March 28, 2024

Economix: Are We About to Repeat the Mistakes of 1937?

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.

Friday’s jobs report clearly indicates that the economy remains weak, yet the pressure to reverse stimulus and begin tightening fiscal and monetary policy has become overwhelming.

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Perspectives from expert contributors.

The Federal Reserve has already ended its policy of quantitative easing, and many of its regional bank presidents are demanding higher interest rates to forestall inflation. Republicans and Democrats in Congress appear to agree that large spending cuts must accompany a rise in the debt limit, which will be hit on Aug. 2 if Congress doesn’t act.

Some economists are getting very nervous. With the economy in a fragile state, it may not take much to bring on another recession. Even a small amount of fiscal or monetary tightening may be enough to do that.

It is starting to look like 1937 all over again. As the table below indicates, the economy made a significant recovery after hitting bottom in 1932, when real gross domestic product fell 13 percent. The contraction moderated considerably in 1933, and in 1934 growth was robust, with real G.D.P. rising 11 percent. Growth was also strong in 1935 and 1936, which brought the unemployment rate down more than half from its peak and relieved the devastating deflation that was at the root of the economy’s problems.

Historical Statistics of the United States

By 1937, President Roosevelt and the Federal Reserve thought self-sustaining growth had been restored and began worrying about unwinding the fiscal and monetary stimulus, which they thought would become a drag on growth and a source of inflation. There was also a strong desire to return to normality, in both monetary and fiscal policy.

On the fiscal side, Roosevelt was under pressure from his Treasury secretary, Henry Morgenthau, to balance the budget. Like many conservatives today, Mr. Morgenthau worried obsessively about business confidence and was convinced that balancing the budget would be expansionary. In the words of the historian John Morton Blum, Mr. Morgenthau said he believed recovery “depended on the willingness of business to increase investments, and this in turn was a function of business confidence,” adding, “In his view only a balanced budget could sustain that confidence.”

Roosevelt ordered a very big cut in federal spending in early 1937, and it fell to $7.6 billion in 1937 and $6.8 billion in 1938 from $8.2 billion in 1936, a 17 percent reduction over two years.

At the same time, taxes increased sharply because of the introduction of the payroll tax. Federal revenues rose to $5.4 billion in 1937 and $6.7 billion in 1938, from $3.9 billion in 1936, an increase of 72 percent. As a consequence, the federal deficit fell from 5.5 percent of G.D.P. in 1936 to a mere 0.5 percent in 1938. The deficit was just $89 million in 1938.

At the same time, the Federal Reserve was alarmed by inflation rates that were high by historical standards, as well as by the large amount of reserves in the banking system, which could potentially fuel a further rise in inflation. Using powers recently granted by the Banking Act of 1935, the Fed doubled reserve requirements from August 1936 to May 1937. Higher reserve requirements restricted the amount of money banks could lend and caused them to tighten credit.

This combination of fiscal and monetary tightening – which conservatives advocate today – brought on a sharp recession beginning in May 1937 and ending in June 1938, according to the National Bureau of Economic Research. Real G.D.P. fell 3.4 percent in 1938, and the unemployment rate rose to 12.5 percent from 9.2 percent in 1937.

Economists are still debating the precise causes of the 1937-8 recession. While most say they believe that fiscal tightening is primarily to blame, some disagree. Perhaps it would have been positive if tightening was confined to the spending side of the budget, without the large increase in taxes. Maybe the fiscal contraction would have been benign if the Fed hadn’t tightened monetary policy simultaneously.

Given President Obama’s endorsement of large budget cuts, the only question now appears to be how much fiscal policy will tighten and how fast. If it is back-loaded and mainly involves cuts in transfer programs, the impact on growth may be modest. But if – as I suspect Republicans will demand – the spending cuts are front-loaded and involve reductions in government consumption and investment spending, the impact could be severe.

While it’s unlikely that the Fed will repeat its error of 1936-7 and raise reserve requirements or the federal funds rate, it has already begun de facto tightening by moving from monetary stimulus to a more neutral stance. Moreover, with interest rates on Treasury bills hovering near zero, there is little it can do to stimulate growth on the monetary side.

While the odds of another recession are still low, they are increasing. Given the economy’s fragility, policy makers need to be very careful, because it may take only a small misstep on either the monetary or fiscal side to tip the balance. The experience of 1937-38 should be a warning.

Article source: http://feeds.nytimes.com/click.phdo?i=9398b3c256bd9e76a8fc8ef339e4b1b9

Media Decoder: News Corporation Sells MySpace for $35 Million

DESCRIPTIONJin Lee/Bloomberg

6:30 p.m. | Updated MySpace, the long-suffering Web site which the News Corporation bought six years ago for $580 million, was sold on Wednesday to the advertising targeting firm Specific Media for roughly $35 million.

The News Corporation, which is controlled by Rupert Murdoch, had been trying since last winter to rid itself of the unprofitable unit, which was a casualty of changing tastes and a cautionary tale for social companies like Zynga and LinkedIn that are presently enjoying sky-high valuations.

