail. "We’ll get a modest cyclical rebound, but globalization and technological advances are still driving a strong downward structural trend."
Employment growth may have even less impact on the second trend – the income gains of the top 1 percent. It's tempting to see this as the rich getting richer and the poor getting poorer, but the picture is more nuanced than that.
For one thing, the top 1 percent took the biggest hit of any group during the Great Recession, according to Mr. Saez' report. Their real income fell by 36.3 percent compared with everyone else, who saw income fall an average 11.6 percent. The main reason: the stock market's crash, which caused a dramatic fall in realized capital gains for the rich. Since then, however, the top 1 percent have begun to recover.
In 2010, their income grew 11.6 percent; everyone else's rose 0.2 percent – a trend that probably continued in 2011, the report says. "Based on the US historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back."
That happened during the Great Depression; it hasn't happened this time.
Not all the rich have benefited evenly. While the shares of the top 1 percent and the top 2 to 5 percent have climbed since the late 1970s, the share of the 6 to 10 percent group (earning from $108,000 to $150,000 in 2010) has not moved up much at all.
While other lower-paid jobs are snapping back, "we're not seeing the six figure jobs or that 20-year veteran [middle manager] coming back," says Mr. John. "This recession has lasted a lot longer than anyone had predicted. [It] has sensitized companies to the fact that you're going to need to continue managing your expenses incredibly carefully."
So the ranks of the near-rich are not poised to grow as fast as they once did.
Investing isn't always exciting. In this age of deleveraging, which began in 2007 and probably has another five to seven years to run, my investment themes this year look a lot like my themes from last year.
If there is something about 2012 that should make investors stand up and take notice, it's this: I look for a moderate US recession, a hard landing in China, and a severe recession in Europe – in sum, a global recession.
Fortunately, opportunities remain for investors in a landscape dominated by financial institutions, US consumers, and governments unwinding an immense buildup of debt. Here's my list of nine investment themes that encapsulate the best prospects for 2012:
1. Treasury bonds: They're a haven in an era of slow growth and deflation. They've been my most profitable investment in the past three decades.
2. High-quality income-producing securities: They shined last year as the stock market went nowhere. Municipal yields, compared with Treasurys, are probably high enough now to be attractive. The same is true for investment-grade corporate bonds. Companies that pay substantial, predictable, and increasing dividends may be coming back into style.
3. Small luxuries: Hard-pressed consumers tend to buy the very best of what they can afford. Some manufacturers and retailers are offering essentially the same products at lower prices by cutting their manufacturing costs. Another route to small luxury success is for companies to introduce new and improved models that make their predecessors obsolete. Apple is the master at this strategy.
4. Consumer staples and foods: Items like laundry detergent, bread, and toothpaste are basic essentials of life that are purchased in good times and bad, and I believe their producers' equities will be attractive relative to stocks in general in 2012. Among retailers of consumer staples, the winners may continue to be discounters, including dollar stores and used-merchandise stores.
5. The US dollar: In the long run, it's likely to remain the world's primary international trading and reserve currency because of rapid growth in the US economy and in per capita gross domestic product, promoted by robust productivity growth. Also, the United States has the world's biggest economy, and its financial markets are broad, deep, and open.
6. Selected health-care providers: They, as well as medical office buildings, remain attractive as demand in the US for medical services mushrooms over coming decades.
7. Rental apartments: They are still attractive because they will continue to benefit from the separation that Americans are making between their abodes and their investments. Apartments tend to be rented by foreclosure victims, those who don't want to buy houses, and by the growing number of postwar babies as they retire and downsize.
8. Productivity enhancers: In the ongoing environment of slow economic growth and deflation, many firms find it difficult to boost profits via price and volume increases. So anything – high tech, low tech, no tech – that helps them reduce costs and promote productivity will be in demand.
9. North American energy: I'm a fan because of the national resolve to reduce imports from unreliable foreign sources. My favorites include natural-gas producers, pipelines, oil sands, energy services, oil producers, nuclear energy, shale oil and gas, and maybe even coal. I remain skeptical of renewable energy activities because of their heavy dependence on federal subsidies.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."
