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Economic Scene: Despite Keynesians’ Victory, Economic Policy Holds

May 21, 2013 by Leave a Comment

Fans of John Maynard Keynes, the renowned early 20th-century economist who developed the theory on how nations could dig themselves out of an economic downturn, have been running victory laps since the collapse last month of the claim by the Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff that economies tend to slow significantly after government debt reaches 90 percent of gross domestic product.

Then, as if on cue, the number-crunchers in Brussels announced last week that the economy of the euro area countries — which have been following a decidedly non-Keynesian path — shrank
yet again at the beginning of the year. It was the region’s sixth quarterly contraction in a row.

The confluence of events provided further evidence of Keynes’s central proposition: when consumers and businesses set out to reduce their debt burden, and private spending and investment stall, it is the government’s job to borrow, spend and pick up the slack.

The claim by Ms. Reinhart and Mr. Rogoff had provided an intellectual foundation to the demand by House Republicans, British Tories and Germans that indebted governments should move quickly to reduce their budget deficits and the burden of debt.

Its demise — at the hands of a graduate student from the University of Massachusetts, Amherst, who discovered flaws in the Harvard economists’ methods — left a more modest assertion in its wake: heavily indebted nations grow more slowly. Yet it is not even clear that debt necessarily depresses growth. The track record from Europe and elsewhere suggests that austerity programs that hold back growth often make the debt burden even worse.

Two economists — Lawrence H. Summers of Harvard, President Obama’s former chief economic adviser; and Brad DeLong of the University of California, Berkeley — proposed in a recent paper that at the rock-bottom interest rates that prevail today, government spending to encourage growth would in fact pay for itself. In the United States, they concluded, it would lighten the nation’s future debt burden — not increase it.

But in many ways it is the worst of times for Keynesian economists. For despite all this intellectual firepower, governments across the industrial world are zealously tightening their belts.

The Italian government has cut its annual budget deficit to 3 percent of G.D.P. last year from 5.5 percent in 2009, and the Irish government has slashed it to 7.6 percent from 13.9 percent. In Britain — which has its own currency and is freer than its euro-area neighbors to set policy — the government of Prime Minister David Cameron reduced the deficit to 6.3 percent of G.D.P. last year, down from 11.5 percent in 2009.

“We will not be able to build a sustainable recovery with long-term growth,” Mr. Cameron said in a speech in March, “unless we fix this fundamental problem of excessive government spending and borrowing that undermines our whole economy.”

The German government is running a budget surplus. And despite the public’s belief that Washington is engaged in a spending spree, the deficit in the United States narrowed to 7 percent of G.D.P. in 2012 from 10.1 percent in 2009.

None of these countries are growing much, mind you. In the United States, unemployment is still stuck at 7.5 percent. In its latest economic forecast last month, the International Monetary Fund predicted that the nation’s economy would grow only 1.9 percent this year, slowed by further budget-cutting.

What explains the gap between theoretical victory and policy defeat? Voters appear to want everything — including more jobs and a smaller deficit. Is resistance to fiscal stimulus simply a matter of political tactics? Do Republicans automatically oppose anything coming from a Democratic administration they loathe?

Economists have articulated other tempting possibilities. One is that moral views are getting in the way of reason: the decisions of both elected officials and voters are driven not by economic research but by a belief in the virtue of thrift drawn from The Ant and the Grasshopper.

Another is that policy serves the interests of moneyed creditors, lenders who fear that heavily indebted governments will be tempted to default, permit higher inflation to erode the debt’s real value or tax the wealthy more heavily in the future.

N. Gregory Mankiw of Harvard, a former chief economic adviser to President George W. Bush, has proposed another reason, rooted in a notion of democratic rule.

“If the goal of government is to express the collective will of the citizenry, shouldn’t it follow the lead of those it represents by tightening its own belt?” he wrote in a recent paper. “If we as individual citizens are feeling poorer and cutting back on our spending, why should our elected representatives in effect reverse these private decisions by increasing spending and going into debt on our behalf?”

E-mail: eporter@nytimes.com; Twitter: @portereduardo

Article source: http://www.nytimes.com/2013/05/22/business/despite-keynesians-victory-economic-policy-holds.html?partner=rss&emc=rss

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Economix Blog: Bruce Bartlett: Keynes and Keynesianism

May 14, 2013 by Leave a Comment

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Before the recent brouhaha about John Maynard Keynes fades from memory, I’d like to make a few final comments about Keynesian economics.

Today’s Economist

Perspectives from expert contributors.

When I began studying economics in the early 1970s, the term “Keynesian” was already losing its luster. In fact, one can date the precise moment when it became passé: Jan. 4, 1971. On that day, President Richard Nixon gave a joint interview to several television journalists. After the cameras were off, he made on offhand comment to Howard K. Smith of ABC News that he was “now a Keynesian in economics.” The New York Times reported this statement in a brief article on Jan. 7, 1971.