Relief over the sale was palpable on Wednesday, and not just at News Corporation: Wall Street “just wanted it done, because it’s been a real drag on growth,” said Michael Nathanson, a media sector analyst for Nomura Securities.

Terms of the deal were not disclosed, but the News Corporation said that it would retain a minority stake. Specific Media said it had brought on board the artist Justin Timberlake as a part-owner and an active player in MySpace’s future, but said little else about how the site would change.

The sale closes a complex chapter in the history of the Internet and of the News Corporation, which was widely envied by other media companies when it acquired MySpace in 2005. At that time, MySpace was the world’s fastest-growing social network, with 20 million unique visitors each month in the United States. That figure soon soared to 70 million, but the network could not keep pace with Facebook, which overtook MySpace two years ago.

As users fled MySpace, so, too, did advertisers. The market research firm eMarketer estimates that the site will earn about $183 million in worldwide ad revenue this year, down from $605 million at its peak, when the site introduced many Web users and many advertisers to the concept of social networking.

“It’s a shame that MySpace’s value has diminished so severely since the acquisition; MySpace’s pioneering of social networking (now referred to as social media) will always be revered as igniting a new medium,” Richard Rosenblatt, the chairman of MySpace at the time of the sale to the News Corporation, said in an e-mail.

Instead of envy, News Corporation’s bet on MySpace now provokes punch lines. Tom Freston, who was fired as the chief executive of Viacom in part for failing to buy MySpace, joked in an interview with CNBC earlier this year that “I’m still waiting for a thank you note” from the Viacom chairman, Sumner Redstone.

Mr. Freston, who was in Iceland on Wednesday and was smiling at the news of an impending sale, declined to comment.

News Corporation executives declined interview requests on Wednesday.

It is not clear whether MySpace itself was profitable for the company; the division that houses MySpace and other digital properties has turned a profit only once in the last six years. An advertising deal with Google helped the company to recoup what it spent on MySpace in the first place, but the site became a burden on the company’s earnings; by last year executives were calling the losses unacceptable. Mr. Nathanson called it a “headache.”

What doomed the site? Lee Brenner, the former director of MySpace’s “Impact” section who is now the publisher of HyperVocal, wrote in a blog post Tuesday, “I’m sure most employees (former or current) will argue that it was poor management, or a need to hit revenue targets once News Corp. took over, or a bottleneck in the technology department, or lack of resources given to their division, or a poor public relations effort, etc., that set the course of MySpace’s downfall.

“Any number of these could be true,” Mr. Brenner wrote. “I suppose we’ll never know for sure. It is most likely a combination of these factors, along with a ‘low attention span’ public. It probably didn’t help to be doing business, and trying to grow, along with all of these issues, in the midst of a global economic crisis.”

MySpace has attempted to reboot itself several times, most recently as a social destination for music, movies and other media. It has not been abandoned altogether; it still has 35 million visitors a month in the United States, according to the measurement firm ComScore. Facebook has 157 million visitors a month in the United States.

“It’s still one of the biggest pockets of traffic on the Internet, for the price,” said a former MySpace executive who insisted on anonymity in order to maintain friendships and business relationships with News Corporation.

Mr. Timberlake said in a statement about the sale that MySpace still has the potential to be the place on the Web where “fans can go to interact with their favorite entertainers, listen to music, watch videos, share and discover cool stuff and just connect.”

Many of the current and former MySpace users who reacted to Wednesday’s sale thought differently — some lumped it in with Friendster as a dead social network and others compared it to a shopping mall that no one visits anymore.

In preparation for the change in ownership, many of MySpace’s roughly 400 employees were dismissed on Wednesday. Mike Jones, the Web site’s chief executive, said in an internal memorandum that he would depart in the next two months.

“Today should be a day,” Sean Percival, a vice president at MySpace, wrote on Twitter on Wednesday morning, ahead of the sale announcement.

Later in the day, he followed up, telling his online followers that Wednesday would be his last day at the company. Seemingly referring to the site’s rise and fall, he wrote, “It was a unique moment in time and an impossible problem to solve. Was proud to be a part of it.”

Article source: http://feeds.nytimes.com/click.phdo?i=111d5a2194791b1872769652fe7ff9d7

Economix: Economic Winner in 2010: North Dakota

Of all the states, North Dakota’s economy grew fastest in 2010. The biggest decline was in Wyoming, according to a report released Tuesday by the Bureau of Economic Analysis.

Click the interactive map below to see trends across the country:

As for North Dakota and Wyoming, how can two states so similar in shape and population density have such different fates?

The key seems to be mining.

In North Dakota, almost every sector grew at least a little. The biggest contribution to growth, though, was in mining.

In Wyoming, about equal numbers of sectors grew as shrank, but the biggest drag on the state economy was mining.

After North Dakota, the state with the second-strongest economic improvement in 2010 was New York. The rebounding finance and insurance sector was New York’s biggest source of growth, although most of the state’s other industries also grew.

Article source: http://feeds.nytimes.com/click.phdo?i=e7e774b20deaffb07bf75faf52ccaa22