Sovereign default, as a rule, is nasty business. It ripples throughout the world's financial system, rattling investors and sparking huge sell-offs.
That is why the investing world is so focused on Greece, which is teetering on the edge of default. On Tuesday, markets tanked on worries that enough holders of Greek debt might not agree to the restructuring deal that had been negotiated. The deadline is Wednesday. Some analysts warn that such a default would trigger another financial crisis on the order of the 2008 meltdown after the failure of Lehman Brothers, perhaps worse.
By Wednesday, news out of Greece was a little more reassuring. At least two-thirds of Greece's debt-holders are likely to accept the restructuring, which would trigger collective-action clauses that would force all the bond-holders to accept the deal. If 90 percent of the bond-holders take the deal, then it wouldn't trigger a default, technically speaking.
But make no mistake: Greece is defaulting, even if it's dubbed "voluntary.' The banks and other holders of its debt will get back only a fraction of what they invested. This is how nations work off their excess debt: Everyone from taxpayers to bond-holders takes a hit. It's a process that Portugal, Japan, and other nations will have to go through to bring their debt back down to a manageable level.
Greece is an example for other nations of what it's like to go through the economic wringer of default. It isn't pretty.
In February, Samantha Parisi was fired from her job at Thalatta Shipping, a respected maritime company in Thessaloníki, because of a downturn in business. It's a common refrain throughout Greece. In her family, "we are three people and only my brother is working 'under the table' in a cafeteria. My mother is unemployed for two years now and has no chance whatsoever finding a job," says Ms. Parisi, a graduate of The Citadel in Charleston, S.C., in an e-mail. "I am seriously thinking about going to Germany."
Already in its fifth year of recession, Greece's economy has shrunk 16 percent (a contraction three times larger than the United States endured doing its recent Great Recession.) And the Greek downturn shows no sign of abating: nearly half of it happened last year. Default "will intensify that recession and lower economic activity," says Richard Phillips, senior analyst at S-Network Global Indexes, a publisher of financial indexes based in New York.
"You wake up in the morning and there is another store closed," says Lambros Semertzidis, an accountant also from Thessaloníki, in an e-mail. "All the companies are laying off people. Nobody pays anymore.… We do have clients and work, but nobody pays on time."
The economic contraction means the current Greek aid package might not be enough. Under the deal, private-sector bondholders agree to write down nearly 70 percent of its debt, the European Union and the International Monetary Fund kick in €130 billion ($170 billion) to keep the government afloat, and Greece agrees to a raft of tough reforms to bring its debt ratio down from a whopping 160 percent of gross domestic product to 120 percent by 2020. But if the economy keeps shrinking, tax revenues will be lower than the aid package envisions.
And the reforms are harsh, enough so that Greeks rioted in the streets and wrecked nearly 100 buildings when the Greek Parliament agreed to the measures. They include making $4.3 billion in extra budget cuts this year, selling off more than $60 billion in government assets, cutting the government workforce by 15,000, and boosting public transport fares by 25 percent. The withdrawal of government funds through budget cuts puts many Greeks in a double bind: Prices rise while business declines.
"Although our business is down 50 percent, gas prices have risen by 50 percent," writes Kostas Marinos, a truck driver who lives in a small village, in an e-mail. "I am not married and I live with my parents. My father only gets a small pension. If I do not bring money to the house they would be in deep trouble."
The other option for Greece is to default on its own terms, leaving the eurozone and creating its own currency. That's no panacea. When Argentina defaulted on all its debts in 2001, Argentines saw their bank deposits frozen, stocks crash, the value of their currency fall by two-thirds against the US dollar, inflation, and the economy shrink by at least 20 percent.
The Greeks "are just walking along the edge of the volcano," says Andrew Rose, an economics professor at the University of California, Berkeley. "The millisecond that Greece defaults, there'll be an attack on Portugal."