The article says Mr. Smith was taken aback by Nixon’s statement, because Keynes was viewed as being well to the left, politically and economically, and Nixon was viewed as an arch-conservative. Mr. Smith said it was as if a Christian had said, “All things considered, I think Mohammad was right,” referring to the prophet who founded Islam.

The Times’s economics columnist Leonard Silk quickly noted the significance of Nixon’s remark and said the president was actually carrying out Keynesian policies at that moment. His budget for the next fiscal year, which would be released in a few weeks, would be “expansionary,” Nixon had said in his television interview. Instead of aiming for budgetary balance in nominal dollar terms, Nixon said he would aim to balance the budget on a “full employment” basis.

This statement was really no less controversial than the one Nixon made about Keynesian economics. Conservatives viewed it as a license to run budget deficits forever. The idea, now called the “cyclically adjusted deficit,” is to separate the share of the budget deficit resulting from a downturn in the economy, which automatically raises spending and reduces revenue, from its “structural” component, which is a function of the basic nature of the budget itself.

The point of looking at the deficit on a cyclically adjusted basis, which the Congressional Budget Office calculates regularly, is to avoid cutting spending that is only temporarily high and will fall automatically as the economy expands, or raising taxes that will automatically rise. Such actions would exacerbate the economic downturn.

According to the C.B.O., the economic downturn has increased the budget deficit by about 2.5 percent of the gross domestic product annually since 2009. It also calculates that if the economy were operating at its potential based on its productive capacity – what used to be called “full employment,” a term now in disuse among economists – G.D.P. would be $1 trillion larger this year.

Conservatives still don’t like calculating the deficit any way except literally. All adjustments are assumed to be tricks to make it look smaller, they believe. But back in 1971, having a Republican president talk about an expansionary budget policy and balancing the budget on a full employment basis was radical stuff indeed.

The irony, of course, is that Keynesian economics, which had dominated macroeconomic thinking since the war, was already dying. For decades it had been under intellectual assault by economists associated with the University of Chicago known as “monetarists.” Their most well-known spokesman was Milton Friedman, who argued against the Keynesians’ focus on fiscal policy – federal spending and taxing policy – and their inattention to monetary policy, which is conducted by the Federal Reserve.

As it happens, Friedman had said in 1965 that “we’re all Keynesian now” in the Dec. 31 issue of Time magazine. He later complained that his quote had been taken out of context. His full statement was, “In one sense, we are all Keynesian now; in another, nobody is any longer a Keynesian.” Friedman said the second half of his quote was as important as the first half.

But it wasn’t only those on the right, such as Friedman, who were abandoning Keynes; so were those on the left such as the Harvard economist John Kenneth Galbraith, an early and energetic supporter of Keynesian economics. In July 1971, he said that Keynes was obsolete because big business and big labor so controlled the economy that Keynesian economics didn’t work.

Galbraith said that it was “sad that Mr. Nixon has proclaimed himself a Keynesian at the very moment in history when Keynes has become obsolete.”

By 1976, it was common to hear world leaders denigrate Keynesian economics as primarily responsible for the problem of inflation. That year, Prime Minister James Callaghan of Britain, leader of the left-wing Labor Party, gave a speech to a party conference that repudiated the core Keynesian idea of a countercyclical fiscal policy. It only worked, he said, by injecting higher doses of inflation that eventually led to higher unemployment.

The following year, Chancellor Helmut Schmidt, of West Germany’s left-wing Social Democratic Party, likewise repudiated Keynesian economics. The German economy, he said, had avoided inflation by resisting the temptation to implement countercyclical fiscal policies during economic downturns. “The time for Keynesian economics is past,” Mr. Schmidt explained, “because the problem of the world today is inflation.”

On his blog last week, Paul Krugman took me to task for misconstruing the generality of Keynesian theory. My point was that policy makers in the early postwar era routinely accepted the idea that Keynesian stimulus was justified whenever the economy wasn’t doing as well as they wanted.

I acknowledge that this view derived mainly from economists who called themselves Keynesians rather than Keynes himself. He was, in fact, a strong opponent of inflation who would have opposed many “Keynesian policies” of the 1950s and 1960s, which contributed to the problem of stagflation in the 1970s that ultimately discredited those policies.

Economists and policy makers mostly forgot that Keynes prescribed budget surpluses during economic upswings to offset the deficits that he correctly advocated during downturns. In his 1940 book, “How to Pay for the War,” he advocated balancing the budget over the business cycle.

I think Milton Friedman was right that in a sense we are all Keynesians and not Keynesians at the same time. What I think he meant is that no one advocates Keynesian stimulus at all times, but that there are times, like now, when it is desperately needed. At other times we may need to be monetarists, institutionalists or whatever. We should avoid dogmatic attachment to any particular school of economic thought and use proper analysis to figure out the nature of our economic problem at that particular moment and the proper policy to deal with it.

Article source: http://economix.blogs.nytimes.com/2013/05/14/keynes-and-keynesianism/?partner=rss&emc=rss

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Lew’s Visit to Europe Reveals a Wide Policy Divide

April 9, 2013 by Leave a Comment

Mr. Lew pointed to evidence that increased government spending and looser monetary policy had helped the United States recover at a much faster pace than the Continent has. But even as some European leaders expressed concern about rising unemployment and deepening recession, it was clear that Europe’s political constraints — and Germany’s insistence that bringing down deficits and reassuring lenders is the best route to sustained growth — was preventing a more expansionary approach from taking hold.

“Nobody in Europe sees this contradiction between fiscal consolidation and growth,” said Wolfgang Schäuble, the German finance minister, sitting alongside Mr. Lew at a joint news conference in Berlin on Tuesday. “We have the common position of a growth-friendly process of consolidation, or sustainable growth.”

Consumed by the problems of the American economy and its efforts to hold off deep budget-cutting proposals from Republicans in the United States, the Obama administration has hardly been in a position in recent years to lecture other nations on good policy.

But Mr. Lew’s trip to Brussels, Frankfurt, Berlin and Paris — his first swing through Europe since becoming Treasury secretary — gave the administration an opportunity to highlight the diverging economic fortunes of the United States and Europe and to make the case that more expansionary policies could actually help with budget deficits.

The United States has pointed out that its quick rescue of the financial system, front-loaded stimulus measures and delayed budget-cutting have helped foster 14 straight quarters of growth and a falling unemployment rate — even if the recovery has proved sluggish by historical standards.

In contrast, Europe has lurched from one crisis to another, hobbled by a complicated political structure and skittish financial markets. It continues to suffer through rising joblessness and economic stagnation. Greece, Spain and Portugal all remain mired in deep recessions, and even the large economies of Germany, Italy and France were contracting as well at the end of 2012.

A Treasury official, speaking on condition of anonymity to discuss the sensitive diplomatic conversations, said that while the Americans did not endeavor to lecture the Europeans, they did focus on the profound need for growth on the Continent, for the good of Europe as well as the world.

As Mr. Lew said in Berlin, “The driver for economic growth will be consumer demand and policies that would help to encourage consumer demand in countries that have the capacity would be helpful.”

But some of the biggest levers that governments employ to bolster their economies during a downturn are seemingly out of the question in Europe, given its political constraints and some countries’ heavy debt burdens. Any calls for more stimulus spending, less austerity or looser monetary policy face entrenched resistance in powerful Germany. The view there, shared in other Northern European countries like Austria and Finland, is that the European Central Bank has already gone far out on a limb with measures to prevent a collapse of the 17-nation euro zone.

Michael Heise, chief economist of the German insurance giant Allianz, said Tuesday that the central bank should already be thinking about how to reabsorb some of the money it has pumped into euro zone banks by issuing unlimited cheap loans. Otherwise, he said, easy money policies could feed new asset bubbles and remove pressure for economic reforms.

Looking on the bright side, the Treasury official said the European representatives all recognized the urgent need to focus on employment and growth. The official also said that there seemed to be growing pragmatism in Europe, with more officials willing to allow budget flexibility in certain economies, for instance.

Jack Ewing contributed reporting from Frankfurt and Steven Erlanger from Paris.

Article source: http://www.nytimes.com/2013/04/10/business/global/us-advice-to-europe-gets-polite-refusal.html?partner=rss&emc=rss

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As California Bounces Back, Governor Sets Horizon High

January 24, 2013 by Leave a Comment

Grasping at California’s vision of itself as a land of opportunity and a model for the rest of the nation, Mr. Brown said the state was rebounding financially after a difficult period. In a speech citing sources as varied as the Bible, Montaigne and Yeats, Mr. Brown said the state’s budget was now sound, but he also warned of profligacy, a remark that seemed directed at the Democratic lawmakers listening to him in the State Capitol here.

“The message this year is clear: California has once again confounded our critics. We have wrought in just two years a solid and enduring budget,” Mr. Brown, a Democrat, said in his third State of the State address since returning to office in 2011. “Against those who take pleasure, singing of our demise, California did the impossible.”

Mr. Brown spoke of wanting to reform school financing by empowering local school districts, and of continuing to lead efforts to fight climate change, like the cap-and-trade system for carbon emissions that went into effect recently.

Recalling the big infrastructure projects in the state’s past, Mr. Brown also voiced strong support for two big-ticket items that have drawn strong opposition: a bullet train that would eventually link Los Angeles and the Bay Area, and two tunnels that would funnel water directly from Northern California to more populated areas in the south.

“The London Olympics lasted a short while and cost $14 billion, about the same cost as this project,” he said of the tunnels. “But this project will serve California for hundreds of years.”

Mr. Brown’s speech came at what many are describing as a turning point for California after years of economic turmoil. The state’s economy is continuing to show signs of strengthening, with job growth and a housing market revival.

Fiscally, after years of ballooning budget deficits, the state is now projecting a balanced budget. In November, Mr. Brown surprised many by winning a hard-fought campaign to pass Proposition 30, a temporary tax surcharge that will pour $6 billion a year into the state treasury for the next seven years.