In Greece, "they either have to raise their productivity by a huge amount or lower their wages tremendously," Mr. Rose says. At some point, wages will fall to such a point that Greece will become a low-cost producer of goods and services and its economy will begin to grow again.
How far those wages fall depends not only on Greece but on the health of the European economy. If the eurozone can grow robustly, it will provide a ripple of economic activity that would buoy Greece's economy and ease the adjustment somewhat, says Joshua Aizenman, economics professor at the University of California, Santa Cruz. But if the region's growth rate is very low – it contracted slightly in the fourth quarter – then Greece faces an even more crushing adjustment.
"Even foreign immigrants are leaving Greece and going back to their countries," says Mr. Marinos, the truck driver. "There are no jobs here."
– Michail Vafeiadis contributed to this report.
[Editor's note: This story has been updated as more companies have pulled their ads.]
The outcry over right-wing radio personality Rush Limbaugh’s rude comments on a law student’s sex life has cost him at least 19 advertisers. Some have dropped their specific ad buys on the show, at least five others have suspended their ads, even after he apologized twice. Other companies, whose media buys happened to place their ads during Mr. Limbaugh's show, have publicly stated that they are ensuring that they don't appear there again.
How much more erosion of his advertising base can he afford?
Probably a lot more, if he can hold onto his audience and survive the immediate reaction from shareholders of Clear Channel, which produces the show.
"As long as the Limbaugh show maintains its ratings and notoriety, there will be advertisers eager to utilize it," writes Michael Harrison, publisher of industry trade magazine, Talkers, in an e-mail. “I would imagine Clear Channel is already picking up new sponsors to replace the ones that have publicly defected and I wouldn't be surprised if some of those that have cancelled come back after the dust has settled.... The American advertising industry is not necessarily known for its taste or dignity.”
Departing sponsors include LegalZoom, ProFlowers, Citrix, Quicken Loans, Sensa, Sleep Number beds, and Carbonite. Others, including AOL and Tax Resolution Services, have “suspended” their advertising on the show. Sears, AutoZone and Allstate have all said they do not sponsor Limbaugh’s show and advertisements for the companies that appeared on the program were placed there by mistake.
Limbaugh got the controversy started last Wednesday when he impugned Georgetown University’s Sandra Fluke on the air, calling her a “slut” and a “prostitute” after she appeared before a congressional committee arguing that her school’s health coverage should include birth control. Limbaugh later in the week insisted that the public should have access to video of her sexual encounters in exchange for the alleged funding of her birth control.
The comments struck many as extraordinarily crass, even for Limbaugh, who frequently makes derisive ad hominem attacks against those he disagrees with. A boycott movement quickly took root, spreading across online communities on sites like Reddit and Facebook, and the strong reaction against Limbaugh inspired seven sponsors to pull ads.
Carbonite CEO David Friend wrote on his company’s blog: "No one with daughters the age of Sandra Fluke, and I have two, could possibly abide the insult and abuse heaped upon this courageous and well-intentioned young lady. Mr. Limbaugh, with his highly personal attacks on Ms. Fluke, overstepped any reasonable bounds of decency. Even though Mr. Limbaugh has now issued an apology, we have nonetheless decided to withdraw our advertising from his show."
Limbaugh himself apologized in a statement Saturday and again on his show, Monday, saying that he wanted to “sincerely apologize” to Fluke for “using those two words to describe her.”
But he also struck back at critics, saying that he would replace those advertisers with others.
The big question is how Clear Channel reacts to the controversy. Unlike Limbaugh, the San Antonio-based company has quarterly revenue targets to meet and has to be concerned about the immediate reaction of shareholders. Clear Channel operates 866 stations in 150 markets in the United States. Its Premiere Networks handles 90 syndicated programs, which it distributes to approximately 5,800 affiliate stations.
So far, Clear Channel has not commented on the controversy.
"The question and focus should be on how many listeners Rush might lose because of this," Mr. Harrison says. "Ironically, his ratings will probably increase due to all this attention. If that happens his sponsorships will actually increase."