Still, Mr. Brown has repeatedly warned about the need to control spending. With Democrats now having supermajorities in the Senate and the Assembly, they can pass tax increases unilaterally. As experts predict that Democratic legislators will face pressure to increase spending, many are now describing Mr. Brown, long known as “Governor Moonbeam” for his eccentricities, as the only adult in the room.

Citing the story of Genesis and Pharaoh’s dream of seven cows, he said: “The people have given us seven years of extra taxes. Let us follow the wisdom of Joseph, pay down our debts and store up reserves against the leaner times that will surely come.”

In interviews, Mr. Brown, who served two terms as governor from 1975 to 1983, has brushed aside talk of his legacy. But in recent months, Mr. Brown, 74, who was treated recently for prostate cancer, has spoken about his mortality, mentioning the death of a close friend.

“This is my 11th year in the job, and I have never been more excited,” he said.

Article source: http://www.nytimes.com/2013/01/25/us/with-california-rebounding-governor-pushes-big-projects.html?partner=rss&emc=rss

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Economix Blog: How Other Countries Do Deficit Reduction

November 22, 2011 by Leave a Comment

As noted in my previous post, today’s (failing) deficit “supercommittee” discussions are hardly the first time Congress has engaged in efforts to reduce the deficit. In most of the deals of the last 30 years, tax increases have accounted for a significant portion of deficit reductions.

The same is true across the developed world.

Researchers at the International Monetary Fund have recently put together a comprehensive report on how developed countries have tried to cut deficits in the last three decades.

The study looked only at tax and revenue changes that were passed explicitly to reduce budget deficits, and calculated the total tax increases, spending cuts or both made in each year, as a share of a given country’s gross domestic product.

It found that the typical year that a deficit-reduction plan was in effect, tax increases accounted for reductions equal to about 0.37 percent of a country’s gross domestic product. Spending cuts accounted for reductions amounting to 0.62 percent of a country’s economy. That means spending cuts were about twice as big as tax increases in this group of 17 rich countries.

In the United States, deficit-curbing plans from 1978 to 1998 were about equally reliant on tax increases and spending trims, with each accounting for deficit cuts of about 0.18 percent of America’s gross domestic product in the average year that any austerity plan was in effect.

To look at other countries, I suggest checking out the original report. A detailed chronology for each country begins on Page 6. On Pages 86 and 87 you can find a table summarizing all the data, which I’ve also adapted below (after the jump). Note that the monetary fund researchers decided to exclude the Balanced Budget Act of 1997 and the Taxpayer Relief Act of 1997.

 

Article source: http://feeds.nytimes.com/click.phdo?i=572aba42f2235d260f98fc9656e55357

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For Italy, Berlusconi Is a Problem but Also a Solution

October 28, 2011 by Leave a Comment

Mr. Berlusconi, at 75 the dominant Italian politician for almost two decades, has watched his support slide precipitously in recent months over everything from the economy to his own trial on charges of tax fraud, corruption and paying for sex with a minor. As Italy has struggled to present viable responses to the euro zone crisis, calls have multiplied for Mr. Berlusconi to step aside, even from his own coalition.

Italy, the third-largest economy in the euro zone, is not currently running large budget deficits and should be capable of shouldering its overall debt, which stands at 120 percent of gross domestic product, one of the highest levels in the world. But that assumes that markets maintain faith in its ability to handle its problems and do not send interest rates on its debts skyrocketing, as they did with Greece, Portugal and Ireland.

When it comes to calming jittery markets, Mr. Berlusconi and his increasingly paralytic government are seen as a growing liability. While the prime minister gave a letter to the European leaders in Brussels laying out his intentions for economic change, his immediate record on making good on his pledges is spotty at best.

“It’s difficult to believe that the tough ‘intentions’ adopted yesterday can really be transformed into the biggest plan of market reforms Italy has ever put on paper,” Antonio Polito wrote in a front-page editorial in Corriere della Sera, a daily newspaper.

The letter to the European Commission contained a substantial checklist of measures to make Italy more efficient and competitive, stimulate growth and cut the public debt. But the broad scope of the plan, with measures range from scaling back the state to accelerating privatizations to loosening labor laws, as well as its rigidly drawn timetable, makes its passage in Parliament an uphill battle.

The plan contains “commitments and dates that would be very difficult to respect,” Dario Franceschini, leader of the opposition Democratic Party in the lower house of Parliament, said Thursday morning.

Trade unions also said they would fight the proposed changes, and threatened to call a strike over a change to labor law that would make it easier for financially troubled companies to fire people.

The measures, said Susanna Camusso, leader of the CGIL, Italy’s largest trade union, “go in the opposite direction of what’s needed to help the country grow,” she said. “Giving young people a future means guaranteeing their rights, not taking them away.”

Others criticized the plan for its omissions, like a wealth tax, which has been object of much national debate. Pension reform was also notably absent, after Umberto Bossi of the Northern League threatened to pull his support from Mr. Berlusconi’s government over the issue.

“Italy is not living in normal conditions, its debt is high, too high to sustain according to markets, and bankers are also looking on with preoccupation. In these conditions, they should have done more” regarding pensions, said Elsa Fornero, the scientific coordinator of the Centre for Research on Pensions and Welfare Policies at the University of Turin. But pension restructuring is never a vote-getter, which is why in Italy, “reforms are passed and then politicians want to defend everyone from them,” she said.

Mr. Berlusconi warned Thursday that Italy’s credibility was on the line if the government failed to maintain its commitments. In his favor, some commentators suggested, if there is one thing many Italians fear more than the current government it is the available alternatives.

“We are in a situation where we are without a government, but also without an opposition, and that is the trouble of the Italian political system today,” said Sergio Fabbrini, Director of the Luiss School of Government and Professor of Political Science and International Relations at LUISS Guido Carli in Rome.

Mr. Fabbrini said that even with open opposition to Mr. Berlusconi from Confindustria, the Italian business lobby, the Roman Catholic Church and several major newspapers that have been calling for his resignation on almost a daily basis, “voters don’t trust the opposition.” Many Italians believe that they, too, would not be able to make the tough choices needed to pull Italy out of the cross hairs of the financial markets.

Mr. Berlusconi’s “strength is the weakness of his rivals,” he said. “This is a stalemate.”

Gaia Pianigiani contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=a9d994b08f3cd1fbac199b7c2de91fe0

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E.U. Moves to Toughen Rule Book for Euro Membership

September 27, 2011 by Leave a Comment

While steering far clear of transferring actual authority over national budgets to Brussels, the revamped rules, set to be voted on Wednesday in the European Parliament, are described as tougher, more credible and more sophisticated than the original set, on paper at least.

Laid out in six pieces of legislation and known as the six pack, the rules contain the same targets for euro zone members as the old one: budget deficits of no more than 3 percent of gross domestic product, and a maximum debt level of 60 percent of G.D.P.

But this time, the drafters hope the policing system will be more credible. In part, that is because countries that break rules will face potential sanctions sooner, and a new voting system will make it harder for finance ministers to block them, as has happened in the past.

“We cannot go back in time and prevent the current crisis,” said Guy Verhofstadt, a former Belgian prime minister and leader of the liberal deputies in the European Parliament, “but we finally have armed ourselves with the right measures to avoid future ones.”

Yet nobody can predict whether the new rules will stand up better than the old ones if challenged by the euro zone’s two big members: Germany and France. That is crucial because, in the history of euro rule bending, Greece’s concealment of its true public finances — which came to light almost two years ago — was only the most flagrant example.

At the very beginning, when the euro was created, France met the rules laid down by the currency’s founders thanks to a windfall from the state-owned utility, France Télécom. Overnight, the French budget deficit shrank by 0.5 percent of G.D.P.

In 2003, Paris and Berlin both exceeded the deficit limits set in the rule book, officially called the Stability and Growth Pact. Faced with the prospect of sanctions and potential fines, Paris and Berlin used their political muscle to tear up the pact, and a weakened version was adopted in 2005.

The new sanctions system is even tougher than in the original, because countries that break rules will be pressured early on to put up a cash deposit — in a noninterest-bearing account — worth 0.2 percent of G.D.P.

If they then fail to correct their course, the deposit is converted to a fine and forfeited.

And, while the finance ministers still have to give the European Commission permission to punish errant countries, the voting system has been tweaked to make this significantly harder to block.

In another innovation, countries with high debt that resist bringing levels down by a specified amount can also be fined in a similar way. Had such a system been in place before, Italy — with a debt ratio of twice the maximum target — would have been required to consolidate more rapidly.

Instead, Rome concentrated on controlling its budget deficit. That was not enough, however, to keep it from getting sucked in as worries over sovereign debt levels spread around Europe’s periphery.

The package is expected to pass the Parliament, its final hurdle, though opposition to some parts from the Socialists could make for a close vote. Once enacted, it would begin to take effect in stages in January, with the rules on debt delayed until 2015.

If approved, an early warning system would be set up to spot developments like asset bubbles, including the housing booms that later collapsed in Spain and Ireland. Countries thought to be at risk could find themselves in an “excessive imbalance procedure” that could also lead ultimately to sanctions.

Though targets apply to all 27 E.U. members, fines can be levied only on the 17 countries in the euro zone.

Supporters of the new rules believe that financial markets have overlooked their importance, because reaching agreement has been so tortuous and time consuming.

But will it work?

“What we have is a very strict and very intrusive surveillance regime,” said one E.U. official not authorized to speak publicly. “You are only one decision away from potentially having to face sanctions.”’

But he also acknowledged the challenges ahead in identifying looming problems like asset bubbles because much will rely on interpretation of data.

Article source: http://www.nytimes.com/2011/09/28/business/global/eu-moves-to-toughen-rule-book-for-euro-membership.html?partner=rss&emc=rss

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News Analysis: Pain Builds in Europe’s Sovereign Debt Risk

July 18, 2011 by Leave a Comment

LONDON — European banks for years bolstered their balance sheets with assets considered safe and secure: the sovereign debt of European countries.

But now this debt no longer appears so safe, weakening banks when countries still depend on them for loans to help finance their gaping budget deficits.

The results of the latest European bank stress test, released on Friday, revealed in greater detail than was previously known just how exposed Europe’s banks are to the government bonds of Greece, Portugal, Spain and Italy, which are losing more value daily.

Only eight small banks in Spain, Greece and Austria failed the European Banking Authority’s test, and were ordered to increase their reserves to protect against possible losses. But this may turn out to be a sideshow.

While the tests were criticized for not factoring in a Greek default, the more immediate concern could be the effect on bank balance sheets as their sovereign bond holdings — especially in the case of widely held Italian debt — continue to lose value in the bond market sell-off.

With those bonds now worth less, calls are growing for Europe to take urgent action to recapitalize its banks, as the United States and Britain did in 2008 when the financial crisis damaged the balance sheets of their banks. At the same time, the problems of Europe’s banks also mean it will be difficult for the spendthrift faction of European nations to rely on them to borrow aggressively to finance budget deficits, largely with impunity, as they did until 2008.

The prospect that the flu will spread beyond Greece and Spain to infect Italy and perhaps even France and Belgium, is sure to be a point of urgent discussion on Thursday in Brussels at the debt summit meeting for European Union leaders.

The exposure of European banks to sovereign debt is a point that regulators have long underscored, most recently and acutely in an illuminating report issued this month by the Bank for International Settlements.

The report highlighted just how thin the capital buffers are for banks in highly indebted European nations. For example, banking systems in Belgium, Greece and Italy are sitting on local government bond holdings that range from 60 percent to 90 percent of total bank capital.

“Until recently, investors have paid little attention to diversifying their portfolios of government bonds of advanced countries, as these bonds were considered virtually riskless,” the report warned. “This situation has changed: some sovereign securities have already lost their risk-free status, while others may do so in the future,” it said. Take Greece, for instance. The National Bank of Greece passed its test with a Tier 1 capital ratio of 11 percent, compared with a minimum of 5 percent required to pass. But the bank holds 18 billion euros worth of Greek bonds that are, at best, worth half that amount, and if written down accordingly would immediately wipe out the bank’s capital of 8.1 billion euros. 

BNP Paribas in France and Commerzbank in Germany also passed, but they own 5 billion and 3 billion euros, respectively, in Greek bonds. (As is the case with most banks, these assets are held in the banking book, not the trading book, so they do not reflect the true market value until written down.)

But it is to Italy, which, with its huge debt financing burden, is home to the world’s third largest bond market after Japan and the United States, that Europe’s banks remain most heavily exposed. 

It was the Greek finance minister who zeroed in on this point last week. Yes, Greece’s debt is high at 355 billion euros, Evangelos Venizelos said in a speech to his Parliament. But it was not as dire as Italy’s, he argued, because Italy borrows about that amount in a single year to keep current on its own financial obligations, which at 120 percent of gross domestic product are second only to those of Greece itself.

Again BNP Paribas stands out in that regard, owning 28 billion euros in Italian bonds (just about half its core capital at the end of 2010). Other big holders of Italian bonds include Commerzbank with 11 billion euros and Crédit Agricole in France with 10.7 billion euros.

Unicredit, the large Italy-based bank with significant operations outside its core market, remains tied to the fortunes of its home country. At 49 billion euros, its Italian government bond holdings are 140 percent of capital as of 2010, according to stress test data.

Italian government debt does not carry anywhere close to the risk of its Greek counterpart. Italy’s budget deficit of 4 percent of gross domestic product puts it in a different category, and there has been no talk of Italy’s not being in a position to keep paying its obligations.

But as foreign and domestic holders of Italian bonds keep selling their holdings — bankers remark that many of the sellers are weak holders who were attracted to the higher yield but never thought that Italy would be lumped with Greece and others —  the price of the benchmark Italian bond has plummeted and the yield has spiked. 

What was once seen as more or less a risk-free asset is becoming increasingly less so, as the Bank for International Settlements’ report notes.

Beyond the sovereign debt question, other revelations are to be found in the individual bank disclosures.

The British banking giant Barclays, for example, has significant exposure to the troubled Spanish economy. After its home country and the United States, Spain represents the third largest credit market for Barclays. (Of this 43.9 billion euros, close to half is loans to Spain’s devastated mortgage and commercial real estate sectors.) 

And the British-government controlled Royal Bank of Scotland has 64 billion euros of dubious Irish loans on its books (12 billion euros of which is already in default), compared with a capital level of 58 billion euros at the end of 2010.

For now, all these banks can say that they have passed Europe’s latest banking crucible. Many have also raised equity over the last year to address market concerns.

But as the crisis worsens, it may well be the case that today’s capital cushion will not be enough to cover tomorrow’s sovereign bond losses.  

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Amazon Backs End to Online Sales Tax in California

July 12, 2011 by Leave a Comment

SAN FRANCISCO — Amazon said Monday that it would back a California ballot initiative that would roll back a new state law that forces more online retailers to collect sales tax.

Amazon’s decision to support the proposed referendum pits the world’s biggest online retailer against the state government, which is looking for ways to raise additional revenue to cover budget shortfalls.

The California legislature last month passed a law, now in effect, requiring online retailers to collect sales tax just like merchants physically located in the state. The law was intended to close a loophole that let online retailers sell their wares but not collect and pay sales tax to the state.

Two weeks ago, Amazon, hoping it could comply with the new law and still avoid collecting taxes, severed ties with thousands of California businesses whose Web sites linked to products on its site. California officials say that move does not free it of this year’s tax obligation, estimated at $83 million.

“At a time when businesses are leaving California, it is important to enact policies that attract and encourage business, not drive it away,” said Paul Misener, Amazon’s vice president of public policy. He also called Amazon’s antisales tax position “a referendum on jobs and investment in California.”

Evan Westrup, a spokesman for Gov. Jerry Brown, said Monday that, “Amazon should be spending less time punishing its affiliates, threatening lawsuits and collecting signatures and more time doing what every other retailer does in California every day.”

The collection of online sales tax by states facing budget deficits is an issue that threatens to spill across the country. Amazon has been at loggerheads in various states. The company has severed ties with affiliates in some states, including Illinois, and is in the process of closing a warehouse in Texas.

Amazon currently collects sales tax in New York, even though it says it does not have a physical presence in the state. But it is challenging the state’s law as unconstitutional.

Legally, Californians are still responsible for sales tax even when retailers do not collect it. When filing their tax forms, residents are supposed to declare what they owe in so-called use tax. Most don’t, and the state argues that the growth of online shopping is leading to an ever greater loss of revenue.

The state Board of Equalization, California’s tax collector, estimates the unpaid taxes at $1.15 billion in the last fiscal year, and estimates it will grow to almost $1.2 billion this year and $1.27 billion in 2012.

At the heart of the issue is what constitutes a company’s physical presence. The new California law expands the definition of physical presence to potentially include Amazon subsidiaries, like an office in Cupertino that designs the Kindle book reader and another in Studio City that handles online advertising.

Under the law, if Amazon fails to pay any taxes owed to California, it would be required to pay penalties and interest, like any other tax scofflaw. Its first payment would be due by Oct. 31.

 Amazon says it supports a simplified sales tax structure that would be applied evenly across the country, which would require cooperation from federal and state governments. Some state officials say the issue is about more than just tax revenue. They say it’s about fairness to local retailers competing against Amazon but with the added cost to consumers of sales tax.

Supporters of the proposed initiative must now gather around 505,000 signatures to qualify it for the ballot, according to the secretary of state. A vote could occur during the next statewide election in February 2012.

“Where does Amazon plan to collect these signatures — in front of bricks and mortar retailers that collect sales tax everyday?” asked Mr. Westrup.

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Labor Chieftain Seizes the Anti-Union Moment

April 12, 2011 by Leave a Comment

But now, with public sector unions under attack in deficit-plagued states and cities nationwide, Mr. McEntee faces the biggest challenge of his career — avoiding a wipeout.

In Wisconsin and Ohio, newly enacted laws will cripple the bargaining rights of 200,000 members of his union and may cause many to quit, jeopardizing the union’s dues base and political clout. The union, the American Federation of State, County and Municipal Employees, known as Afscme (pronounced AF-skmee), is also under assault in Florida and New Jersey, where governors and lawmakers are seeking to curb bargaining rights or achieve far-reaching concessions on what many say are overly generous health benefits and pensions.

Still combative at age 76, Mr. McEntee has pushed away talk of retirement and plunged into battle to defend his union, which has grown from 900,000 members when he took over to 1.4 million today.

“The Republicans who were elected last November promised to focus on jobs, but instead they’re focusing on going after the unions,” Mr. McEntee said. “That’s a big overreach.”

In Wisconsin and Ohio, Republican lawmakers argued that public sector unions had grown too powerful and that it was vital to weaken public employees’ bargaining rights, so as to give state and local governments flexibility to help erase their budget deficits. In what is largely a decentralized union, Mr. McEntee is doing his utmost to serve as national field marshal, strategist and megaphone for the counterattack. He sent money to Wisconsin to help fight Governor Scott Walker’s anti-union legislation, initially to mount the huge protests in Madison before the law was enacted and more recently to try to elect a labor-friendly Supreme Court justice and gather signatures to recall eight Republican state senators who voted for the law.

Mr. McEntee has also been pouring resources into Ohio to promote a statewide referendum to overturn that state’s new anti-bargaining law.

Last week, he joined an emerging national battle — fighting House Republicans’ plan to cut Medicare and Medicaid. In addition to plotting strategy with Democrats, Afscme is helping to pay for broadcast ads attacking Republican. The union is also urging 250,000 retirees to fight the plan by contacting lawmakers in Washington.

“He’s a very political animal,” said Richard A. Gephardt, the former House Democratic leader. “He’ll be effective in fighting back.”

The son of a Philadelphia street cleaner, Mr. McEntee followed his father into the labor movement in 1958, becoming Afscme’s top official in Pennsylvania. In 1970, he played an important role in persuading that state’s Republican governor and Republican-led Senate to give state employees the right to bargain collectively.

In 1981, in an upset victory, he defeated Afscme’s secretary-treasurer to become the union’s president. In 1995, frustrated with uninspired leadership at the A.F.L.-C.I.O., he engineered a coup that pushed out its long-time president, Lane Kirkland, and installed John Sweeney.

Mr. McEntee relishes his active role in national and state politics. He heads the A.F.L.-C.I.O.’s political committee, which has made him somewhat of a kingmaker in deciding political endorsements, and was an early backer of Bill Clinton for president.

After the Republican revolution of 1994, Mr. McEntee led a labor-financed advertising campaign to help derail Newt Gingrich’s proposal to rein in Medicare spending. And when Mr. Gingrich, then the House speaker, precipitated a government shutdown, Mr. McEntee’s union again ran ads hitting the Republicans, helping turn public opinion against Mr. Gingrich and in favor of President Clinton.

“Gerry’s effort was very helpful,” said Harold M. Ickes, who served as Mr. Clinton’s deputy chief of staff. “Once Gerry makes up his mind on something, he’s very forceful and dogged.”

In 1996, Mr. McEntee joined Mr. Sweeney to persuade the A.F.L.-C.I.O. to spend $36 million, then a huge sum, to help re-elect President Clinton and Democratic House members. As the federation’s political chairman, he helped overhaul labor’s campaign operations to emphasize workplace fliers, door-knocking and get-out-the-vote efforts.

“He was the main mover and shaker in rebuilding labor’s political clout,” said Steve Rosenthal, a former A.F.L.-C.I.O. political director, who added, “He’s a big personality and he rolls the dice in a very big way.”

Mr. McEntee’s critics say he can be brash, pushy and all too happy to pound political opponents in speeches and ads.

Mark Neumann, who was a Republican congressman from Wisconsin in the mid-1990s, still complains about the “horrible” ads Mr. McEntee ran against Mr. Gingrich’s allies. One showed a middle-aged couple at their kitchen table, with the wife worrying that she might have to quit her job to take care of her mother if Mr. Gingrich’s proposals were enacted. “Gingrich and his Republicans are starting to ram their Medicare and Medicaid cuts through Congress now,” the same ad said. “so they can pay for more tax giveaways to the rich.”

“They were misleading,” Mr. Neumann said. He said Republicans were not planning cuts, but were merely trying to hold down Medicare spending increases to 7 percent a year from a projected 14 percent.

More recently, some of Mr. McEntee’s political bets have gone more wrong than right.

During the 2008 primaries, he aggressively backed Hillary Rodham Clinton over Barack Obama, at one point saying Mr. Obama “has a problem with the blue-collar work and relating to that worker.”

Last fall, he claimed that his union had spent $90 million in the 2010 campaign, making Afscme the biggest underwriter of the Democrats’ efforts. Mr. McEntee now regrets his boastful words, acknowledging that they helped make public employee unions a target when Republicans swept to victory in many states.

“Some of this is political payback,” he said. “The Republicans are thinking, ‘The public sector unions are a major political force, and if we weaken them, that’ll leave us with an awfully weakened Democratic Party.’ ”

Given recent events, public sector unions may well end up smaller and weaker.

In Wisconsin, where Afscme was founded in 1932, Governor Walker’s legislation, which has been suspended pending a legal challenge, would all but end collective bargaining. It would bar state and local governments from collecting workers’ union dues for public employee unions and would require employees to vote every year on whether they want to keep their union.

“I don’t see how unions can survive in this situation,” said William Powell Jones, a University of Wisconsin labor historian. “This bill is designed to make it almost impossible to operate a union.”

Unlikely as it may sound, Mr. McEntee asserts that his union is on the offensive, not the defensive. He points to opinion polls showing that the public backs unions, not the Republican governors, in their recent clashes. He says many union members are feeling so angry toward the Republicans and so enthusiastic about their union that they will want to continue paying union dues — unlike in Indiana, where 90 percent of state employees stopped paying dues after Governor Mitch Daniels ended bargaining for them in 2005.

“We haven’t had this kind of energy, this kind of spark, in our union in decades,” Mr. McEntee said. “Look at the crowds that came out to protest in Wisconsin: 50,000, 70,000, 100,000. These people are jazzed up. They’re ready to do battle.”

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